<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------------
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 2, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-19253
PANERA BREAD COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2723701
- ----------------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7930 BIG BEND BLVD, WEBSTER GROVES, MO 63119
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
(314) 918-7779
----------------------------------------------------
(Registrant's telephone number, including area code)
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 November 9, 1999, 10,616,382 shares and 1,536,321 shares of the
registrant's Class A and Class B Common Stock, respectively, $.0001 par value,
were outstanding.
<PAGE>
PANERA BREAD COMPANY
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS............................. 3
Consolidated Balance Sheets as of
October 2, 1999 and December 26, 1998............ 3
Consolidated Statements of Operations
for the twelve and forty weeks
ended October 2, 1999 and October 3, 1998........ 4
Consolidated Statements of Cash Flows
for the forty weeks ended October 2,
1999 and October 3, 1998......................... 5
Notes to Consolidated Financial
Statements....................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................ 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................. 17
ITEM 5. OTHER INFORMATION................................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................. 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 2, DECEMBER 26,
1999 1998
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................. $ 2,110,910 $ 1,860,445
Accounts receivable, net ................... 1,542,939 1,301,185
Inventories ................................ 1,753,504 1,662,573
Prepaid expenses ........................... 987,912 1,780,922
Refundable income taxes .................... 98,483 115,297
Deferred income taxes ...................... 1,500,000 1,500,000
------------- -------------
Total current assets ................... 7,993,748 8,220,422
------------- -------------
Property and equipment, less
accumulated depreciation and amortization .. 45,062,662 38,855,569
------------- -------------
Other assets:
Assets held for sale, net, non-current
(Note D) ................................. -- 69,394,736
Notes receivable ........................... 45,000 20,000
Intangible assets, net of accumulated
amortization ............................. 19,006,667 19,786,858
Deferred financing costs ................... 155,458 768,232
Deposits and other ......................... 4,157,839 4,138,219
Deferred income taxes ...................... 12,434,099 12,434,099
------------- -------------
Total other assets ..................... 35,799,063 106,542,144
------------- -------------
Total assets ........................... $ 88,855,473 $ 153,618,135
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 2,793,929 $ 4,020,239
Liabilities held for sale, net (Note D) .... -- 6,469,618
Accrued expenses ........................... 13,754,539 5,927,720
Current maturities of long term debt ....... -- 40,800
------------- -------------
Total current liabilities .............. 16,548,468 16,458,377
Long Term Liabilities:
Deferred revenue ........................... 2,116,000 --
Long term debt, less current maturities .... -- 34,089,587
Convertible Subordinated Notes ............. -- 30,000,000
------------- -------------
Total liabilities ...................... 18,664,468 80,547,964
------------- -------------
Minority interest ............................ -- (256,761)
Stockholders' equity:
Common stock, $.0001 par value:
Class A, shares authorized 50,000,000;
issued and outstanding 10,614,875 and
10,518,213 in 1999 and 1998, respectively . 1,061 1,047
Class B, shares authorized 2,000,000;
issued and outstanding 1,536,747 and
1,557,658 in 1999 and 1998, respectively .. 154 156
Additional paid-in capital .................. 70,487,022 70,031,945
Retained earnings ........................... (297,232) 3,293,784
------------- -------------
Total stockholders' equity ............ 70,191,005 73,326,932
------------- -------------
Total liabilities and stockholders'
equity .............................. $ 88,855,473 $ 153,618,135
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE FOR THE
12 WEEKS ENDED 40 WEEKS ENDED
----------------------------- ------------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales ................... $ 23,486,771 $ 55,529,242 $ 130,745,602 $ 179,190,997
Franchise sales and
other revenues ................. 2,908,618 2,625,133 10,451,570 10,057,019
------------- ------------- ------------- -------------
26,395,389 58,154,375 141,197,172 189,248,016
Costs and expenses:
Cost of food and paper products .... 9,567,714 19,595,843 48,395,180 66,505,149
Restaurant operating expenses:
Labor .......................... 6,495,882 15,870,570 38,287,595 50,610,516
Occupancy (Note E) ............. 1,661,591 6,526,020 13,692,505 21,248,331
Other (Note E) ................. 2,877,528 6,591,344 15,904,257 20,818,007
------------- ------------- ------------- -------------
11,035,001 28,987,934 67,884,357 92,676,854
Depreciation and amortization ...... 1,454,611 2,217,358 4,672,607 11,420,108
General & administrative
expenses ....................... 3,115,843 4,141,187 13,557,122 14,087,755
Non-recurring charge (Note D) ...... -- 24,235,000 5,545,000 25,445,000
------------- ------------- ------------- -------------
25,173,169 79,177,322 140,054,266 210,134,866
------------- ------------- ------------- -------------
