PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant |X|
Filed by a party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AU BON PAIN CO., INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined.):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
AU BON PAIN CO., INC.
Notice of Annual Meeting of Stockholders
June 25, 1998 -- 10:00 A.M.
You are hereby notified that the Annual Meeting of Stockholders of Au Bon
Pain Co., Inc. will be held on Thursday, June 25, 1998 at 10:00 A.M., at
USTrust, 40 Court Street, 12th Floor, Boston, Massachusetts, to consider and act
upon the following matters:
1. To elect two (2) Directors;
2. To ratify the action of the Directors reappointing Coopers &
Lybrand L.L.P. as auditors for the Company for the fiscal year
ending December 26, 1998;
3. To transact such other business as may properly come before the meeting.
If you are unable to attend the meeting personally, please be sure to date,
sign and return the enclosed proxy in the envelope provided to: Boston EquiServe
Limited Partnership, 150 Royall Street, Canton, Massachusetts 02021.
Only stockholders of record on the books of the Company at the close of
business on May 6, 1998, are entitled to notice of and to vote at the meeting.
By Order of the Board of Directors,
Walter D. Wekstein, Secretary
Dated: May 26, 1998
<PAGE>
AU BON PAIN CO., INC.
EXECUTIVE OFFICES:
19 FID KENNEDY AVENUE
BOSTON, MASSACHUSETTS 02210
PROXY STATEMENT
VOTING PROCEDURES
This proxy statement and the accompanying proxy card are first being mailed
to stockholders commencing on or about May 26, 1998. The accompanying proxy is
solicited by the Board of Directors of Au Bon Pain Co., Inc. (the "Company" or
"Au Bon Pain"), for use at the Annual Meeting of Stockholders to be held on June
25, 1998, and any adjournment or adjournments thereof. The cost of soliciting
proxies will be borne by the Company. Directors, officers and employees of the
Company may assist in the solicitation of proxies by mail, telephone, telegraph
and personal interview without additional compensation.
When a proxy is returned properly signed, the shares represented thereby
will be voted by the persons named as proxies in accordance with the
stockholder's directions. You are urged to specify your choices on the enclosed
proxy card. If a proxy is signed and returned without specifying choices, the
shares will be voted `FOR' proposals 1 and 2 and in the discretion of the
persons named as proxies in the manner they believe to be in the best interests
of the Company as to other matters that may properly come before the meeting. A
stockholder giving a proxy may revoke it at any time before it is voted at the
meeting by written notice to the Company, by oral notice to the Secretary at the
meeting or by submitting a later dated proxy.
The Board of Directors has fixed May 6, 1998 as the record date for the
meeting. Only stockholders of record on the record date are entitled to notice
of and to vote at the meeting. On the record date, there were 10,277,999 shares
of Class A Common Stock (each of which is entitled to one vote), and 1,605,575
shares of Class B Common Stock (each of which is entitled to three votes) of the
Company issued and outstanding. The Class A and Class B Common Stock are
referred to in this proxy statement as the "Common Stock." The holders of Common
Stock do not have cumulative voting rights.
For all proposals on the agenda for the meeting, the holders of a majority
in interest of the combined voting power of the Class A and Class B Common Stock
issued and outstanding and entitled to vote and present in person or represented
by proxy, will constitute a quorum. Shares represented by all proxies received,
including proxies that withhold authority for the election of directors and/or
abstain from voting on a proposal, as well as "broker non-votes," discussed
below, count toward establishing the presence of a quorum.
Assuming the presence of a quorum, Directors of the Company are elected by
plurality vote of the combined voting power of the shares of Class A and Class B
Common Stock present in person or represented by proxy and voting in the
election of Directors. Shares may be voted for or withheld from each nominee for
election as a Director. Shares for which the vote is withheld and "broker
non-votes" will be excluded entirely and will have no effect on the election of
Directors of the Company.
-1-
<PAGE>
Assuming the presence of a quorum, the ratification of the appointment of
Coopers & Lybrand LLP must be approved by affirmative vote of a majority of the
combined voting power of the shares of Class A and Class B Common Stock present
in person or represented by proxy and voting on each matter. Shares represented
by proxies which are marked "abstain" for this proposal on the proxy card and
proxies which are marked to deny discretionary authority on other matters will
not be included in the vote totals for the respective proposals and, therefore,
will have no effect on the vote.
Under applicable rules, brokers who hold shares of the Company's Common
Stock in street name have the authority to vote the shares in the broker's
discretion on "routine" matters if they have not received specific instructions
from the beneficial owner of the shares. Item 1, the uncontested election of
directors, and Item 2, the ratification of independent accountants are "routine"
matters for this purpose. With respect to matters which are determined by the
appropriate broker-dealer regulatory organization to be "non-routine," none of
which appear on the Agenda for this meeting of the Company's stockholders,
brokers may not vote shares held in street name without specific instructions
from the beneficial owner. If a broker holding shares in street name submits a
proxy card on which the broker physically lines out the matter (whether it is
"routine" or "non-routine") or does not indicate a specific choice ("for,"
"against" or "abstain") on a matter that is "non-routine," that action is called
a "broker non-vote" as to that matter. Broker "non-votes" with respect to
"routine" matters such as Items 1 and 2 on the agenda for this meeting, or
"non-routine" matters, are not counted in determining the number of votes cast
with respect to the matter. If a broker submits a proxy but does not indicate a
specific choice on a "routine" matter, the shares will be voted as specified in
the proxy card. At this meeting of the Company's stockholders, shares
represented by such proxy card would be voted for the election of the director
nominees and for the ratification of the independent accountants.
ELECTION OF DIRECTORS
(Item 1 On Proxy Card)
The Board of Directors is divided as nearly as possible into three classes,
each having an equal number of directors, with the terms of each class staggered
so that the term of one class expires at each annual meeting of the
stockholders.
Nominees George E. Kane and Henry J. Nasella are Directors whose terms
expire at the 1998 Annual Meeting. Unless otherwise instructed in the proxy, all
proxies will be voted for the election of each of the nominees to a three-year
term expiring at the 2001 Annual Meeting, with each to hold office until his
successor has been duly elected and qualified. Stockholders who do not wish
their shares to be voted for a particular nominee may so indicate by striking
out the name of the nominee(s) on the proxy card. Management does not
contemplate that any of the nominees will be unable to serve, but in that event,
proxies solicited hereby will be voted for the election of another person or
persons to be designated by the Board of Directors.
-2-
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE NOMINEES.
Information Regarding Nominees, Directors and Executive Officers
The following table and biographical descriptions sets forth information
regarding the principal occupation, other affiliations, committee memberships
and age, for the nominees for election as a Director, each director continuing
in office and the executive officers of the Company who are not Directors, based
on information furnished to the Company by each nominee, director and officer.
The following information is as of April 17, 1998 unless otherwise noted.
<TABLE>
<CAPTION>
Term as a
Name Age Position with Company Director Ends
---- --- --------------------- -------------
<S> <C> <C> <C>
Nominees for Election:
George E. Kane (3)............. 93 Director 2001*
Henry J. Nasella (1)(2)........ 51 Director 2001*
Directors continuing in Office:
Francis W. Hatch (1)(2)(3)..... 72 Director 1999
Louis I. Kane.................. 67 Co-Chairman, Director 2000
James R. McManus (1)(2)........ 64 Director 2000
Ronald M. Shaich............... 44 Co-Chairman, Director, Chief 1999
Executive Officer
</TABLE>
- -------------
* Assuming election at this Annual Meeting.
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Committee on Nominations.
(3) Member of the Audit Committee.
Nominees for Election as Directors
GEORGE E. KANE, Director since November 1988. Mr. Kane was a Director of
the Company from March 1981 to December 1985 and a Director Emeritus from
December 1985 to November 1988. Mr. Kane retired in 1970 as President of Garden
City Trust Company (now University Trust Company). Mr. Kane is an Honorary
Director of USTrust. Mr. Kane is the father of Louis I. Kane.
HENRY J. NASELLA, Director since June 1995. Mr. Nasella has been the
President, Chief Executive Officer and Chairman of Star Markets Company, Inc.
from September 1994. From January 1994 to September 1994, he was a principal of
Phillips-Smith Specialty Venture Capital. From 1988 to July 1993, Mr. Nasella
served as the President and Chief Operating Officer of Staples, Inc. Mr. Nasella
served as President and Chief Executive Officer of Staples USA (Domestic) from
1992 to July 1993. Mr. Nasella currently is a member of the Board of Visitors of
Northeastern University School of Business and a member of the Board of Trustees
of Northeastern University Corporation.
