SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
- - - - - - - - - - - - - -
FORM 10-Q/A
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13
- ----- OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13
OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-19253
Au Bon Pain Co., Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2723701
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Fid Kennedy Avenue, Boston, MA 02210
--------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(617) 423-2100
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(Registrant's telephone number, including area code)
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(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 December 31, 1998, 10,059,544 shares and 1,557,658 shares of the
registrant's Class A and Class B Common Stock, respectively, $.0001 par value,
were outstanding.
<PAGE>
AU BON PAIN CO., INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS ............................. 3
Consolidated Balance Sheets as of
October 3, 1998 and December 27, 1997 ............ 3
Consolidated Statements of Operations
for the twelve and forty weeks ended
October 3, 1998 and October 4, 1997 .............. 4
Consolidated Statements of Cash Flows
for the forty weeks ended October 3, 1998
and October 4, 1997 .............................. 5
Notes to Consolidated Financial Statements ....... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .... 9
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................. 18
ITEM 5. OTHER INFORMATION ................................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................. 19
</TABLE>
2
<PAGE>
Item 1. Financial Statements
AU BON PAIN CO., INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, December 27,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS (unaudited)
- ------
Current assets:
Cash and cash equivalents....................... $ 680,240 $ 853,025
Accounts receivable, net........................ 7,065,115 9,427,190
Inventories..................................... 6,285,697 9,116,794
Prepaid expenses................................ 2,625,544 775,036
Refundable income taxes......................... 595,272 595,916
Deferred income taxes........................... 2,300,040 600,040
------------ ------------
Total current assets........................ 19,551,908 21,368,001
------------ ------------
Property and equipment, less accumulated
depreciation and amortization................... 91,300,662 112,231,916
------------ ------------
Other assets:
Notes receivable................................ 4,984,966 4,742,994
Intangible assets, net of accumulated
amortization 20,259,446 31,360,459
Deferred financing costs........................ 902,434 952,591
Deposits and other.............................. 11,327,264 9,097,477
Deferred income taxes........................... 9,861,983 6,761,983
------------ ------------
Total other assets.......................... 47,336,093 52,915,504
------------ ------------
Total assets................................ $158,188,663 $186,515,421
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable................................ $ 7,164,430 $ 7,070,881
Accrued expenses................................ 14,369,276 13,917,058
Current maturities of long term debt (Note D)... 64,071,240 438,100
------------ ------------
Total current liabilities................... 85,604,946 21,426,039
Long-term debt, less current maturities........... -- 42,526,752
Convertible Subordinated Notes.................... -- 30,000,000
------------ ------------
Total liabilities........................... 85,604,946 93,952,791
------------ ------------
Minority interest................................. 1,448 287,847
Stockholders' equity:
Preferred Stock, $.0001 par value:
Class B, shares authorized 2,000,000; issued and
outstanding none in 1998 and 1997, respectively
Common stock, $.0001 par value:
Class A, shares authorized 50,000,000; issued
and outstanding 10,410,421 and 10,144,840 in
in 1998 and 1997, respectively............... 1,042 1,019
Class B, shares authorized 2,000,000; issued
and outstanding 1,557,658 and 1,572,907 in
1998 and 1997, respectively.................. 156 161
Additional paid-in capital...................... 69,720,343 68,485,661
Retained earnings............................... 2,860,728 23,787,942
------------ ------------
Total stockholders' equity................. 72,582,269 92,274,783
------------ ------------
Total liabilities and stockholders' equity. $158,188,663 $186,515,421
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
for the 12 weeks ended for the 40 weeks ended
---------------------- ----------------------
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales.............. $ 55,529,242 $56,153,956 $179,190,997 $177,930,040
Franchise sales and other
revenues.................... 2,625,133 4,014,229 10,057,019 12,567,752
----------- ----------- ------------ ------------
58,154,375 60,168,185 189,248,016 190,497,792
Costs and expenses:
Cost of food and paper
products..................... 19,595,843 21,288,633 66,505,149 67,865,101
Restaurant operating expenses:
Labor..................... 15,870,570 15,339,169 50,610,516 48,885,248
Occupancy................. 7,060,020 7,177,517 21,043,416 21,571,163
Other..................... 6,722,875 6,762,642 20,759,702 20,902,095
----------- ----------- ------------ ------------
29,653,465 29,279,328 92,413,634 91,358,506
Depreciation and amortization. 2,217,358 3,973,962 11,420,108 12,972,301
General and administrative
expenses.................... 4,141,187 3,903,652 14,087,755 12,571,269
Non-recurring charge(Note D).. 24,235,000 -- 25,445,000 --
----------- ----------- ----------- ------------
79,842,853 58,445,575 209,871,646 184,767,177
----------- ----------- ------------ ------------