Operating profit/(loss) ................ 1,222,220 (21,022,947) 1,142,906 (20,886,850)
Interest expense, net .................. 150,176 1,437,606 2,654,323 4,972,282
Other expense, net ..................... 57,479 177,461 517,591 393,466
Loss on sale of assets (Note F) ........ -- -- -- 734,823
Minority interest ...................... -- (105,515) (25,420) (79,988)
------------- ------------- ------------- -------------
Income/(loss) before income taxes
and extraordinary item ............. 1,014,565 (22,532,499) (2,003,588) (26,907,433)
Income tax expense (benefit) ........... 346,000 (4,773,000) 1,205,000 (5,806,000)
------------- ------------- ------------- -------------
Income/(loss) before
extraordinary item ................. 668,565 (17,759,499) (3,208,588) (21,101,433)
============= ============= ============= =============
Extraordinary loss from early
extinguishment of debt, net
of tax(Note D) ..................... -- -- 382,428 --
Net income/(loss) ...................... $ 668,565 $ (17,759,499) $ (3,591,016) $ (21,101,433)
============= ============= ============= =============
Basic earnings/(loss) per common share:
Income/(loss) before
extraordinary loss ............. $ 0.06 $ (1.49) $ (0.27) $ (1.77)
Extraordinary loss ................. -- -- $ (0.03) --
------------- ------------- ------------- -------------
Net Income/(loss) .............. $ 0.06 $ (1.49) $ (0.30) $ (1.77)
------------- ------------- ------------- -------------
Diluted earnings(loss) per common share:
Income/(loss) before
extraordinary loss ............. $ 0.05 $ (1.49) $ (0.27) $ (1.77)
Extraordinary loss ................. -- -- $ (0.03) --
------------- ------------- ------------- -------------
Net Income/(loss) .............. $ 0.05 $ (1.49) $ (0.30) $ (1.77)
------------- ------------- ------------- -------------
Weighted average number of common
and common equivalent shares
outstanding - basic ................ 12,150,345 11,966,493 12,128,892 11,896,858
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common
and common equivalent shares
outstanding - diluted .............. 12,249,060 11,966,493 12,128,892 11,896,858
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
FOR THE 40 WEEKS ENDED
--------------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operations:
Net loss ...................................... $ (3,591,016) $ (21,101,433)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................ 4,672,607 11,420,108
Amortization of deferred financing costs ..... 339,210 533,988
Provision for losses on accounts receivable .. 21,025 43,165
Minority interest ............................ (25,420) (79,988)
Deferred income taxes ........................ -- (4,800,000)
Reserve (charge) for closed stores ........... -- --
Non-recurring charge ......................... 5,545,000 25,445,000
Loss on sale of assets ....................... -- 734,823
Extraordinary loss on early extinguishment
of debt .................................... 382,428 --
Changes in operating assets and liabilities:
Accounts receivable ........................... (380,844) 410,382
Inventories ................................... 61,092 628,828
Prepaid expenses .............................. (4,063,837) (1,835,808)
Refundable income taxes ....................... -- 644
Accounts payable .............................. (3,778,642) 93,549
Deferred revenue .............................. 2,116,000 --
Accrued expenses .............................. 2,287,588 182,374
------------- -------------
Net cash provided by operating activities ... 3,585,191 11,675,632
------------- -------------
Cash flows from investing activities:
Additions to property and equipment ........... (11,699,511) (13,809,108)
Proceeds from sale of assets .................. 72,162,987 12,693,917
Change in cash included in net current
liabilities sold ............................ (465,748) --
Payments received on notes receivable ......... 139,014 178,028
Increase in intangible assets ................. (50,309) (121,032)
(Increase) decrease in deposits and other ..... 655,254 (2,388,804)
Increase in notes receivable .................. (65,000) (45,000)
------------- -------------
Net cash provided by/(used in) investing
activities ................................ 60,676,687 (3,491,999)
------------- -------------
Cash flow from financing activities:
Exercise of employee stock options ............ 38,590 1,017,777
Proceeds from draw down on revolving
line of credit .......................... 41,837,243 56,057,388
Principal payments on debt .................... (106,072,800) (64,951,000)
Proceeds from issuance of common stock ........ 416,495 216,923
Deferred financing costs ...................... (110,141) (491,095)
Decrease in minority interest ................. (120,800) (206,411)
------------- -------------
Net cash used in financing activities ....... (64,011,413) (8,356,418)
------------- -------------
Net increase (decrease) in cash and
cash equivalents ............................ 250,465 (172,785)
------------- -------------
Cash and cash equivalents, at beginning of period 1,860,445 853,025
------------- -------------
Cash and cash equivalents, at end of period ..... $ 2,110,910 $ 680,240
============= =============
</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 Panera
Bread Company and Subsidiaries (the "Company") have been prepared in accordance
with instructions to Form 10-Q and, therefore, do not include all information
and footnotes normally included in financial statements prepared in conformity
with generally accepted accounting principles. They should be read in
conjunction with the audited financial statements of the Company for the fiscal
year ended December 26, 1998.