-3-
<PAGE>
Directors Continuing In Office
FRANCIS W. HATCH, Director since February 1983. Mr. Hatch is a trustee of
certain private trusts, and also serves as a director of various corporations.
LOUIS I. KANE, Director since 1981, co-founder of the Company and
Co-Chairman of the Board since January 1988. From January 1988 to May 1994, Mr.
Kane served as Co-Chief Executive Officer of the Company. From March 1981 to
January 1988, Mr. Kane served as Chairman and Chief Executive Officer of the
Company. Beginning in August 1978, Mr. Kane was Chief Executive Officer of Au
Bon Pain Corporation, an operator of French bakeries and a predecessor of the
Company.
JAMES R. MCMANUS, Director since October 1987. Since 1971, Mr. McManus has
been Chairman, Chief Executive Officer and founder of Marketing Corporation of
America, Westport, Connecticut, a marketing consulting and marketing services
firm which advises companies in the consumer products and services industry. Mr.
McManus is also a director of First Brands Corporation. On February 1, 1994, Mr.
McManus resigned as President and Chief Executive Officer of Business Express,
Inc., a regional airline operating in the northeastern United States. On January
22, 1996, a petition for Chapter XI Bankruptcy Protection was filed against
Business Express, Inc. in federal Bankruptcy Court in Manchester, New Hampshire
by Saab Aircraft of America and two of its operating subsidiaries.
RONALD M. SHAICH, Director since 1981, co-founder of the Company,
Co-Chairman of the Board since January 1988 and Chief Executive Officer since
May 1994. From January 1988 to May 25, 1994, Mr. Shaich served as Co-Chief
Executive Officer of the Company.
Executive Officers Who Are Not Directors
MAXWELL T. ABBOTT, 51, Senior Vice President Technical Services since June
1995. Prior to that time and for the five years preceding December 27, 1997, Mr.
Abbott was Senior Vice President - Research and Development of Long John
Silver's, Inc.
MARK A. BORLAND, 45, Executive Vice President since January 1993 and
President, Manufacturing Services Division since January 1995. Prior to January
1995 and from May 1992, Mr. Borland served as Executive Vice President of Au Bon
Pain Retail Operations and Manufacturing Operations. Prior to May 1992, Mr.
Borland served as Vice President Manufacturing Operations of the Company.
ANTHONY J. CARROLL, 46, Senior Vice President and Chief Financial Officer
since November 1988. Mr. Carroll has also served as Treasurer of the Company
since 1992.
MARIEL CLARK, 41, Senior Vice President Corporate Human Resources since
July 1994. Prior to that and since June 1992, Ms. Clark served as Vice
President Human Resources. From May 1986 to November 1991, Ms. Clark served as
Vice President of Human Resources at Clairpoint Corporation.
THOMAS R. HOWLEY, 47, Vice President, General Counsel and Assistant
Secretary since January 1993. Prior to that time and for the five years
preceding December 28, 1996, Mr. Howley was an attorney with the law firm of
Rackemann, Sawyer & Brewster.
-4-
<PAGE>
RICHARD C. POSTLE, 49, Executive Vice President and President, Saint Louis
Bread Company, Inc. since August 1995. From August 1994 through August 1995, Mr.
Postle was President and Chief Operating Officer of Checkers Drive-In
Restaurants, Inc. From January 1992 through August 1994, Mr. Postle was Senior
Vice President, Operations of KFC-USA. From 1988 through December 1991, Mr.
Postle was Chief Operating Executive of Brice Foods Inc.
ROBERT TAFT, 45, Executive Vice President since February 1997 and
President, Au Bon Pain Company Owned Stores Business Unit since October 1996.
From June 1996 to October 1996, Mr. Taft was Executive Vice President of Golden
Corral and from November 1993 to May 1996 he was President and Chief Executive
Officer of Papa Gino's. Mr. Taft was previously President of Skippers, Inc.
SAMUEL H. YONG, 48, Executive Vice President and President, International
and Trade Channels Business Unit since January 1994. From April 1989 to December
1993, Mr. Yong served as Managing Director for Burger King Asia Pacific Private,
Ltd.
The Board of Directors and Its Committees
The Company's Board of Directors held five meetings, including one action
by written consent, during fiscal year 1997. The Board of Directors has
established an Audit Committee, a Compensation and Stock Option Committee and a
Committee on Nominations.
The Audit Committee, which held two meetings in fiscal year 1997, meets
with the Company's auditors and principal financial personnel to review the
results of the annual audit. The Audit Committee also reviews the scope of, and
establishes fees for, audit and non-audit services performed by the independent
accountants, reviews the independence of the independent accountants and the
adequacy and effectiveness of the Company's internal accounting controls. The
Audit Committee consists of two members, currently Messrs. George E. Kane and
Francis W. Hatch, and is reconstituted annually.
The Compensation and Stock Option Committee ("Compensation Committee"),
which held three meetings in fiscal year 1997, establishes the compensation,
including stock options and other incentive arrangements, of the Company's
Co-Chairmen and Chief Executive Officer. It also administers the Company's 1992
Equity Incentive Plan and 1992 Employee Stock Purchase Plan. The Compensation
Committee consists of three members, currently Messrs. Francis W. Hatch, James
R. McManus and Henry J. Nasella, and is reconstituted annually.
The Committee on Nominations was established in November 1995 and held no
meetings in 1997. The Committee on Nominations consists of three members,
currently Messrs. Francis W. Hatch, James R. McManus and Henry J. Nasella, and
is reconstituted annually. The Committee on Nominations selects nominees for
election as Directors and will consider written recommendations from any
stockholder of record with respect to nominees for Directors of the Company.
All Directors attended at least 75% of the meetings of the Board and of the
committees of which they are members in fiscal 1997.
-5-
<PAGE>
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee has interlocking or other
relationships with other boards or with the Company that would call into
question his independence as a Committee member.
Compensation of Directors
Directors who are not employees of the Company receive a quarterly fee
ranging from $3,000 to $3,500 for serving on the Board, plus reimbursement of
out-of-pocket expenses for attendance at each Board or committee meeting.
Under a formula-based stock option plan for independent directors (the
"Directors' Plan"), as amended by the stockholders at the 1995 Annual Meeting of
Stockholders, each current Director who is not an employee or principal
stockholder of the Company ("Independent Director") first elected after the
effective date of the Directors' Plan will receive, upon his or her election to
the board, a one-time grant of an option to purchase 5,000 shares of Class A
Common stock. All Independent Directors who serve as such at the end of each of
the Company's fiscal years will receive an option to purchase 5,000 shares of
Class A Common Stock. All such options will have an exercise price per share
equal to the fair market value of a share of Class A Common Stock as of the
close of the market the trading day immediately preceding the grant date, will
be fully vested when granted, and will be exercisable for a period of 10 years.
RATIFICATION OF CHOICE OF INDEPENDENT ACCOUNTANTS
(Item 2 on Proxy Card)
The Board of Directors has reappointed the firm of Coopers & Lybrand
L.L.P., independent accountants, to audit the books, records and accounts of the
Company and its subsidiaries for the fiscal year ending December 26, 1998. In
accordance with a resolution of the Board of Directors, this reappointment is
being presented to the stockholders for ratification at the meeting.
Coopers & Lybrand L.L.P. has no direct or indirect material financial
interest in the Company or its subsidiaries. Representatives of Coopers &
Lybrand L.L.P. are expected to be present at the meeting and will be given the
opportunity to make a statement on behalf of Coopers & Lybrand L.L.P. if they so
desire. The representatives also will be available to respond to appropriate
questions raised by those in attendance at the meeting.
Proxies solicited by management will be so voted unless stockholders
specify otherwise. Ratification by the stockholders is not required. If the
proposal is not approved by the stockholders, the Board of Directors will not
change the appointment for fiscal 1998, but will consider the stockholder vote
in appointing auditors for fiscal 1999.
-6-
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE `FOR' THE
REAPPOINTMENT OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT
ACCOUNTANTS FOR FISCAL YEAR 1998.
OTHER BUSINESS
In addition to the business described above, there will be remarks by the
Co-Chairmen of the Board and the Chief Executive Officer and a general
discussion period during which stockholders will have an opportunity to ask
questions about the Company.