Operating profit (loss)......... (21,688,478) 1,722,610 (20,623,630) 5,730,615
Interest expense, net........... 1,437,606 1,680,717 4,972,282 5,423,953
Other expense (income), net..... 177,461 (354,803) 393,466 145,821
Loss on sale of assets.......... -- -- 734,823 --
Minority interest............... (105,515) (15,943) (79,988) 4,339
----------- ---------- ----------- ------------
Income (loss) before provision
for income taxes.............. (23,198,030) 412,639 (26,644,213) 156,502
Benefit for income taxes........ (5,000,000) (1,051,545) (5,717,000) (1,154,000)
------------ ----------- ------------ ------------
Net income (loss)............... $(18,198,030) $ 1,464,184 $(20,927,213) $ 1,310,502
============ =========== ============ ============
Net income (loss) per common
share - basic................. $ (1.52) $ 0.12 $ (1.76) $ 0.11
============ =========== ========== ============
Net income (loss) per common
share - diluted............... $ (1.52) $ 0.12 $ (1.76) $ 0.11
============ =========== ========== ============
Weighted average number of
common and common equivalent
shares outstanding - basic.... 11,966,493 11,769,882 11,896,858 11,756,981
============ =========== =========== ============
Weighted average number of
common and common equivalent
shares outstanding - diluted.. 11,966,493 12,192,048 11,896,858 11,917,501
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
for the 40 weeks ended
----------------------------------
October 3, October 4,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operations:
Net income (loss) ................................................... $(20,927,213) $ 1,310,502
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................ 11,420,108 12,972,301
Amortization of deferred financing costs ................................. 533,988 375,950
Provision for losses on accounts receivable .............................. 43,165 46,575
Minority interest ........................................................ (79,988) 4,339
Deferred income taxes .................................................... (4,800,000) (583,987)
Expenditures towards closing of stores ................................... -- 1,063,909
Non-recurring charge ..................................................... 25,445,000 --
Loss(gain) on sale of assets ............................................. 734,823 (325,426)
Gain on sale of investment ............................................... -- (930,344)
Changes in operating assets and liabilities:
Accounts receivable ...................................................... 410,382 (1,593,282)
Inventories .............................................................. 628,828 (473,380)
Prepaid expenses ......................................................... (2,040,723) (1,181,958)
Refundable income taxes .................................................. 644 1,667,914
Accounts payable ......................................................... 93,549 1,015,438
Accrued expenses ......................................................... 213,069 (2,065,999)
------------ ------------
Net cash provided by operating activities .............................. 11,675,632 11,302,552
------------ ------------
Cash flows from investing activities:
Additions to property and equipment ...................................... (13,809,108) (12,083,345)
Proceeds from sale of assets ............................................. 12,693,917 3,641,043
Proceeds from sale of investment ......................................... -- 2,000,000
Payments received on notes receivable .................................... 178,028 91,253
Increase in intangible assets ............................................ (121,032) (78,506)
Increase in deposits and other ........................................... (2,388,804) (1,299,143)
Increase in notes receivable ............................................. (45,000) (2,591,044)
------------ ------------
Net cash used in investing activities .................................. (3,491,999) (10,319,742)
------------ ------------
Cash flows from financing activities:
Exercise of employee stock options ....................................... 1,017,777 185,969
Proceeds from issuance of warrants ....................................... -- --
Proceeds from debt issuance net
of deferred financing costs ............................................ 56,057,388 46,136,488
Principal payments on debt ............................................... (64,951,000) (45,639,600)
Proceeds from issuance of common stock ................................... 216,923 --
Deferred financing costs ................................................. (491,095) (188,026)
(Decrease) in minority interest .......................................... (206,411) (242,307)
------------ ------------
Net cash provided by(used in)financing
activities ........................................................... (8,356,418) 252,524
------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................................................ (172,785) 1,235,334
------------ ------------
Cash and cash equivalents, at beginning of period ............................ 853,025 2,578,830
------------ ------------
Cash and cash equivalents, at end of period .................................. $ 680,240 $ 3,814,164
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited, consolidated financial statements of Au Bon
Pain Co., Inc. and Subsidiaries (the "Company") have been prepared in accordance
with instructions to Form 10-Q and, therefore, do not include all information
and footnotes normally included in financial statements prepared in conformity
with generally accepted accounting principles. They should be read in
conjunction with the financial statements of the Company for the fiscal year
ended December 27, 1997.