The accompanying financial statements are unaudited and include all
adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its financial position
and results of operations for the interim periods, and are not necessarily
indicative of the results that may be expected for the entire year.
Note B - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share.
<TABLE>
<CAPTION>
FOR THE TWELVE WEEKS ENDED FOR THE 40 WEEKS ENDED
---------------------------- -----------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) used in net income
(loss) per common share - basic .. $ 668,565 $(17,759,499) $ (3,591,016) $(21,101,433)
Net income (loss) used in net income
(loss) per common share - diluted $ 668,565 $(17,759,499) $ (3,591,016) $(21,101,433)
Weighted average number of
shares outstanding - basic ....... 12,150,345 11,966,493 12,128,892 11,896,858
Effect of dilutive securities:
Employee Stock Options .... 58,484 -- -- --
Stock warrants ............ 40,231 -- -- --
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding - diluted ............ 12,249,060 11,966,493 12,128,892 11,896,858
Net income (loss) per common
share - basic .................... $ 0.06 $ (1.49) $ (0.30) $ (1.77)
Net income (loss) per common
share - diluted .................. $ 0.05 $ (1.49) $ (0.30) $ (1.77)
</TABLE>
During the third quarter of 1998, options to purchase 1,176,000 shares
of common stock at $25.50 per share were outstanding in conjunction with the
issuance of $30 million of convertible subordinated notes. These shares were not
included in the computation of diluted earnings per share for the twelve weeks
and forty weeks ended October 3, 1998 because the deduction of interest expense,
after the effect of income taxes, would have been antidilutive. The $30 million
of convertible subordinated debt was paid in full during the second quarter of
1999, subsequent to the sale of the Au Bon Pain Division (see Note D).
6
<PAGE>
During the third quarter of 1998 options to purchase 89,000 shares of common
stock and warrants to purchase 38,000 shares of common stock were outstanding
but were not included in the computation of diluted earnings per share for the
twelve weeks ended October 3, 1998, because the effect would have been
antidilutive.
Note C - Recent Accounting Pronouncements
None
Note D - Sale of Au Bon Pain Division and Non-recurring charges
The Company, together with its wholly-owned subsidiary ABP Holdings, Inc.
("ABPH") entered into a Stock Purchase Agreement dated August 12, 1998 and
amended on October 28, 1998 with ABP Corporation (the "Buyer"), an affiliate of
Bruckmann, Rosser, Sherrill & Co., L.P., relative to the transfer of
substantially all of the assets and liabilities of the Company's Au Bon Pain
Division business (the "Au Bon Pain Division") and sale of all of the
outstanding capital stock of ABPH to the Buyer, whereby the Buyer would become
the owner of the Au Bon Pain Division (the "Sale"). The Sale was effective May
16, 1999 for $73 million in cash before contractual purchase price adjustments
of approximately $1 million. The Company, which now consists of the Panera
Bread/Saint Louis Bread Co. Business Unit only, has been renamed Panera Bread
Company. The proceeds from the sale were used to pay off all outstanding debt
and provide cash for growth. In conjunction with the sale, the Company recorded
a non-cash, pre-tax loss in the first quarter of 1999 of approximately $5.5
million. The Company recorded an extraordinary loss before tax of $0.6 million
associated with the early extinguishment of debt outstanding in the second
quarter of 1999.
Operating income in the year-to-date period of 1999 was favorably impacted
by $4.7 million due to the suspension of depreciation and amortization
associated with the Au Bon Pain Division assets held for sale after August 12,
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 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 expenses. 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 subsequent sale of
the Au Bon Pain Division.
During the first quarter of 1998, the Company recorded a $1.2 million
non-cash charge to write-down the net book value of eight underperforming Au Bon
Pain stores whose leases expired in 1998 and were not renewed. The charge is
included as a separate component of operating expenses. For the sixteen weeks
ended April 18, 1998 and April 19, 1997, the stores included in the reserve had
sales of $869,000 and $1,238,000, respectively, and pre-tax losses of $175,000
and $73,000, respectively.