As of the date of this proxy statement, the management of the Company knows
of no matter not specifically referred to above as to which any action is
expected to be taken at the meeting of stockholders. It is intended, however,
that the persons named as proxies will vote the proxies, insofar as they are not
otherwise instructed, regarding such other matters and the transaction of such
other business as may be properly brought before the meeting, as seems to them
to be in the best interest of the Company and its stockholders.
EXECUTIVE COMPENSATION
Report of the Compensation Committee
This report is made by the Compensation and Stock Option Committee (the
"Compensation Committee") of the Board of Directors, the committee which is
responsible for establishing the compensation, including base salary and
incentive compensation, for the Company's Co-Chairman of the Board, Louis I.
Kane and its Co-Chairman and Chief Executive Officer, Ronald M. Shaich.
Philosophy
The Compensation Committee seeks to set the compensation of the Company's
Chief Executive Officer and Co-Chairmen at levels which are competitive with
companies of similar size in the Company's industry. Messrs. Kane and Shaich
share the overall responsibilities of Chairman of the Board of Directors. Mr.
Shaich also has the overall responsibilities of Chief Executive and Chief
Operating Officer. In addition to his responsibilities as Co-Chairman, Mr. Kane
is actively involved in a number of areas of the Company, including real estate
development, finance and international franchise development. The Compensation
Committee examined compensation structures for the chief executive and chief
operating officers of companies in the restaurant industry using generally
available source material from business periodicals and other sources, and
sought to structure the Chief Executive Officer's and Co-Chairmen's compensation
at a competitive level appropriate to the comparable companies' group. The
companies examined for purposes of evaluating and setting compensation of the
Chief Executive Officer and Co-Chairmen are not necessarily included in the
"Standard & Poor's 400 - MidCap Restaurant Index" used in the Stock Performance
Graph set forth under "Stock Performance" below.
Compensation Structure
As can be seen from the Summary Compensation Table included under
"Compensation Tables" below, the compensation of the Chief Executive Officer and
Co-Chairmen consists of two principal parts, salary and bonus, each of which is
reviewed annually by the Committee. The compensation of the Chief Executive
Officer and Co-Chairmen is structured to be competitive within the Company's
industry and is based upon the general performance of the Company.
-7-
<PAGE>
Components of Compensation
Salary. The salary shown in the Summary Compensation Table represents the
fixed portion of compensation for the Chief Executive Officer and Co-Chairmen
for the year. Changes in salary depend upon overall Company performance as well
as levels of base salary paid by companies of similar size in the Company's
industry.
Bonus. The cash bonus is the principal incentive-based compensation paid
annually to the Chief Executive Officer and Co-Chairmen. The Chief Executive
Officer and Co-Chairmen will receive a bonus in a predetermined amount if the
Company achieves its net income objective for the fiscal year. A higher bonus is
paid if the Company exceeds the net income objective by a predetermined
percentage. In determining the bonus amount, the Compensation Committee seeks to
create an overall compensation package for the Chief Executive Officer and
Co-Chairmen which is at the mid-point for comparable companies in the restaurant
industry. For 1997, the Company did not achieve the net income objective and,
therefore, no cash bonuses were paid to the Chief Executive Officer and
Co-Chairmen.
The Chief Executive Officer and Co-Chairmen may elect to take their
respective bonuses in the form of 10-year, fully vested stock options for that
number of shares of the Company's Class A Common Stock that could be purchased
with an amount equal to two times the cash value of his bonus. The exercise
price of the option equals the fair market value of the Company's Class A Common
Stock on the date of grant.
Stock Options. Neither Mr. Kane nor Mr. Shaich participates in either the
Performance-Based Option Program under the Company's 1992 Equity Incentive Plan
or the 1992 Employee Stock Purchase Plan. In order to provide what the
Compensation Committee believes to be appropriate and continuing long-term
incentives to its Chief Executive Officer and Co-Chairmen, and in order to align
more fully the interests of the stockholders and the Chief Executive Officer and
Co-Chairmen, the Compensation Committee on June 12, 1997 granted, to each of
Messrs. Kane and Shaich a 10-year option, vesting equally over a five-year
period (subject to continued employment), to purchase 400,000 shares of the
Company's Class A Common Stock at an exercise price equal to the fair market
value of a share of the Class A Common Stock calculated immediately preceding
the date of grant. These grants were made in order to retain the services of
Messrs. Kane and Shaich over the next five years, at a minimum. As these options
have exercise prices equal to the market value of the Company's Class A Common
Stock on the grant date, they provide incentive for the creation of stockholder
value over the long term since their full benefit cannot be realized unless
there occurs over time an appreciation in the price of the Company's Class A
Common Stock. The Compensation Committee considers the number of shares to be an
appropriate incentive for the Chief Executive officer and Co-Chairmen to
continue to focus on building stockholder value. The Compensation Committee has
not determined whether any ongoing program of long-term incentive compensation
should or will be adopted with respect to its Chief Executive Officer and
Co-Chairmen.
-8-
<PAGE>
Deductibility of Executive Compensation
The Compensation Committee has reviewed the potential consequences for the
Company of Section 162(m) of the Code which imposes a limit on tax deductions
for annual compensation in excess of one million dollars paid to any of the five
most highly compensated executive officers. Based on such review, the
Compensation Committee believes that the limitation will have no effect on the
Company in 1998.
Respectfully submitted,
James R. McManus
Chairman
Francis W. Hatch
Henry J. Nasella
Report of the Chief Executive Officer
This report is made by the Company's Chief Executive Officer, who is
responsible for establishing the compensation, including salary, bonus and
incentive compensation, for all of the Company's executive officers other than
the Chief Executive Officer and Co-Chairmen of the Board.
Philosophy
In compensating its executive officers, the Chief Executive Officer seeks
to structure a salary, bonus and incentive compensation package that will help
attract and retain talented individuals and align the interests of the executive
officers with the interests of the Company's stockholders.
Components of Compensation
There are two components to the compensation of the Company's executive
officers: annual cash compensation (consisting of salary and bonus incentives)
and long-term incentives.
Cash Compensation. The Company participates annually in an
industry-specific survey of executive officers, which serves as the basis for
determining total target cash compensation packages, which are crafted
individually for each executive officer. The individual's compensation consists
of a base salary and contingent compensation based on actual performance against
agreed-to expectations of performance. The individual compensation packages are
structured so that, if the executive officer attains the expected level of
achievement of each performance goal, the cash compensation of the executive
officer will be approximately at the 75th percentile of the compensation of
individuals occupying similar positions in the industry, using generally
available surveys of executive compensation within the retail industry for
companies with comparable revenues.
At the beginning of each fiscal year, the Chief Executive Officer and each
executive officer establish a series of individual performance goals which are
specific to the executive's responsibilities. These goals seek to measure
performance of each executive officer's job responsibilities: for executive
-9-
<PAGE>
officers whose responsibilities are operational in nature, attainment of
operating group goals and objectives is stressed, and for corporate staff
officers, overall Company performance measured by earnings-per share growth is
utilized. Currently, the maximum potential cash bonus for the Company's
executive officers, as a percentage of base salary, ranges from 20% to 60%.
Thus, the Company's cash compensation practices seek to motivate executives
by requiring excellent performance measured against both internal goals and
competitive performance.
Long-Term Incentive Compensation. The second element of executive
compensation, long-term incentive compensation, currently takes the form of
stock options granted under the Company's 1992 Equity Incentive Plan. Currently,
stock options are granted under the Performance-Based Option program, which
consists of a series of guidelines which provide for the periodic granting of
specific amounts of stock options, denominated in dollars rather than in numbers
of shares, depending upon the executive's position within the Company. Existing
holdings of stock or stock options are not a factor in determining the dollar
value of an individual executive officer's award.
As is the case with short-term incentive compensation, at the beginning of
each fiscal year, the Chief Executive Officer and each executive officer
establish a series of individual performance goals specifically related to the
executive's responsibilities and designed to measure execution of these
responsibilities. In addition, a Company-wide performance goal measured in
earnings-per-share growth is established. Further consideration is given to each
executive officer's accountability and/or level of responsibility for managing
one or more aspects of the Company's overall business. These factors are
weighted for each executive officer, with greater emphasis and value being
placed on those factors which could have a greater impact on the Company's
long-term profitability. An individual executive officer's performance against
each of these criteria is then graded at one of five levels: significantly less
than expected, less than expected, as expected, exceeds expectation, and
significantly exceeds expectation. Awards of options are then made based upon a
dollar value, which increases as the executive officer achieves higher grades
for overall performance.