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.
<TABLE>
<CAPTION>
For the twelve weeks ended For the forty weeks ended
-------------------------- -------------------------
Oct. 3, 1998 Oct. 4, 1997 Oct. 3, 1998 Oct. 4, 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) used in net income
(loss) per common share - basic ....... $(18,198,030) $ 1,464,184 $(20,927,213) $ 1,310,502
============ =========== ============ ===========
Net income (loss) used in net income
(loss) per common share - diluted ..... $(18,198,030) $ 1,464,184 $(20,927,213) $ 1,310,502
============ =========== ============ ===========
Weighted average number of shares
outstanding - basic .................... 11,966,493 11,769,882 11,896,858 11,756,981
Effect of dilutive securities:
Employee stock options .............. -- 299,013 -- 67,205
Stock warrants ...................... -- 123,153 -- 93,315
------------ ----------- ----------- -----------
Weighted average number of shares
outstanding - diluted .................. 11,966,493 12,192,048 11,896,858 $11,917,501
============ =========== =========== ===========
Net income (loss) per common share -
basic .................................. $ (1.52) $ 0.12 $ (1.76) $ 0.11
============ =========== =========== ===========
Net income (loss) per common share -
diluted ................................ $ (1.52) $ 0.12 $ (1.76) $ 0.11
============ =========== =========== ===========
</TABLE>
Note C - Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information", which changes the
6
<PAGE>
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 revenue. 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.
Note D - Non-recurring Charges
During the third quarter of 1998, the Company recorded a non-recurring,
non-cash charge of $24.2 million principally to reflect a write-down under
Statement of Financial Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to be Disposed of" ("SFAS 121").
The charge is included as a separate component of operating expense. The
non-cash charge was taken to record an impairment for long lived assets to be
disposed of as a result of the agreement entered into for the sale of the Au Bon
Pain Division (see Note E - Subsequent Events).
As a result of this charge, operating income in the third quarter of 1998
was favorably impacted by $1,735,000 due to the suspension of depreciation and
amortization associated with the Au Bon Pain Division assets held for resale. In
addition, a tax benefit of $5.4 million was recorded related to this charge. The
benefit is less than the benefit obtained by applying the statutory tax rate to
the pretax loss due to the fact that certain deferred state tax assets will no
longer be realizable following the Sale.
The Company intends to repay all of its outstanding debt with the proceeds
from the Sale (see Note E). The recording of the non-recurring, non-cash charge
during the third quarter of 1998 caused the Company to be in violation of
certain covenants within the Company's revolving line of credit agreement. All
outstanding debt at October 3, 1998 has been included in current liabilities.
The agreement with the bank group has been amended to eliminate such defaults
through the end of the Company's fiscal first quarter of 1999 (April 17, 1999).
The Company expects the Sale will become effective during the fiscal first
quarter of 1999, resulting in the repayment of the revolving line of credit.
The Company anticipates costs of approximately $1.6 million associated with
the repayment of all outstanding debt at the time of the Sale.
Note E - Subsequent Events
On October 28, 1998, 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"), entered into an amendment (the "Amendment") to the Stock Purchase
Agreement dated as of August 12, 1998 (the "Original Agreement," and together
with the Amendment, the "Amended Agreement"), which Original Agreement was the
subject of a Form 8-K filed by the Company on August 21, 1998, the contents of
which are hereby incorporated by reference. The Amended Agreement contemplates
(a) the transfer, in the aggregate, from the Company to ABPH and a new Delaware
corporation to be formed as a wholly owned subsidiary of the Company ("ABP
Newco," and collectively
7
<PAGE>
with ABPH, the "Subsidiaries"), of 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) the merger of ABP Newco with and into ABPH,
with ABPH being the surviving corporation and (c) the sale of all the capital
stock of ABPH to the Buyer, whereby the Buyer will become the owner of the Au
Bon Pain Division (the "Sale").