7
<PAGE>
Note E - Restatement of Prior Periods
Results of operations for the twelve weeks and forty weeks ended
October 3, 1998 have been restated with respect to certain restaurant operating
expenses, principally rent, between interim periods. These expenses are now
being recognized on a weekly basis during interim reporting periods. Previously,
three months of these expenses were recorded in each of the Company's quarterly
external reporting periods. Since the first quarter reporting period consists of
sixteen weeks, this change resulted in the recognition of an additional
$1,533,000 of restaurant operating expenses for the period ended April 18, 1998.
The second, third and fourth quarters of 1998 will also be restated to reflect a
reduction of restaurant operating expenses of $605,000, $665,000 and $263,000,
respectively. Results for the full fiscal 1998 year remain unchanged. Depicted
in the table below are the reported and restated quarterly results.
<TABLE>
<CAPTION>
QUARTER ENDING FISCAL YEAR
---------------------------------------------- -----------
04/18/98 07/11/98 10/03/98 12/26/98 1998
<S> <C> <C> <C> <C> <C>
AS REPORTED
Net Income $ (1,950) $ (779) $ (18,198) $ 433 $ (20,494)
Basic earnings per share (0.16) (0.07) (1.52) 0.03 (1.72)
Diluted earnings per share (0.16) (0.07) (1.52) 0.03 (1.72)
RESTATED
Net Income $ (2,962) $ (380) $ (17,759) $ 607 $ (20,494)
Basic earnings per share (0.25) (0.03) (1.49) 0.05 (1.72)
Diluted earnings per share (0.25) (0.03) (1.49) 0.05 (1.72)
</TABLE>
Note F - Loss on sale of assets
On March 23, 1998 the Company sold the Mexico, MO production facility
and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash, and recognized a pre-tax loss of $734,023.
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, except where otherwise noted, of certain items included in the
Company's consolidated statements of operations for the periods indicated.
Percentages may not add due to rounding:
<TABLE>
<CAPTION>
FOR THE FOR THE
12 WEEKS ENDED 40 WEEKS ENDED
------------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales .......................................... 89.0% 95.5% 92.6% 94.7%
Franchise sales and other revenues ........................ 11.0 4.5 7.4 5.3
----------- ---------- ----------- ----------
Total revenue ............................................. 100.0% 100.0% 100.0% 100.0%
Costs of sales (as a percentage of Company restaurant sales):
Food and paper products ................................... 40.7% 35.3% 37.0% 37.1%
Labor ..................................................... 27.7 28.6 29.3 28.2
Occupancy ................................................. 7.1 11.8 10.5 11.9
Other ..................................................... 12.3 11.9 12.2 11.6
----------- ---------- ----------- ----------
Total Cost of Sales ....................................... 87.7% 87.5% 88.9% 88.8%
Depreciation and amortization ............................. 5.5 3.8 3.3 6.0
General and administrative ................................ 11.8 7.1 9.6 7.4
Non-recurring charge ...................................... -- 41.7 3.9 13.4
----------- ---------- ----------- ----------
Operating profit (loss) ..................................... 4.6 (36.2) 0.8 (11.0)
Interest expense, net ....................................... 0.6 2.5 1.9 2.6
Other (income), net ......................................... 0.2 0.3 0.4 0.2
Loss on sale of assets ...................................... -- -- -- 0.4
Minority interest ........................................... -- (0.2) -- --
----------- ---------- ----------- ----------
Profit before provision for
income taxes ............................................ 3.8 (38.7) (1.4) (14.2)
Provision for income taxes .................................. 1.3 (8.2) 0.9 (3.1)
Extraordinary loss from early extinguishment of debt,
net of tax .............................................. -- -- 0.3 --
----------- ---------- ----------- ----------
Net income (loss) ........................................... 2.5% (30.5)% (2.5)% (11.1)%
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
9
<PAGE>
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, royalty income and franchise fees. Certain
expenses (cost of food and paper products, restaurant operating expenses, and
depreciation and amortization) relate primarily to restaurant sales, while
general and administrative expenses relate to all areas of revenue generation.
The Company's fiscal year ends on the last Saturday in December. The
Company's fiscal year normally consists of 13 four-week periods, with the first,
second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively,
into the fiscal year.