As often as seems appropriate, but at least annually, the Chief Executive
Officer reviews the Company's executive compensation program to judge its
consistency with the Company's compensation philosophy, whether it supports the
Company's strategic and financial objectives, and whether it is competitive
within the Company's industry.
Deductibility of Executive Compensation
The Chief Executive Officer has reviewed the potential consequences for the
Company of Section 162(m) of the Code which imposes a limit on tax deductions
for annual compensation in excess of one million dollars paid to any of the five
most highly compensated executive officers. Based on such review, the Chief
Executive Officer believes that the limitation will have no effect on the
Company in 1998.
Respectfully submitted,
Ronald M. Shaich
Chief Executive Officer
-10-
<PAGE>
Severance Arrangements
Pursuant to certain employment agreements, the Company has agreed to
provide each of Messrs. Postle and Taft with severance benefits equal to one
year's base salary plus car allowance and insurance benefits if employment is
terminated other than for cause.
COMPENSATION TABLES
The following tables set forth information concerning the compensation paid
or accrued by the Company during the fiscal years ended December 30, 1995,
December 28, 1996 and December 27, 1997, to or for the Company's Chief Executive
Officer and its four other most highly compensated executive officers whose
salary and bonus combined exceeded $100,000 for fiscal year 1997 (hereinafter
referred to as the "named executive officers").
-11-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation All Other
Name and ------------ Salary Bonus Other Annual Options/SARs Compensation
Principal Position Year ($) ($) Comp. ($) (#) ($)
------------------ ---- --- --- --------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Ronald M. Shaich 1997 250,000 - 1,428 400,000(a)
Co-Chairman and Chief 1996 249,519 - 1,428 -
Executive Officer 1995 241,346 - 1,428 100,000(b)
Louis I. Kane 1997 250,000 - 17,640 400,000(a)
Co-Chairman 1996 249,519 - 17,640 -
1995 241,346 - 9,828 100,000(b)
Richard C. Postle 1997 295,192 75,000 8,846 10,000
President, Saint Louis 1996 250,000 75,000 7,436 35,000(c)
Bread Business Unit 1995 77,885 - 1,538 46,822 35,000(f)
Robert C. Taft (e) 1997 250,000 88,850 5,924 10,000
President, Au Bon 1996 42,308 21,150 1,826 50,000(d)
Pain Company Owned Stores
Business Unit
Samuel H. Yong 1997 175,377 51,465 5,975 45,000
President, International 1996 170,000 57,375 6,600 13,763
and Trade Channels 1995 161,634 67,575 6,600 16,259
Business Unit
</TABLE>
(a) Consists of a ten-year option, vesting equally over a five year period
beginning June 12, 1997 and is subject to continued employment.
(b) Consists of an option for 100,000 shares granted in fiscal 1996 in order to
reflect compensation earned for performance in fiscal 1995.
(c) Includes an option for 5,000 shares granted in fiscal 1997 in order to
reflect compensation earned for performance in fiscal 1996.
(d) Represents a one time hire grant.
(e) Mr. Taft began his employment with the Company in October 1996.
(f) Represents one time relocation payment.
-12-
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------
Percent of
Number of Total Potential Realizable
Securities Options / Annual Rates of Stock
Underlying SARs Valued at Assumed Price
Options / Granted to Appreciation
SARs Employees Exercise or Prices for Option Term
Granted in Fiscal Base Price Expiration ($)*
Name (#) Year ($ / Sh) Date 5% 10%
---- --- ---- -------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Ronald M. Shaich 400,000 32.6% $7.50 6/12/07 $1,886,684 $4,781,227
Louis I. Kane 400,000 32.6% $7.50 6/12/07 $1,886,684 $4,781,227
Richard C. Postle 10,000 0.8% $8.63 12/2/07 $54,274 $137,540
Robert C. Taft 10,000 0.8% $8.63 12/2/07 $54,274 $137,540
Samuel H. Yong 45,000 3.7% $7.88 8/21/07 $223,006 $565,141
</TABLE>
* The dollar amounts in this table are the result of calculations at stock
appreciation rates specified by the Securities and Exchange Commission and
are not intended to forecast actual future appreciation rates of the
Company's stock price.
-13-
<PAGE>
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised
Options / SARs at FY-End (#)
----------------------------
Name Exercisable / Unexercisable
---- ---------------------------
<S> <C>
Ronald M. Shaich.............................. 277,330/400,000
Louis I. Kane................................. 277,330/400,000
Richard C. Postle............................. 11,706/80,116
Robert C. Taft................................ -- / 60,000
Samuel H. Yong................................ 58,115/39,003
</TABLE>
-14-
<PAGE>
OWNERSHIP OF AU BON PAIN COMMON STOCK
The following table sets forth certain information as of March 31, 1998,
with respect to the Company's Class A and Class B Common Stock owned by (1) each
director of the Company (2) the executive officers named in the Summary
Compensation Table, (3) all directors and executive officers of the Company as a
group, and (4) each person who is known by the Company to beneficially own more
than five percent of the Company's capital stock. Unless otherwise indicated in
the footnotes to the table, all stock is owned of record and beneficially by the
persons listed in the table. +
<TABLE>
<CAPTION>
Class A Common Class B Common
Name and, with respect to owner -------------- -------------- Combined Voting
of more than 5%, address Number Percent (1) Number Percent (2) Percentage (3)
- ------------------------------ ------ ----------- ------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Ronald M. Shaich+........................... 304,865(4) 2.89% 1,097,710 68.36% 23.4%
Co-Chairman, Director and
Chief Executive Officer
c/o Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, MA 02210
Louis I. Kane............................... 278,580(5) 2.65% 130,436 8.12% 2.7%
Co-Chairman and Director
c/o Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, MA 02210
Francis W. Hatch............................ 49,880(6)(7) * 42,013 2.61% 1.2%
Director
George E. Kane.............................. 23,942(6)(8) * 20,000 1.24% *
Director
James R. McManus............................ 38,542(6)(9) * -- -- *
Director
Henry J. Nasella............................ 20,080(10) * -- -- *
Director
Samuel H. Yong.............................. 64,408(11) * -- -- *
Executive Vice President and President,
International & Trade Channels
Richard C. Postle........................... 12,670(12) * -- -- *
Executive Vice President and President,
Saint Louis Bread
Robert Taft................................. 2,247(13) * -- -- *
Executive Vice President and
President, Au Bon Pain Company Owned Stores
-15-
<PAGE>
Class A Common Class B Common
Name and, with respect to owner -------------- -------------- Combined Voting
of more than 5%, address Number Percent (1) Number Percent (2) Percentage (3)
- ------------------------------ ------ ----------- ------ ----------- --------------
All Directors and officers as
a group (13 persons) +.................... 895,828(14) 8.74% 1,310,070 81.58% 30.4%
Morgan Stanley Group Inc. (15)(16).......... 1,331,215 12.98% -- -- 8.8%
1251 Avenue of the Americas
New York, NY 10020
PG Investors, Inc. (15)(17)................. 1,326,468 12.93% -- -- 8.8%
1251 Avenue of the Americas
New York, NY 10020
Princes Gate Investors, L.P. (15)(18)....... 993,896 9.69% -- -- 6.6%
1251 Avenue of the Americas
New York, NY 10020
Brown Capital Management.................... 1,210,550 11.81% -- -- 8.0%
809 Cathedral Street
Baltimore, MD 21201
Acorn Investment Trust,
Series Designated Acorn Fund (19)......... 634,000 6.18% -- -- 4.2%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Wanger Asset Management, L.P. (20).......... 634,000 6.18% -- -- 4.2%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Fund Asset Management, L.P. (21)............ 1,166,800 11.37% -- -- 7.7%
c/o Merrill Lynch & Co., Inc.
World Financial Center, North Tower
250 Vesey Street
New York, NY 10281
Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 (22)............... 509,550 4.96% -- -- 3.4%
</TABLE>
- -------------
+ Does not include 140,000 shares of Class B Common Stock held by Mr. Joseph
Shaich, a director of the Company on March 31, 1998. Mr. Shaich died on April
16, 1998. Ronald Shaich and Joseph Shaich entered into an agreement pursuant
to which Ronald Shaich agreed to purchase all such shares of stock within 60
days of Joseph Shaich's death. If Ronald Shaich acquires such shares, his
combined voting percentage will be 26.2% and the combined voting percentage
of officers and directors as a group will be 33.1%.