The Sale will become effective subject to the terms and conditions of the
Amended Agreement, including, but not limited to, the approval of the
stockholders of the Company, consents of certain landlords, governmental
approvals, and consummation of financing by Buyer (as to which no assurance can
be given). With regard to these contingencies, the Buyer has advised the Company
that its proposed original lender has withdrawn its commitment relative to the
acquisition, however, the Buyer has also advised the Company that it has
obtained commitments from new lenders sufficient to consummate the transactions
contemplated by the agreement. In the event that any of the above-referenced
conditions remain unfulfilled, including, but not limited to the existence of a
material adverse change in the Au Bon Pain Division as described in the
Agreement, the closing of the Sale may not be consummated in a timely fashion,
or the Buyer may seek to renegotiate or terminate the agreement.
The description of the Amended Agreement contained herein is qualified in
its entirety by reference to (a) the Original 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 Amendment, attached as Exhibit 2 to the
Company's Form 8-K filed November 6, 1998 and incorporated by reference herein.
Pursuant to the Amended Agreement, the purchase price payable to the Company
upon the effectiveness of the Sale shall be seventy three million dollars
($73,000,000), subject to possible purchase price adjustments, as described in
the Amended Agreement.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of certain items included in the Company's consolidated statements of
operations for the period indicated:
<TABLE>
<CAPTION>
For the For the
12 weeks ended 40 weeks ended
-------------------- -------------------
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales ........................................ 95.5% 93.3% 94.7% 93.4%
Franchise sales and other revenues ...................... 4.5 6.7 5.3 6.6
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of food and paper products ......................... 33.7% 35.3% 35.2% 35.6%
Restaurant operating expenses ........................... 51.0 48.7 48.8 48.0
Depreciation and amortization ........................... 3.8 6.6 6.1 6.8
General and administrative .............................. 7.1 6.5 7.4 6.6
Non-recurring charge .................................... 41.7 -- 13.4 --
----- ----- ----- -----
137.3 97.1 110.9 97.0
----- ----- ----- -----
Operating margin .......................................... (37.3) 2.9 (10.9) 3.0
Interest expense, net ..................................... 2.5 2.8 2.6 2.8
Other (income) expense, net ............................... 0.3 (0.6) 0.2 0.1
Loss on sale of assets .................................... -- -- 0.4 --
Minority interests ........................................ (0.2) -- -- --
----- ----- ----- -----
Income (expense) before provision for income taxes ........ (39.9) 0.7 (14.1) 0.1
Provision (benefit) for income taxes ...................... (8.6) (1.7) (3.0) (0.6)
----- ----- ----- -----
Net income (loss) ......................................... (31.3)% 2.4% (11.1)% 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
Company's fiscal year normally consists of 13 four-week periods,
9
<PAGE>
with the first, second and third quarters ending 16 weeks, 28 weeks and 40
weeks, respectively, into the fiscal year.
Results of Operations
Total revenues for the twelve weeks ended October 3, 1998 decreased 3.3% to
$58.2 million from $60.2 million for the comparable period of 1997. Total
revenues at the Saint Louis Bread business unit increased 17.2% to $19.6
million, while total revenues at the Au Bon Pain business unit decreased 11.3%
to $38.6 million. The increase in the Saint Louis Bread/Panera Bread business
unit in the third quarter of 1998 was driven by positive comparable restaurant
sales, incremental revenues from the fourteen company-owned bakery cafes opened
in 1997 and 1998 to-date, and higher franchise income. Comparable restaurant
sales at Saint Louis Bread Co./Panera Bread increased 2.0% in the third quarter
of 1998 versus the comparable period of 1997. This increase is on top of the
7.2% comparable restaurant sales increase of the third quarter of 1997. In the
Au Bon Pain business unit, the decrease in total revenues reflects the closing
of certain restaurants in 1997 and 1998 and the franchising of eleven stores in
the Philadelphia market in the third quarter of 1997. Comparable restaurant
sales for the Au Bon Pain business unit in the third quarter of 1998 decreased
by 0.4%.