Results of Operations
Effective May 16, 1999, the Company completed its transaction to
sell the Au Bon Pain Division. For the forty weeks ended October 2, 1999 the
Company has recorded a pre-tax loss of $5.5 million related to the
transaction and a $0.6 million pre-tax ($0.4 million after tax) extraordinary
loss related to the early extinguishment of debt from the proceeds of the
sale. Results of operations in the third quarter of 1999 include only the
results of the Panera Bread/Saint Louis Bread Company business unit. Results
of operations for the forty weeks ended October 2, 1999, also include the
results of the divested Au Bon Pain business unit for the period December 27,
1998 through May 15, 1999.
Total revenues in the third quarter of 1999 totaled $26.4 million,
versus $58.2 million in the comparable quarter of 1998. Total revenues for the
forty weeks ended October 2, 1999 and October 3, 1998 were $141.2 million and
$189.2 million, respectively. The decrease in revenue was caused by the sale of
the Au Bon Pain Division effective May 16, 1999. Total revenues in the Panera
Bread business unit increased 34.7% over the prior year to $26.4 million in the
third quarter of 1999 and 31.1% to $80.0 million for the forty week period ended
October 2, 1999. Company restaurant sales in the Panera Bread business unit for
the twelve weeks and forty weeks ended October 2, 1999 increased 29.9% to $23.5
million and 25.2% to $71.4 million, respectively, principally due to the opening
of 15 new Company-operated bakery-cafes since the third quarter of 1998. Panera
Bread's comparable restaurant sales for the third quarter and forty week period
ending October 2, 1999 increased by 4.9% and 2.8% respectively. Franchise sales
and other revenues for the Panera Bread business unit increased 92.1% to $2.9
million in the third quarter of 1999 from $1.5 million in the third quarter of
1998, primarily driven by increased franchise royalties, which grew 169.6% to
$1.2 million in the third quarter of 1999, and an increase in product sales to
franchisees. For the forty weeks ended October 2, 1999, franchise sales and
other revenues for the Panera Bread business unit increased 115% to $8.6
million.
The cost of food and paper products as a percentage of Company restaurant
sales was 40.7% in the third quarter compared to 35.3% for the same period in
1998. For the forty weeks ended October 2, 1999, the cost of food and paper
products was 37.0% compared to 37.1% for the same period in 1998. Included in
food costs are costs associated with the commissary operations that sell fresh
dough products to both Company-owned and franchised bakery-cafes. The increase
in the third quarter was due to the fact that the Panera Bread/Saint Louis Bread
Company business unit utilizes fresh dough commissaries while the Au Bon Pain
business unit did not and the fact that Panera Bread has opened 6 commissaries
since 1998 that become more efficient as they service more bakery-cafes.
The cost of labor as a percentage of restaurant revenue decreased 0.9% to
27.7% from 28.6% in the third quarter compared to the same period in 1998 and
increased 1.1% to 29.3% from 28.2% for the forty week period ended October 2,
10
<PAGE>
1999, compared to the same period in 1998. The decrease in the third quarter
between years is due to the fact that the Panera Bread/Saint Louis Bread Company
business unit operates at lower labor percentages than the Au Bon Pain business
unit. The overall increase in the year-to-date labor is primarily due to an
increase in the average hourly wage rate due to the highly competitive labor
market.
Total operating profit/(loss) for the Company in the third quarter of 1999
versus the comparable quarter of the previous year increased to $1.2 million in
1999 from $(21.0) million in 1998. For the forty weeks ended October 2, 1999 and
October 3, 1998, total operating income/(loss) for the Company was $1.1 million
and $(20.9), respectively. The forty weeks ended October 2, 1999 includes $4.7
million in reduced depreciation and amortization expense associated with the Au
Bon Pain business unit assets held for sale. The 1998 results included a $24.2
million write-down of assets connected to the sale. Operating income in the
Panera Bread Division for the twelve weeks and forty weeks ended October 2,
1999, was $1.2 million and $2.6 million respectively, on a stand-alone, pro
forma basis which includes an additional allocation for overhead services
provided by ABP Corporation.
During the third quarter of 1999, no additional Panera Bread franchise area
development agreements were signed. As of October 2, 1999, the Company had
franchise commitments to develop 529 additional bakery-cafes. In the third
quarter of 1999, 11 Panera Bread bakery-cafes were opened, including 2
Company-owned cafes and 9 franchisee-operated cafes. As of October 2, 1999,
there were 80 Company-owned bakery-cafes (including two specialty bakery-cafes)
and 80 franchised bakery-cafes open.