-16-
<PAGE>
* Less than one percent.
(1) Percentage ownership of Class A Common Stock is based on 10,254,301
shares issued and outstanding plus shares subject to options
exercisable within sixty days of March 31, 1998 held by the stockholder
or group.
(2) Percentage ownership of Class B Common Stock is based on 1,605,741
shares issued and outstanding plus shares subject to options
exercisable within sixty days of March 31, 1998 held by the stockholder
or group.
(3) This column represents voting power rather than percentage of equity
interest as each share of Class A Common Stock is entitled to one vote
while each share of Class B Common Stock is entitled to three votes.
(4) Includes options exercisable within 60 days for 277,330 shares.
(5) Consists of (a) 1,200 shares owned by Mr. Kane's spouse and as to which
Mr. Kane disclaims beneficial ownership; and (b) options exercisable
within 60 days for 277,330 shares.
(6) Includes options for 23,542 shares exercisable within sixty days of
March 31, 1998 pursuant to the Directors' Plan for independent
directors.
(7) Includes 22,338 shares owned by Mr. Hatch's spouse and as to which
Mr. Hatch disclaims beneficial ownership.
(8) Also includes 400 shares owned by Mr. Kane.
(9) Also includes 15,000 shares owned by Mr. McManus.
(10) Consists of 1,000 shares jointly owned by Mr. Nasella and his spouse
and options for 19,080 shares exercisable within sixty days of March
31, 1998 pursuant to the Directors' Plan for independent directors.
(11) Consists of (a) options for 64,388 shares exercisable within sixty days
of March 31, 1998, and (b) 20 shares in custodial accounts for Mr.
Yong's minor children and as to which Mr. Yong disclaims any beneficial
ownership.
(12) Includes 964 shares owned by Mr. Postle and options for 11,706 shares
exercisable within sixty days of March 31, 1998.
(13) Consists of 2,247 shares of which 895 shares are held in custodial
accounts for Mr. Taft's children and as to which Mr. Taft disclaims any
beneficial ownership.
(14) Includes options for 801,050 shares exercisable within sixty days of
March 31, 1998.
(15) Information included is based solely upon a Schedule 13D filed with the
Commission, jointly on behalf of Morgan Stanley Group Inc. ("MS
Group"), PG Investors, Inc. ("PGI") and Princes Gate Investors, L.P.
("Princes Gate L.P."). PGI Investors, Inc. is a wholly-owned subsidiary
of Morgan Stanley Group Inc., and is the general partner of Princes
Gate L.P. On December 22, 1993, the Company issued to several
purchasers, including Princes Gate L.P., $30,000,000 in aggregate
principal amount of 4.75% Convertible Subordinated Notes due 2001 (the
"Notes"). The Notes are convertible into fully paid and non-assessable
shares of Class A Common Stock at a conversion price (subject to
adjustment) equal to $25.50 principal amount for each share of Class A
Common Stock, or currently 1,176,468 shares of Class A Common Stock in
the aggregate.
-17-
<PAGE>
(16) Includes (a) 4,247 shares of Class A Common Stock owned by its
wholly-owned subsidiary, Morgan Stanley & Co. Incorporated ("MS & Co.")
in its capacity as a market-maker in the Company's Class A Common
Stock, (b) 500 shares of Class A Common Stock over which MS & Co.
exercises discretionary authority on behalf of customers, and (c) since
PGI exercises investment management, voting and/or disposition control
over all of the Notes and the underlying shares of Class A Common Stock
obtainable upon conversion of the Notes, 1,176,468 shares of Class A
Common Stock obtainable upon conversion of the Notes. In connection
with a financing transaction consummated in July 1996, also includes a
Class A Common Stock purchase warrant issued for 150,000 shares,
exercisable at $5.62 per share through July 24, 2001.
(17) Since PGI exercises investment management, voting and disposition
control over the Notes and the underlying shares of Class A Common
Stock obtainable upon conversion of the Notes, includes 1,176,468
shares of Class A Common Stock obtainable upon conversion of the Notes.
In connection with a financing transaction consummated in July 1996,
also includes a Class A Common Stock purchase warrant issued for
150,000 shares, exercisable at $5.62 per share through July 24, 2001.
(18) Includes 881,504 shares of Class A Common Stock obtainable upon
conversion of the Notes currently held by Princes Gate L.P. In
connection with a financing transaction consummated in July 1996, also
includes a Class A Common Stock purchase warrant issued for 112,392
shares, exercisable at $5.62 per share through July 24, 2001.
(19) Power over voting and disposition of these securities is shared with
Wanger Asset Management, L.P., which is the investment adviser of Acorn
Investment Trust, Series Designated Acorn Fund.
(20) Includes 634,000 shares beneficially owned by Acorn Investment Trust,
Series Designated Acorn Fund (the "Trust"), with respect to which the
Trust has delegated to Wanger Asset Management, L.P. ("WAM") shared
voting power and shared dispositive power. WAM serves as investment
adviser to the Trust.
(21) Merrill Lynch & Co., Inc. ("ML&Co."), Merrill Lynch Group, Inc. ("ML
Group"), and Princeton Services, Inc. ("PSI"), are parent holding
companies pursuant to the Securities Exchange Act of 1934. PSI is the
general partner of Fund Asset Management, L.P. (d/b/a) Fund Asset
Management ("FAM"), and Merrill Lynch Asset Management L.P. (d/b/a)
Merrill Lynch Asset Management ("MLAM"). The following entities, (a)
ML&Co., (b) ML Group, a wholly-owned direct subsidiary of ML&Co., and
(c) PSI, a wholly-owned direct subsidiary of ML Group, may all be
deemed to be the beneficial owner of certain of these shares by virtue
of PSI being the general partner of FAM and MLAM. FAM is an investment
adviser registered under Section 203 of the Investment Advisers Act of
1940 and may be deemed to be the beneficial owner of certain of these
shares by virtue of its acting as investment adviser to one or more
investment companies and to one or more private accounts. One
registered investment company advised by FAM, Merrill Lynch Special
Value Fund, Inc., is the beneficial owner of these shares, and is a
reporting person. MLAM is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940 and may be deemed to
be the beneficial owner of these shares by virtue of its acting as
investment adviser to one or more investment companies registered under
Section 8 of the Investment Company Act and to one or more private
accounts. ML&Co., ML Group and PSI disclaim beneficial ownership of
these shares.
(22) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 509,500 shares, all
of which shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in series of
the DFA Investment Trust Company, a Delaware business trust, or the DFA
Group Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, all of which Dimensional serves as
investment manager. Dimensional disclaims beneficial ownership of all
such shares.
-18-
<PAGE>
TOTAL RETURN TO STOCKHOLDERS
(Assumes $100 investment on December 31, 1992)
The following graph and chart compare the cumulative annual stockholder
return on the Company's Common Stock over the period commencing December 31,
1992 through December 31, 1997 to that of the total return index for the NASDAQ
Stock Market (U.S. Companies) and the Standard & Poor's 400 - MidCap Restaurant
Index, assuming the investment of $100 on December 31, 1992. In calculating
total annual stockholder return, reinvestment of dividends is assumed. The stock
performance graph and chart below are not necessarily indicative of future price
performance.
[INSERT GRAPH HERE]
<TABLE>
<CAPTION>
S&P
Measurement Period Au Bon 400-MidCap NASDAQ
(Fiscal Year Covered) Pain Co., Inc. Restaurants Composite
<S> <C> <C> <C>
12/31/92 $ 100.00 $ 100.00 $100.00
12/31/93 $ 85.85 $ 125.23 $114.79
12/31/94 $ 60.38 $ 86.54 $111.99
12/29/95 $ 31.13 $ 85.49 $164.60
12/31/96 $ 24.53 $ 82.00 $202.46
12/31/97 $ 28.54 $ 89.89 $247.29
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no Certain Relationships or Related Transactions during the
fiscal year ended December 27, 1997 to report.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Proposals of stockholders of the Company (including director
nominations) intended to be presented at the 1999 Annual Meeting of Stockholders
must be received by the Company not later than December 31, 1998 to be included
in the Company's proxy statement and form of proxy relating to the 1999 Annual
Meeting of Stockholders. Nominations and proposals of stockholders may be
submitted to the Company for consideration at the 1999 Annual Meeting of
Stockholders if certain conditions set forth in the Company's By-laws are
satisfied, although such nominations and proposals will not be included in the
proxy statement and form of proxy relating to that annual meeting unless
submitted in accordance with the time limits and other requirements set forth
above and in the related rules of the Securities and Exchange Commission.