Operating income in the third quarter of 1998 increased to $2,546,000
(before the non-recurring charge of $24.2 million), versus $1,722,000 in the
third quarter of 1997. Operating income in the third quarter of 1998 was
favorably impacted by $1,735,000 due to the suspension of depreciation and
amortization associated with the Au Bon Pain Division assets held for resale
(see Note D). Operating margin was 1.4% in the third quarter of 1998 versus 2.9%
in the comparable period of 1997. The decline in operating income was a result
of lower contribution in the quarter in the Au Bon Pain business unit, as the
Saint Louis Bread Co./Panera Bread business unit contribution was modestly
higher in the third quarter of 1998 versus the comparable quarter of 1997. The
lower contribution in the Au Bon Pain business unit was due to several factors.
First, the decline in comparable restaurant sales produced a negative leverage
against the normal inflationary cost elements, reducing contribution. Second,
the Au Bon Pain business unit was significantly impacted by extraordinarily high
market prices for butter, increasing food costs. In addition, the level of
franchise income from the Au Bon Pain International & Trade Channels area was
reduced due both to the Asian economic crisis and to the pending sale of the Au
Bon Pain business unit overall.
Contribution in the Saint Louis Bread business unit in the third quarter of
1998 was only modestly higher than that of the comparable quarter of 1997, as
increases in store profits from company-owned cafes and greater franchise income
in the 1998 third quarter were largely offset by higher overhead costs,
particularly related to the field organization and the commissary
infrastructure.
During the third quarter of 1998, four Saint Louis Bread Co./Panera Bread
franchise area development agreements were signed, representing commitments for
the development of 102 bakery cafes and increasing the number of franchise
commitments to a total of 577 bakery cafes to be developed. Eight Saint Louis
Bread/Panera Bread bakery cafes were opened in the third quarter of 1998,
including two
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<PAGE>
company-owned cafes and six franchise-operated cafes. Within the Au Bon Pain
business unit, five franchise-operated units were opened in the third quarter of
1998.
During the third quarter of 1998, the Company recorded a non-recurring,
non-cash charge of $24.2 million principally to reflect a write-down under
Statement of Financial Standards, 121, "Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to be Disposed of" ("SFAS 121").
The charge is included as a separate component of operating expense. The
non-cash charge was taken to record an impairment for long lived assets to be
disposed of as a result of the agreement entered into for the sale of the Au Bon
Pain Division (see Note E - Subsequent Events).
Net Income
Including the non-recurring after tax charge of $17.7 million, the Company
recorded a net loss in the third quarter of 1998 of $18,198,030 versus net
income of $1,464,184 in the comparable 1997 period. Interest expense decreased
to $1,438,000 in the third quarter of 1998 versus $1,680,000 in the comparable
period in 1997 with other expense of $177,000 at October 3, 1998 compared to
other income of $355,000 at October 4, 1997. The year over year decrease in
other income of $532,000 mostly represents the sale of stock and assets
consummated in the third quarter of 1997.
Liquidity and Capital Resources
The Company's principal requirements for cash are capital expenditures for
constructing and equipping new bakery cafes, maintaining or remodeling existing
bakery cafes and working capital. To date, the Company has met its requirements
for capital with cash from operations, proceeds from the sale of equity and debt
securities and bank borrowings.
For the forty weeks ended October 3, 1998, operating activities provided
$11.7 million versus $11.4 million for the comparable period of 1997. Funds
provided by operating activities were primarily the result of the sale of assets
and decreases in accounts receivable and inventories, offset by an increase in
prepaid expenses. In 1997, cash was generated by disposal of assets offset by a
decrease in accounts payable and an increase in accounts receivable.
Total capital expenditures for the forty weeks ended October 3, 1998 of
$13.8 million were related primarily to the construction of new Saint Louis
Bread bakery cafes and commissaries and the remodeling of existing Au Bon Pain
bakery cafes. The expenditures were funded principally by net cash from
operating activities and by use of the Company's revolving line of credit. Total
capital expenditures for the forty weeks ended October 4, 1997 were $12.0
million.