Interest expense declined to $150,176 compared to $1,437,606 for the third
quarter and $2,654,323 versus $4,972,282 for the forty weeks ended October 2,
1999 and October 3, 1998 due to the repayment in the second quarter of all the
Company's outstanding debt. As a result of the above, the Company recorded a net
income/(loss) of $668,565 and $(3,591,016) for the twelve weeks and forty weeks
ended October 2, 1999 compared to a net loss of $(17,759,499) and $(21,101,433)
for the comparable 1998 period.
11
<PAGE>
Liquidity and Capital Resources
Effective May 16, 1999, the Company completed its transaction to sell
the Au Bon Pain business unit. In the second quarter of 1999 the Company repaid
all of its outstanding debt with the proceeds from the Sale (see Note D). In
connection with the early retirement of debt, in the second quarter of 1999, the
Company recorded an after tax extraordinary non-cash charge of approximately
$382,000.
The Company's principal requirements for cash are capital expenditures
for constructing and equipping new bakery-cafes and commissaries, maintaining or
remodeling existing bakery-cafes and commissaries, the implementation of a new
financial system 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, the sale of assets and bank borrowings.
Cash and cash equivalents were $2,110,910 at October 2, 1999, compared
to $1,860,445 at December 26, 1998. Funds provided by operating activities were
primarily the result of an increase in the working capital deficit and deferred
revenue.
Total capital expenditures for the forty weeks ended October 2, 1999 of
$11.7 million were related primarily to the opening of 11 new Company-operated
Panera Bread bakery-cafes, maintaining or remodeling existing bakery-cafes and
commissaries and implementing a new financial system. The expenditures were
mainly funded by net cash from operating activities and the use of the remaining
proceeds from the sale of the Au Bon Pain business unit. Total capital
expenditures for the forty weeks ended October 3, 1998 were $13.8 million.
On March 23, 1998 the Company sold its Mexico, MO production facility
and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash. The net proceeds of the sale were used to
repay the $7.9 million outstanding for the Company's Industrial Revenue Bond and
to reduce amounts outstanding under the Company's revolving credit line. There
were no gains or losses associated with the early retirement of the Industrial
Revenue Bond or the partial repayment of the revolving credit line.
Concurrently with the sale of the Au Bon Pain business unit effective
May 16,1999, the Company amended its existing credit facility to reduce the
unsecured revolving line of credit to $10.0 million, reflecting reduced needs
for debt financing. Amounts outstanding under the amended facility bear interest
at either LIBOR plus 2.25% or the commercial bank's prime rate plus .75%, at the
Company's option. As of October 2, 1999, the Company had $9.4 million available
to it under the $10.0 million revolving line of credit, reduced by a $0.6
million outstanding standby letter of credit.
Excluding the expenditures related to the divested Au Bon Pain business
unit, the Company currently anticipates spending approximately $16 million in
1999, principally for the opening of new Panera Bread Company bakery-cafes and
commissaries, maintaining or remodeling existing cafes and implementing a new
financial system. The Company expects to fund these expenditures principally
through internally generated cash flow and cash remaining from the sale of the
Au Bon Pain business unit after repayment of all outstanding debt.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Matters discussed in this report which relate to events or developments
that are expected to occur in the future, including any discussion of growth or
anticipated operating results are forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
12
<PAGE>
Securities Exchange Act of 1934 (identified by the words "estimate," "project,"
"anticipates," "expects," "intends," "believes," "future," and similar
expressions). These are statements which express management's belief,
expectations or intentions regarding the Company's future performance. Moreover,
a number of factors could cause the Company's actual results to differ
materially from those set forth in the forward-looking statements due to known
and unknown risks and uncertainties. The Company's operating results may be
negatively affected by many factors, included but not limited to the lack of
availability of sufficient capital to it and the developers party to franchise
development agreements with the Company, variations in the number and timing of
bakery-cafe openings, public acceptance of new bakery-cafes, consumer
preferences, competition, commodity costs, and other factors that may affect
retailers in general. The foregoing list of important factors is not exclusive.
Year 2000 Issue
The "Year 2000 Issue" is the result of manufactured equipment and
computer programs using two digits rather than four to define the applicable
year. If the Company's equipment and computer programs with date-sensitive
functions are not Year 2000 compliant, they may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process transactions, generate invoices or engage
in similar normal business practices.
During 1997, the Company formed an ongoing internal review team to
address the Year 2000 Issue that encompasses operating and administrative areas
of the Company. Internal information technology professionals are working to
identify and resolve all significant Year 2000 issues in a timely and effective
manner. The Company's executive management monitors the status of the Year 2000
remediation plans, including an assessment of issues and development of said
remediation plans, where necessary, as they relate to internally used software,
computer hardware and use of computer applications. The Company has completed a
comprehensive inventory of all systems in the cafes, commissaries and corporate
offices and has notified critical vendors of the Company's requirements
pertaining to the Year 2000 Issue.