COMPLIANCE WITH SECTION 16(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than 10% of the
Company's outstanding shares of Common Stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC") and
Nasdaq. Officers, Directors and greater than 10% stockholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
-19-
<PAGE>
In accordance with the provisions of Item 405 of Regulation S-K, to the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required during the fiscal year ended December 27, 1997, all Section 16(a)
filing requirements applicable to its executive officers, Directors and greater
than 10% beneficial owners were satisfied, with the exception of a Form 4 that
was not timely filed on behalf of James R. McManus.
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE FISCAL YEAR 1997 MAY BE OBTAINED WITHOUT CHARGE
UPON WRITTEN REQUEST TO INVESTOR RELATIONS COORDINATOR, AU BON PAIN CO., INC.,
19 FID KENNEDY AVENUE, BOSTON, MASSACHUSETTS 02210.
-20-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
For the fiscal years ended
-----------------------------------------------------------------------------
Dec. 25, Dec. 31, Dec. 30, Dec. 28, Dec. 27,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales $113,980 $173,436 $216,411 $225,625 $233,212
Franchise sales and
other revenues 8,935 9,450 10,055 11,309 17,678
-------- -------- -------- -------- --------
122,915 182,886 226,466 236,934 250,890
Costs and expenses:
Cost of food and
paper products 39,695 60,535 77,250 85,631 90,385
Restaurant
operating expenses 56,697 85,139 112,161 115,364 119,537
Depreciation and
amortization 7,967 11,891 14,879 16,195 16,862
General and
administrative 6,757 10,098 12,818 14,979 16,417
Non-recurring
charge - - 8,500 4,435 -
-------- -------- -------- -------- --------
111,116 167,663 225,608 236,604 243,201
-------- -------- -------- -------- --------
Operating income 11,799 15,223 858 330 7,689
Interest expense, net 57 1,727 3,363 5,140 7,204
Other (income)
expense, net (28) 80 2,016 2,513 212
Minority interest 105 78 (94) (40) (42)
Income (loss) before
provision (benefit)
for income taxes 11,665 13,338 (4,427) (7,283) 315
Provision (benefit)
for income taxes 4,844 5,497 (2,813) (2,918) (1,492)
--------- --------- --------- --------- ---------
Net income (loss) $ 6,821 $ 7,841 $ (1,614) $ (4,365) $ 1,807
======== ======== ======== ======== ========
Net income (loss)
per common share - basic $ .71 $ .60 $ (.14) $ (.37) $ .15
======== ======== ======== ======== ========
Net income (loss)
per common share
- diluted $ .69 $ .59 $ (.14) $ (.37) $ .15
======== ======== ======== ======== ========
Weighted average
number of shares
outstanding - basic 11,042 11,429 11,621 11,705 11,766
Weighted average
number of shares
outstanding - diluted 11,353 11,624 11,621 11,705 11,913
Comparable restaurant
sales percentage
increase for
Company-operated
bakery cafes 6.7% 5.8%(1) 0.5% 0.7% 3.6%
</TABLE>
(1) Fiscal 1994 included 53 weeks. The 1994 restaurant sales used in this
computation have been adjusted downward to be comparable to fiscal 1993 and
fiscal 1995.
-21-
<PAGE>
<TABLE>
<CAPTION>
For the fiscal years ended
-------------------------------------------------------------------------
Dec. 25, Dec. 31, Dec. 30, Dec. 28, Dec. 27,
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
(in thousands, except Company-operated bakery cafes open)
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Working capital $ 5,817 $ (3,439) $ 846 $ (1,748) (58)
Total assets 120,474 165,586 193,018 196,428 186,516
Long-term debt, less
current maturities 274 19,095 42,502 49,736 42,527
Convertible
subordinated notes 30,000 30,000 30,000 30,000 30,000
Stockholders' equity 76,098 94,164 93,238 90,056 92,274
Company-operated
bakery cafes open 156 213 244 231 220
</TABLE>
-22-
<PAGE>
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:
<TABLE>
<CAPTION>
For the fiscal years ended
--------------------------------------------------
Dec. 30, Dec. 28, Dec. 27,
1995 1996 1997
-------- -------- ------
<S> <C> <C> <C>
Revenues:
Restaurant sales 95.6% 95.2% 93.0%
Franchise sales and
other revenues 4.4 4.8 7.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Costs and expenses:
Cost of food and paper
products 34.1% 36.1% 36.0%
Restaurant operating
expenses 49.5 48.7 47.7
Depreciation and
amortization 6.6 6.8 6.7
General and administrative 5.7 6.3 6.5
Non-recurring charge 3.7 1.9 -
---- ---- --
99.6 99.8 96.9
----- ----- -----
Operating margin 0.4 0.2 3.1
Interest expense, net 1.5 2.2 2.9
Other expense, net 0.9 1.0 0.1
Minority interest -- -- --
----- ----- -----
Income (loss) before (benefit)
from income taxes (2.0) (3.0) 0.1
Benefit from income taxes (1.3) (1.2) (0.6)
----- ----- -----
Net income (loss) (0.7)% (1.8)% 0.7%
===== ===== =====
</TABLE>
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 fiscal
years from 1995 through 1997 ended on December 30, 1995, December 28, 1996 and
December 27, 1997 and included 52, 52 and 52 weeks, respectively. 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.
-23-
<PAGE>
Results of Operations
1997 Compared to 1996
---------------------
Total restaurant sales from Company-operated bakery cafes increased 3.1% to
$233 million in 1997 from $226 million in 1996 due to several factors.
Incremental sales were generated from the opening of 6 new Saint Louis Bread
Company-operated bakery cafes opened throughout 1997 and 3 Au Bon Pain and 2
Saint Louis Bread Company-operated bakery cafes opened throughout 1996. In
addition, comparable restaurant sales increases in Saint Louis Bread and Au Bon
Pain contributed to the sales growth. Restaurant sales increased 18.3% in the
Saint Louis Bread business due to the store openings and strong comparable
restaurant sales of 9.3%, which were slightly offset by the sale of one Saint
Louis Bread Company-operated restaurant in connection with the execution of a
franchise area development agreement. Sales from Company-owned restaurants in
the Au Bon Pain business unit declined 1.7% as the sales from new
Company-operated restaurants and an increase in comparable restaurant of 1.6%
sales were more than offset by the effect of the disposition throughout 1997 of
a number of underperforming bakery cafes.
Other revenues increased to $17.7 million in 1997 from $11.3 million in
1996, principally from growth in wholesale sales to $8.0 million in 1997, from
$5.7 million in 1996 and an increase in franchise revenue to $9.4 million in
1997, from $5.5 million in 1996. The wholesale sales increase was due to
additional customers and distribution. The franchise revenue increase was driven
by the execution of new franchise area development agreements, fees from opening
new franchise locations and higher royalty income.
Operating income increased to $7.7 million in 1997 from $330,000 in 1996.
Operating income in 1996 included a non-recurring charge recorded by the Company
of $4.4 million ($3.8 million after-tax), related principally to the write-down
of certain assets under FAS #121. Before the non-recurring charge, operating
income increased 61% in 1997 to $2.9 million above 1996, driven by increased
sales and contribution, especially in the Saint Louis Bread division, where a
significant increase in franchise contribution combined with sales growth and
operational efficiencies drove Saint Louis Bread's operating income to nearly
double versus 1996. In addition, manufacturing contribution improved versus
1996, as the new production facility opened in 1996 in Mexico, MO stabilized its
operating performance.
Operating margin in the Au Bon Pain business unit declined by .5 points in
1997 versus 1996, due to higher food and paper costs of 1.2 points caused by
higher commodity costs for butter and less than full capacity in the
manufacturing facility in Mexico, Missouri. Restaurant operating expenses
decreased by .7 points as sales growth and the closing of unprofitable
restaurants provided leverage against occupancy and store overhead costs.