On July 24, 1996, the Company issued $15 million senior subordinated
debentures maturing in July, 2000. The debentures accrue interest at varying
fixed rates over the four-year term, ranging between 11.25% and 14.0%. In
connection with the private placement, warrants with an exercise price of $5.62
per share were issued to purchase between 400,000 and 500,000 shares of the
Company's Class A common stock, depending on the term during which the
debentures remain
11
<PAGE>
outstanding and certain future events. The net proceeds of the financing were
used to reduce the amount outstanding under the Company's bank revolving line of
credit. With the senior subordinated financing and the Company's revolving line
of credit, the Company's management believes it has the capital resources
necessary to meet its growth goals through 1998.
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 Industrial Revenue Bond and to reduce
amounts outstanding under the 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.
The Company has a $22.0 million unsecured revolving line of credit which
bears interest at either the commercial bank's prime rate plus .25% or LIBOR
plus 2.75%, at the Company's option. As of October 3, 1998, $17.2 million was
outstanding under the line of credit and an additional $1.1 million of the
remaining availability was utilized by outstanding letters of credit issued by
the bank on behalf of the Company.
The Company intends to repay all of its outstanding debt with the proceeds
from the Sale (see Note E). The recording of the non-recurring, non-cash charge
during the third quarter of 1998 caused the Company to be in violation of
certain covenants within the Company's revolving line of credit agreement. All
outstanding debt at October 3, 1998 has been included in current liabilities.
The agreement with the bank group has been amended to eliminate such defaults
through the end of the Company's fiscal first quarter of 1999 (April 17, 1999).
The Company expects the Sale will become effective during the fiscal first
quarter of 1999, resulting in the repayment of the revolving line of credit.
In 1998, the Company currently anticipates spending approximately $19.0
million for capital expenditures, principally for the opening of new bakery
cafes and the remodeling of existing units. The Company expects to fund these
expenditures principally through internally generated cash flow.
The unsecured revolving line of credit agreement requires that proceeds
form the sale of assets be used toward a reduction to the revolving credit line.
Upon consummation of the sale of the Au Bon Pain Division, the Company expects
to retire all outstanding debt, including the revolving credit line. In
conjunction with the paydown the Company will record a non-cash write-off of
capitalized deferred financing costs of approximately $800,000. The Company
expects to incur expense associated with the early retirement of the convertible
subordinated notes of approximately $750,000.
Upon consummation of the Sale, the Company anticipates the availability of
sufficient capital on a going forward basis. If the Sale of the Au Bon Pain
Division is not completed, the Company believes it has the ability to replace
outstanding debt at maturity through use of existing instruments in the
marketplace. The Company cannot, however, guarantee that said debt can be
replaced at terms similar or identical to terms currently existing.
12
<PAGE>
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. To date, the Company has
assigned a full time Year 2000 manager, 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 regards 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. 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 operating
performance database systems. Register systems are the point-of-sale systems
used within each retail bakery cafe, which are electronically linked with the
personal computer-based store management systems also located within each retail
bakery cafe, providing cafe management tools for the cafe management.
The costs of addressing the Year 2000 issues has not been finalized.
However, including the cost of a full time Year 2000 manager, the Company has
estimated the cost to be approximately $500,000.
In addition to the above IT systems, the Company has identified the
following as the primary Non-IT systems subject to Year 2000 issues: 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
initial review the Company believes the potential impact of Year 2000 issues
pertaining to Non-IT systems to be minor. Upon full assessment of the impact of
Year 2000 issues, the Company will address, in order of criticality, the
potential issues, and will develop remediation and contingency plans.
While the Company believes it is taking all appropriate steps to assure
Year 2000 compliance, it is dependant 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
13
<PAGE>
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 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 approximately $900,000.
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".
14
<PAGE>
Au Bon Pain Co., Inc.