The Company has completed its assessment of the Year 2000 impact for
both information technology ("IT") and Non-IT systems. In regard to IT systems,
the Company has identified the following as the main areas of Year 2000 focus:
payroll systems, financial systems, network/integration systems, register and
store management systems and commissary systems. Network/integration systems are
corporate office electronic systems and tools which link various information
subsystems and databases, encompassing e-mail and all major financial systems,
such as general ledger database systems, and all major operational systems, such
as store operating performance database systems. Register systems are the
point-of-sale systems used within each retail bakery-cafe. These are
electronically linked with the personal computer-based store back office
management systems also located within each retail bakery-cafe, providing tools
for the cafe management. Commissary systems allow commissaries to accept
electronic orders from cafe's and deliver the ordered product back to the
cafe's.
The cost of addressing the Year 2000 Issues are included in the overall
costs of establishing an independent computer network for Panera Bread. The
total cost of establishing the new system is estimated to be approximately $2.8
million, of which approximately $550,000 is specifically related to the Year
2000 issue.
In addition to the above IT systems, the Company has identified the
following as the primary Non-IT systems subject to the Year 2000 Issue: ovens,
13
<PAGE>
alarms, proofers, HVAC-freezers, and safes. The Company is currently in contact
with vendors and/or landlords in order to assess the potential impact. Based on
this review, the Company believes the potential impact of the Year 2000 Issue
pertaining to Non-IT systems to be minor. The Company is addressing, in order of
criticality, the potential issues, and is developing remediation and contingency
plans.
While the Company believes it is taking all appropriate steps to assure Year
2000 compliance, it is dependent on key business partner and/or vendor
compliance to some extent. The Year 2000 Issue is pervasive and complex as
virtually every computer operation will be affected in some way. If, due to
unforeseen circumstances, the implementation is not completed on a timely basis,
or key business partners and/or vendors fail to resolve all significant Year
2000 issues in a timely and effective manner, the Year 2000 Issue could have a
material adverse impact on the Company. In addition to the estimated costs
outlined above, the Company has estimated the costs for adopting all "worst
case" contingency plans to be an additional $130,000.
The following chart depicts the phases, status, timetable, estimated
cost of completion, contingency plans and risks, and estimated cost of
implementing contingency plans pertaining to Year 2000 issues associated with IT
systems. The most reasonably likely worst case scenarios are outlined under the
columns "Contingency Plan/Risks" and "Estimated Contingency Cost". All
information pertaining directly to the Au Bon Pain Division has been removed
from the chart, leaving a Panera Bread Company Year 2000 summary only.
14
<PAGE>
PANERA BREAD COMPANY
YEAR 2000 SUMMARY FOR IT SYSTEMS
<TABLE>
<CAPTION>
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
AREA/SYSTEM PHASES STATUS TIMETABLE ESTIMATED CONTINGENCY PLAN/RISKS ESTIMATED
COST CONTINGENCY
COST
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
New Financial -Purchase of Integrated Complete 4/99 $1,630,000 Additional consulting
Systems GL, AP, AR, Assets, HR, effort needed.
Cash, Property Application certified
Management and to be Y2K compliant.
Purchasing
-Implementation Planning Complete 6/99
-Conversion & Complete 7/99
Interface Programming
-Testing/Parallel Complete 8/99
-Production Complete 10/99
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
Payroll- -Contract Negotiations Complete 5/99
Outsource
-Conversion of Panera Complete 8/99
active employees
-Production Complete 9/99
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
Network Systems & -Network Infrastructure Complete 4/99 $500,000 No contingency needed
Computer Facility Design as all hardware &
software is new & Y2K
-Network Implementation Complete 6/99 compliant.
out for bid
-Computer Room Complete 6/99
constructed
-Network Bid Assigned Complete 6/99
-Network Install Complete 6/99
-Voice Mail Replacement Complete 8/99
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
Register Systems -Micros 2400 registers Complete 11/99 $155,000 No contingency needed
and software tested as application
for compliance certified by Micros &
-MWS+ to be installed In process 12/99 tested to be compliant
-Register to PC Code In process 12/99
not Y2K compliant
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
AREA/SYSTEM PHASES STATUS TIMETABLE ESTIMATED CONTINGENCY PLAN/RISKS ESTIMATED
COST CONTINGENCY
COST
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Register Systems Processes being In process 12/99 $50,000 Contingency not
Central Support modified for ease of required - application
support for is compliant, if
multi-market pricing & modifications are not
new product rollout complete is more manual
effort.