Depreciation and amortization and general and administrative expenses as a
percentage of revenue remained flat with the prior year.
-24-
<PAGE>
Operating margin in the Saint Louis Bread business unit increased by 4.3
points versus the prior year, as higher sales leveraged the fixed costs within
the operational expenses and significantly higher franchise contribution
increased operating margin. Food and paper costs were .4 points lower in 1997
versus 1996, as operational efficiencies offset commodity cost increases.
Restaurant operating expenses as a percentage of revenue declined by 1.3 points
with the sales improvement providing leverage against occupancy costs, which
declined by .5 points, overhead costs, which declined by .1 points and labor,
which declined by .6 points. Franchise contribution grew by over 700%,
increasing margin by 1.5 points in 1997 versus 1996, as the broad-based
franchise program initiated in 1996 for Saint Louis Bread successfully expanded
the number of committed stores to 356 total stores.
1996 Compared to 1995
---------------------
Restaurant sales from Company-operated bakery cafes increased 4.2% to $226
million in 1996 from $216 million in 1995, due principally to several factors:
incremental sales in 1996 over 1995 from the 15 Au Bon Pain and 20 Saint Louis
Bread Company-operated bakery cafes opened throughout 1995, strong comparable
restaurant sales in the Saint Louis Bread business unit and sales from the 3 Au
Bon Pain and 2 Saint Louis Bread Company-operated bakery cafes opened throughout
1996. Company-operated restaurant sales decreased 2.9% in the Au Bon Pain
business unit, as additional sales stemming from the new Company-operated bakery
cafes opened in 1995 and 1996 were more than offset by the effect on sales of
the disposition throughout 1996 of a series of underperforming bakery cafes
under an initiative begun in late 1995. Company-operated restaurant sales
increased 33.6% in the Saint Louis Bread business unit in 1996 over 1995, due to
sales stemming from the new Company-operated bakery cafes opened in 1995 and
1996 and from strong comparable restaurant sales. Comparable restaurant sales in
1996 decreased 1.3%, or $1.96 million, in the Au Bon Pain business unit. In the
Saint Louis Bread business unit comparable restaurant sales increased 10.2%, or
$3.32 million, in 1996 over the previous year driven by a highly successful
bagel product line introduction.
Operating income declined to $330,000 in 1996 from $858,000 in 1995.
Operating income was significantly affected by separate non-recurring charges
recorded by the Company of $4.4 million ($3.7 million after-tax) in 1996 and of
$8.5 million ($5.3 million after-tax) in 1995. The non-recurring charge recorded
in 1996 related principally to the write-down of certain assets in accordance
with FAS #121. The non-recurring charge recorded in 1995 related principally to
the closure of certain under-performing bakery cafes. Before the non-recurring
charges, operating margin decreased in 1996 to 2.0% from 4.1% in 1995, as
operating margin improvements at the Saint Louis Bread business unit were more
than offset by lower operating margins in the Au Bon Pain business unit, driven
primarily by costs associated with the start-up of a new frozen dough
manufacturing facility opened during 1996 in Mexico, Missouri.
-25-
<PAGE>
Operating margin in the Au Bon Pain business unit declined by 4.3 points in
1996 versus 1995, due principally to start-up costs and inefficiencies related
to the opening of the new manufacturing facility and significantly higher
commodity costs for butter and flour in 1996 versus the previous year. In total,
these manufacturing related costs constituted the majority of the 2.6 point
increase to cost of food and paper costs as a percentage of revenues in the Au
Bon Pain business unit compared to the prior year. Restaurant operating expenses
increased by .4 points in 1996 versus 1995, as percentage increases in occupancy
costs due to negative leverage stemming from the slight comparable restaurant
sales decline more than offset percentage improvements in both labor costs and
controllable expenses at the retail store level. Depreciation and amortization
expense as a percentage of revenues increased by .4 points in 1996 due to
incremental depreciation related to the new Missouri manufacturing facility and
the negative leverage associated with the comparable restaurant sales decline.
General and administrative expenses as a percentage of revenues increased by .9
points in 1996 versus 1995 due primarily to greater investment in infrastructure
in the international franchise area, information systems and other overhead
areas.
At Saint Louis Bread, operating margin improved by 4.8 points in 1996
versus 1995, as the new management team established at the end of 1995 improved
operational focus and control throughout 1996 and the significantly positive
comparable restaurant sales increase in 1996 leveraged many of the largely fixed
costs within the operations. Percentage food and paper costs decreased by .4
points in 1996 compared to 1995, despite higher allocated costs associated with
frozen dough provided by the new manufacturing facility opened during the year.
Percentage restaurant operating expenses decreased by 4.2 points driven by
improved management controls surrounding labor costs and store-level
controllable expenses. Depreciation and amortization expense and general and
administrative expenses each decreased by .2 points versus the previous year due
to leverage from the significantly higher sales in 1996.
Benefit from Income Taxes
The Company had a benefit from income taxes of $2.8 million, $2.9 million
and $1.5 million for the years ended December 30, 1995, December 28, 1996 and
December 27, 1997, respectively, due to federal and state net operating loss
carryforwards, tax credit carryforwards and the fact that the Company has
incurred net losses. As of December 27, 1997, the Company had federal and state
net operating loss carryforwards of approximately $40.0 million, as well as
approximately $3.1 million of tax credit carryforwards available for income tax
purposes. Approximately $13.1 million of these carryforwards expire in the years
2000-2002, while the remaining $26.9 million expires in the years 2010-2012. For
the year ended December 31, 1997, the Company provided a valuation allowance of
$1.3 million to reduce its deferred tax asset to a level which, more likely than
not, will be realized. The valuation allowance is primarily attributable to the
potential expiration of charitable contribution deduction carryforwards and
certain state net operating loss carryforwards. The Company reevaluates the
positive and negative evidence impacting the realizability of its deferred tax
assets on an annual basis.
-26-
<PAGE>
Net income (loss)
Higher operating income in 1997 versus 1996 and deferred tax assets
generated during 1997 from federal net operating loss carryforwards and tax
credit carryforwards (see "Benefit from Income Taxes"), partially offset by
higher interest costs incurred in 1997, produced a significant increase in net
income for the year ended December 27, 1997 versus a net loss of $4.3 million
for the year ended December 28, 1996, which included a non-recurring charge of
$3.8 million.
The lower operating income in 1996 versus 1995, combined with higher
interest expense and other expense, net resulted in a net loss of $4.4 million
in 1996, as compared with a net loss of $1.6 million in 1995. The higher
interest expense was due primarily to higher average long-term debt outstanding,
as higher average interest rate due to the issuance of $15 million senior
subordinated debentures in July, 1996 which carry a significantly higher coupon
rate than the other outstanding long-term debt.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $853,000 at December 27, 1997 from
$2.6 million at December 28, 1996. The Company's principal requirements for cash
are capital expenditures for constructing and equipping new bakery cafes and
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.
Net cash provided by net income plus depreciation was $17.3 million in 1997
versus $10.3 million in 1996. A total of $13.5 million was provided by operating
activities in 1997 compared to $14.8 million in 1996. In 1997, funds provided by
operating activities were primarily the result of an increase in accrued
expenses, offset by growth in accounts receivable and a decrease in accounts
payable. In 1996, funds provided by operating activities were primarily the
result of an increase in accounts payable and accrued expenses, offset by growth
in accounts receivable and inventories.
The Company utilized $7.7 million and $21.8 million for investing
activities in 1997 and 1996, respectively. The investing activities in 1997
resulted primarily from three transactions. In the third quarter of 1997, the
Company sold its interest in Peet's Coffee and Teas, Incorporated back to Peet's
for $2 million in cash, resulting in a pre-tax gain of $930,000. Also in the
third quarter of 1997, the Company sold a Saint Louis Bread cafe for $1.1
million in cash in conjunction with the execution of a franchise area
development agreement, resulting in a pre-tax gain of $325,000. In the fourth
quarter of 1997 the Company sold its Woburn, MA office building for $4.9 million
in cash, resulting in a gain of $660,000. The pre-tax gains on these
transactions were recognized as a component of other expense, net in the
Company's consolidated financial statements for the year ended December 27,
1997. The Company used the proceeds of $3.3 million from these transactions to
reduce debt during 1997.