Year 2000 Summary for IT Systems
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated
Area/System Phases Status Timetable Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll - Software vendor to provide In process 1/99 $0
updated Year 2000 compliant
version of currently used
software
- Review software code to In process 2/99 $60,000
identify non-compliant
components
- Test upgraded software for Upon completion of code scan 3/99 $0
operational effectiveness
- Vendor to complete remediation If necessary 3/99 $0
- Remediation Upon completion of Integration testing 4/99 $0
- Implementation Upon completion of remediation 4/99 --
- ------------------------------------------------------------------------------------------------------------------------------------
Financial System - Software vendor to provide Complete - $0
updated Year 2000 compliant
version of currently used
software
- Review software code to Complete - $60,000
identify non-compliant
components
- Test upgraded software for Upon completion of code scan 2/99 $0
operational effectiveness
- Implementation Upon completion code scan 4/99 $65,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Estimated
Contingency Contingency
Area/System Plan/Risks Cost
- --------------------------------------------------------------------------
<S> <C>
Payroll Outsource payroll processing $100,000
to third party. This process
would begin in June 1999 and
constitutes the worst case
scenario.
- --------------------------------------------------------------------------
Financial System Outsource services to third
party. This process would
begin June 1999 and
constitutes the worst case
scenario.
$500,000
- --------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated
Area/System Phases Status Timetable Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Network - Evaluate all individual systems Complete $0
Integration for Year 2000 compliance
Systems
- Remediate internally In process 10/99 $100,000
- ------------------------------------------------------------------------------------------------------------------------------------
Register Systems - Upgrade currently used software Complete $0
(Saint Louis to be Year 2000 compliant
Bread Co.
Division) - Test upgraded software for In progress 3/99 $0
operational effectiveness
- Implementation Upon completion of integration testing 6/99 $60,000
- ------------------------------------------------------------------------------------------------------------------------------------
Store Management - Upgrade currently used software In progress 5/99 $0
Systems (Saint to be Year 2000 compliant
Louis Bread Co.
Division) - Test upgraded software for Upon completion of remediation 6/99 $0
operational effectiveness
- -----------------------------------------------------------------------------------------------------------------------------------
Register and - Selection of Replacement Complete - $0
Store Management Hardware/software
Systems (Au Bon
Pain Division)
- Pilot test of new In progress 3/99 The new systems
hardware/software are expected to be
leased at the same
annual cost as the
current leased
systems.
- Complete rollout Upon completion of Pilot Test Program 8/99
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Estimated
Contingency Contingency
Area/System Plan/Risks Cost
- --------------------------------------------------------------------------
<S> <C> <C>
Network Many of the subsystems are not $150,000
Integration critical in day to day
Systems operations. If internal
remediation is not successful,
the contingency plan is to
replace subsystems as needed
In the worst case scenario,
those subsystems which have
not been fully remediated
already could be replaced or
reverted to more manual
processes.
- --------------------------------------------------------------------------
Register Systems As a remediate software $0
(Saint Louis currently exists, a
Bread Co. contingency plan is not
Division) necessary at this time
- --------------------------------------------------------------------------
Store Management This is an internally used $150,000
Systems (Saint reporting software that is
Louis Bread Co. considered non-critical to day
Division) to day operations. Year 2000
compliant replacement software
is known to be available and
could be rolled out.
- --------------------------------------------------------------------------
Register and As compliant hardware/software $0
Store Management currently exists, a
Systems (Au Bon contingency plan is not
Pain Division) necessary at this time.
- --------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Recent Accounting Pronouncements
In June 1997, the FASB issued 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 revenue.
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.
Certain Factors Affecting Future Operating Results
Statements made or incorporated in this Form 10Q, including any discussion
or impact, express or implied, on the Company's anticipated operating results
and future earnings per share contain 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 (identified by the words "estimate", "project",
"intend", "expect", "future", "anticipates" and similar expressions) which
express management's belief, expectations or intentions regarding the Company's
future performance. The described sale of the Au Bon Pain Business Unit is
subject to a variety of conditions, including but not limited to stockholder
approval and government antitrust clearance. In addition, the purchase and sale
agreement allows Au Bon Pain Co., Inc. to entertain alternative acquisition
proposals, subject to the payment of a termination fee. No assurances can be
given that the sale of that unit will be completed on a timely basis, if at all.
Moreover, the Company's actual results could differ materially from those set
forth in the forward-looking statements due to known and unknown risks and
uncertainties. The amount of net proceeds available to the Company is subject to
closing adjustments which may result in a lower amount available for expansion
of the Saint Louis Bread Co./Panera Bread bakery cafes. 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, competition and other factors that may affect retailers in
general. These and other risks are detailed from time to time in the Company's
SEC reports, including Form 10K for the year ended December 27, 1997.