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
Bakery Back -Inventory of Complete 5/99 $445,000 -Development Costs $100,000
Office Systems Applications & Hardware exceed estimates or not
completed on schedule.
-Design New BOH Complete 6/99 Would need to hire
register & applications rollout experts to
compress rollout time
-Development Complete 10/99
-Lab Test Complete 11/99
-Pilot In process 11/99
-Rollout In process 12/99
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
Commissary Systems New Application & Complete 6/99 $60,000 Implementation $30,000
hardware to replace DOS postponed requiring
based solution with addition rollout help
customization.
Testing Complete 9/99
Pilot Complete 9/99
Rollout - in phase with In process 12/99
BOH for integration
- ------------------- ------------------------- ----------------- ------------- ------------- ------------------------- -------------
</TABLE>
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's unsecured revolving line of credit bears an interest rate
using the commercial bank's prime rate or LIBOR as the basis, and therefore is
subject to additional expense should there be an increase in prime or LIBOR
interest rates.
In the past, the Company has been able to recover inflationary cost
increases through increased menu prices. There have been and there may be in the
future, delays in implementing such menu price increases, and competitive
pressures may limit the Company's ability to recover such cost increases in
their entirety. Historically, the effects of inflation on the Company's net
income have not been materially adverse.
In the past, the Company has been able to recover commodity price increases
through increased menu prices. There have been and there may be in the future,
delays in implementing such menu price increases, and competitive pressures may
limit the Company's ability to recover such cost increases in their entirety.
Historically, the effects of commodity increases on the Company's net income
have not been materially adverse.
A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws. Although the Company has and will continue
to attempt to pass along any increased labor costs through food price increases,
there can be no assurance that all such increased labor costs can be reflected
in its prices or that increased prices will be absorbed by consumers without
diminishing to some degree consumer spending at the bakery-cafes. However, the
Company has not experienced to date a significant reduction in gross profit
margins as a result of changes in such laws, and management does not anticipate
any related future significant reductions in gross profit margins.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on September 17, 1999,
to consider and vote upon the following matters:
1. To elect one (1) member of the Board of Directors, for a three-year
term ending at the Company's 2002 Annual Meeting (the "Director
Proposal"); and
2. To ratify the action of the Board of Directors reappointing
PricewaterhouseCoopers LLP as auditors for the Company for the
fiscal year ending December 25, 1999 (the "Auditors Proposal");
With respect to the Directors Proposal, Ronald M. Shaich, the sole Nominee,
received the following votes in favor, and withheld, from his nomination:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C>
13,389,399 327,087
</TABLE>
17
<PAGE>
Accordingly, Mr. Shaich was elected as a member of the Board of Directors,
to serve a three-year term expiring at the Company's 2002 Annual Meeting and
until his successor has been duly elected and qualified.
With respect to the Auditors Proposal, 13,687,089 votes were cast for the
proposal, 19,707 votes were cast against the proposal, and there were 9,690
abstentions on the proposal. Accordingly, the Auditors Proposal was approved.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(b) Panera Bread Company did not file any reports on Form 8-K during the
quarter ended October 2, 1999.
18
<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.
PANERA BREAD COMPANY
-----------------------------
(Registrant)
Dated: November 15, 1999 By: /S/ RONALD M. SHAICH
----------------------------------------
Ronald M. Shaich
Chairman and Chief Executive Officer
Dated: November 15, 1999 By: /S/ WILLIAM W. MORETON
----------------------------------------
William W. Moreton
Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> OCT-2-1999
<CASH> 2,110,910
<SECURITIES> 0
<RECEIVABLES> 1,669,520
<ALLOWANCES> 126,581
<INVENTORY> 1,753,504
<CURRENT-ASSETS> 7,993,748
<PP&E> 61,839,832
<DEPRECIATION> 16,777,170
<TOTAL-ASSETS> 88,855,473
<CURRENT-LIABILITIES> 16,548,468
<BONDS> 0
0
0
<COMMON> 1,215
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 88,855,473
<SALES> 130,745,602
<TOTAL-REVENUES> 141,197,172
<CGS> 48,395,180
<TOTAL-COSTS> 140,054,266
<OTHER-EXPENSES> 492,171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,654,323
<INCOME-PRETAX> (2,003,588)
<INCOME-TAX> 1,205,000
<INCOME-CONTINUING> (3,208,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 382,428
<CHANGES> 0
<NET-INCOME> (3,591,016)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