-27-
<PAGE>
Total capital expenditures in 1997 of $14.7 million were related primarily
to the opening of one Au Bon Pain and six Saint Louis Bread new Company-operated
bakery cafes and to the construction of four new local Saint Louis Bread
commissaries. The expenditures were mainly funded by net cash from operating
activities of $13.5 million and cash proceeds from the non-operating transaction
described above.
The Company utilized $7.5 million and generated $3.2 million from financing
activities in 1997 and 1996, respectively. The financing activities in 1997 and
1996 resulted primarily from proceeds from and principal payments on long-term
debt, and the issuance of common stock under the Company's employee stock option
and employee stock purchase plans.
In 1998, the Company expects to spend approximately $22.0 million for
capital expenditures, principally for the opening of new bakery cafes. The
Company expects to fund these expenditures substantially through internally
generated cash flow.
On July 24, 1996, the Company issued $15 million senior subordinated
debentures maturing in July, 2000. The debentures accrue interest at increasing
fixed rates over the four year term, ranging between 11.25% and 14.0%. In
connection with the private placement, warrants with an exercise price of $5.62
per share 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 Company's existing revolving line of credit, management
believes it has the capital resources necessary to meet its growth goals through
1999.
The Company has a $28.0 million unsecured revolving line of credit which
bears interest at either the commercial bank's prime rate or LIBOR plus 3.0%, at
the Company's option. At December 27, 1997, $18.3 million was outstanding under
the line of credit and an additional $1,200,000 of the remaining availability
was utilized by outstanding letters of credit issued by the bank on behalf of
the Company. The revolving line of credit matures on September 30, 1999.
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. In conjunction with the sale, Au Bon Pain and
Saint Louis Bread entered into five year supply agreements with Bunge for the
supply of substantially all their frozen dough needs, excluding bagels, in their
domestic bakery cafes. The Company expects the supply agreements will result in
an improved operating margin of approximately .5% of total revenues, along with
reduced interest expense. The net proceeds of the sale were used to reduce the
$7.9 million outstanding for the Industrial Revenue Bond and $4.9 million for a
permanent reduction to the revolving credit line. This reduction of the
revolving credit line reduced the total commitment of the Banks in the Credit
-28-
<PAGE>
Agreement so that the amount available under the revolving credit line decreased
to $23.1 million from $28 million (see Note 8). In addition, approximately $2
million of related receivables at December 27, 1997 will be used to further
reduce debt. The Company expects to recognize a pre-tax loss on the sale of the
facility of approximately $700,000 in the Company's results of operations for
the first quarter of 1998. 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.
Assuming there is no significant change in the Company's business, the
Company believes that the existing cash and cash equivalents as well as cash
flows from operations will be sufficient to meet its working capital
requirements for at least the next twelve months.
Certain Factors Affecting Future Operating Results
Statements made or incorporated in this Form 10-K 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 "estimates," "projects," "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 forward-looking statements involve known and unknown risks and
uncertainties. The Company's actual results could differ materially from those
set forth in the forward-looking statements. The amount of cost to the Company
under the new Supply Agreements is dependent upon market fluctuations in
commodities prices, particularly flour and butter. 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, competition and other factors that may affect
retailers in general.
The Company has not completed its assessment of the impact of the Year 2000
issue. It is management's belief that the primary financial systems are Year
2000 compatible. Testing of those systems for compliance is expected to occur
during 1998. Many secondary systems associated with the Company's retail
operations will require modifications. It is the Company's belief that existing
internal Company resources will be adequate to reprogram these Year 2000
modifications. It is expected that the most significant Year 2000 system issue
for the Company is with POS systems used by the Au Bon Pain concept. The Company
is in negotiations with several vendors to replace the existing POS systems with
new state-of-the-art systems. The new systems are expected to be leased at a net
incremental cost of approximately $400,000 annually. The incremental cost of the
new system is expected to be substantially offset by labor efficiency savings
associated with the new POS system.
-29-
<PAGE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for annual
periods beginning after December 15, 1997 and the Company will adopt its
provisions in fiscal 1998. Reclassifications for earlier periods is required for
comprehensive purposes. Management does not expect the statement to have an
impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the manner in which public
companies report information about their operating segments. SFAS No 131 which
is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenues.
Management is currently evaluating the effects of this change on its reporting
of segment information. The company will adopt SFAS No. 131 for its fiscal year
ending December 26, 1998.
-30-
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following is included in response to this item:
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
(a) Market Information.
-------------------
The Company's Class A Common Stock is traded on The Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol ABPCA. The following table sets
forth the high and low sale prices as reported by Nasdaq for the fiscal periods
indicated.
<TABLE>
<CAPTION>
1996 High Low
- ---- ---- ---
<S> <C> <C>
First quarter ......................... 9-5/16 6-3/4
Second quarter ........................ 9 6-7/8
Third quarter ......................... 7-1/4 6-1/8
Fourth quarter ........................ 8-1/4 5-1/2
1997
First quarter.......................... 8-7/16 5-7/8
Second quarter ........................ 7-3/8 6
Third quarter ......................... 10-1/4 7
Fourth quarter ........................ 9-13/16 7-1/4
</TABLE>
On March 17, 1998, the last sale price for the Class A Common Stock, as
reported on the Nasdaq National Market System, was $8-5/16.
(b) Holders.
--------
On March 17, 1998, the Company had approximately 1,455 holders of record of
its Class A Common Stock and approximately 91 holders of its Class B Common
Stock.
(c) Dividends.
----------
The Company has never paid cash dividends on its capital stock and has no
intention of paying cash dividends in the foreseeable future.
-31-
<PAGE>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
--------------------
AU BON PAIN CO.,
INC.
--------------------
RECORD DATE SHARES: _________
[Name and Address
of Shareholder]
With- For All
1. Election of Directors. For hold Except
[ ] [ ] [ ]
George E. Kane
Henry J. Nasella
NOTE: If you do not wish your shares voted "FOR" a particular nominee, mark
the "FOR ALL EXCEPT" box and strike a line through that nominee's name. Your
shares shall be voted for the remaining nominees.
For Against Abstain
[ ] [ ] [ ]
2. Ratification of the appointment of
Coopers & Lybrand LLP as independent
auditors of the Company.
3. In their discretion, the Proxies are authorized to vote upon any other
business that may properly come before the meeting or at any adjournment(s)
thereof.
Date
Please be sure to sign and date this Proxy Card
Mark box at right if an address change or comment has been noted on
the reverse side of this card. [ ]
Stockholder sign here Co-owner sign here
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DETACH CARD DETACH CARD
AU BON PAIN CO., INC.
Dear Shareholder,
Please take note of the important information enclosed with this proxy card.
There are a number of issues related to the management and operation of the
Company that require your immediate attention and approval. These are discussed
in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders, June 25,
1998.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Au Bon Pain Co., Inc.
[Name and Address of Shareholder]
<PAGE>
AU BON PAIN CO., INC.
19 Fid Kennedy Avenue
Boston, MA 02210
Annual Meeting of Stockholders - June 25, 1998
Proxy Solicited on Behalf of the Board of Directors
The undersigned, revoking all prior proxies, hereby appoints Louis I. Kane and
Ronald M. Shaich as Proxies, with full power of substitution for and on behalf
of the undersigned at the 1998 Annual Meeting of Stockholders of AU BON PAIN
CO., INC. to be held at USTrust, 40 Court Street, 12th Floor, Boston,
Massachusetts, on Thursday, June 25, 1998, at 10:00 a.m., and at any adjournment
or adjournments thereof. The undersigned hereby directs the said Proxies to vote
in accordance with their judgment on any matters which may properly come before
the Annual Meeting, all as indicated in the Notice of Annual Meeting, receipt of
which is hereby acknowledged, and to act on the following matters set forth in
such notice as specified by the undersigned.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
"FOR" PROPOSALS 1 AND 2.
- --------------------------------------------------------------------------------
PLEASE VOTE, DATE, AND SIGN ON REVERSE AND RETURN PROMPTLY USING THE
ENCLOSED ENVELOPE. PLEASE VOTE, DATE, AND SIGN ON REVERSE AND RETURN
PROMPTLY USING THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
Please sign exactly as your name(s) appear(s) on the books of the Company.
Joint owners should each sign personally. Trustees, custodians, and other
fiduciaries should indicate the capacity in which they sign, and where more than
one name appears, a majority must sign. If the shareholder is a corporation, the
signature should be that of an authorized officer who should indicate his or her
title.
- --------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