17
<PAGE>
PART II. OTHER INFORMATION
- -------- -----------------
Item 3. DEFAULTS UPON SENIOR SECURITIES
The recording of the non-recurring, non-cash charge during the third
quarter of 1998 caused the Company to be in violation of certain covenants
within the Company's revolving line of credit agreement. The agreement with the
bank group has been amended to eliminate such defaults through the end of the
Company's fiscal first quarter of 1999 (April 17, 1999). The Company expects the
Sale will become effective during the fiscal first quarter of 1999, resulting in
the repayment of the revolving line of credit.
Item 5. OTHER INFORMATION
On October 28, 1998, 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"), entered into an amendment (the "Amendment") to the Stock Purchase
Agreement dated as of August 12, 1998 (the "Original Agreement," and together
with the Amendment, the "Amended Agreement"), which Original Agreement was the
subject of a Form 8-K filed by the Company on August 21, 1998, the contents of
which are hereby incorporated by reference. The Amended Agreement contemplates
(a) the transfer, in the aggregate, from the Company to ABPH and a new Delaware
corporation to be formed as a wholly owned subsidiary of the Company ("ABP
Newco," and collectively with ABPH, the "Subsidiaries"), of 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) the merger of ABP Newco
with and into ABPH, with ABPH being the surviving corporation and (c) the sale
of all the capital stock of ABPH to the Buyer, whereby the Buyer will become the
owner of the Au Bon Pain Division (the "Sale").
The Sale will become effective subject to the terms and conditions of the
Amended Agreement, including, but not limited to, the approval of the
stockholders of the Company, consents of certain landlords, governmental
approvals, and consummation of financing by Buyer (as to which no assurance can
be given). With regard to these contingencies, the Buyer has advised the Company
that its original proposed lender has withdrawn its commitment relative to the
acquisition, however, the Buyer has also advised the Company that it has
obtained commitments from new lenders sufficient to consummate the transactions
contemplated by the agreement. In the event that any of the above-referenced
conditions remains unfulfilled, including, but not limited to the existence of a
material adverse change in the Au Bon Pain Division as described in the
Agreement, the closing of the Sale may not be consummated in a timely fashion,
or the Buyer may seek to renegotiate or terminate the agreement.
18
<PAGE>
The description of the Amended Agreement contained herein is qualified in
its entirety by reference to (a) the Original 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 Amendment, attached as Exhibit 2 to the
Company's Form 8-K filed November 6, 1998 and incorporated by reference herein.
Pursuant to the Amended Agreement, the purchase price payable to the Company
upon the effectiveness of the Sale shall be seventy three million dollars
($73,000,000), subject to possible purchase price adjustments, as described in
the Amended Agreement.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) The Company filed a Form 8-K on August 21, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AU BON PAIN CO., INC.
-----------------------
(Registrant)
Dated: January 21, 1999 By: /S/ LOUIS I. KANE
------------------------
Louis I. Kane
Co-Chairman
Dated: January 21, 1999 By: /S/ RONALD M. SHAICH
-------------------------
Ronald M. Shaich
Co-Chairman and
Chief Executive Officer
Dated: January 21, 1999 By: /S/ ANTHONY J. CARROLL
-------------------------
Anthony J. Carroll
Senior Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> OCT-03-1998
<CASH> 680,240
<SECURITIES> 0
<RECEIVABLES> 7,263,219
<ALLOWANCES> 198,104
<INVENTORY> 6,285,697
<CURRENT-ASSETS> 19,551,908
<PP&E> 91,300,662
<DEPRECIATION> 83,136,959
<TOTAL-ASSETS> 158,188,663
<CURRENT-LIABILITIES> 85,604,946
<BONDS> 0
0
0
<COMMON> 1,198
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 158,188,663
<SALES> 55,529,242
<TOTAL-REVENUES> 58,154,375
<CGS> 19,595,843
<TOTAL-COSTS> 79,842,853
<OTHER-EXPENSES> 71,946
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,437,606
<INCOME-PRETAX> (23,198,303)
<INCOME-TAX> (5,000,000)
<INCOME-CONTINUING> (18,198,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,198,303)
<EPS-PRIMARY> (1.52)
<EPS-DILUTED> (1.52)
</TABLE>
