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PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT |X|
Filed by a party other than the Registrant | |
Check the appropriate box:
| | Preliminary Proxy Statement | | Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
| | Definitive Additional Materials
| | Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AU BON PAIN CO., INC.
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(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
| | No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
(2) Aggregate number of securities to which transaction applies:
Class A Common Stock (10,518,213 shares as of 1/11/99); Class B Common Stock
(1,557,658 shares as of 1/11/99)
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined.):
Value of Transaction: $73,000,000, based upon the stated purchase price in
the Stock Purchase Agreement dated August 12, 1998, as amended on October
28, 1998.
(4) Proposed maximum aggregate value of transaction:
$73,000,000 (See line 3 above).
(5) Total fee paid:
$14,600, per Exchange Act Rule 0-11(C) (2).
|X| Fee paid previously with preliminary materials.
| | Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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AU BON PAIN CO., INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
MONDAY, FEBRUARY 22, 1999 -- 2:00 P.M.
You are hereby notified that a Special Meeting of Stockholders of Au Bon
Pain Co., Inc. (the "Company") will be held on Monday, February 22, 1999 at 2:00
P.M., at BankBoston, 100 Federal Street, Boston, Massachusetts, to consider and
act upon the following matters:
1. To consider the approval of: (1) the terms and conditions of the Stock
Purchase Agreement, as amended and supplemented, by and among the
Company, ABP Holdings, Inc., a Delaware corporation and wholly owned
subsidiary of the Company ("ABPH"), and ABP Corporation, a Delaware
Corporation and an affiliate of Bruckmann, Rosser, Sherrill and Co.,
L.P. (the "Buyer") which 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"),
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"), for a purchase price of $73,000,000, subject to
adjustments, (b) the merger of ABP Newco with and into ABPH, with ABPH
being the surviving corporation and (c) the sale of all of the capital
stock of ABPH to the Buyer, whereby the Buyer will become the owner of
the Au Bon Pain Division; and (2) the amendment to the Company's
Certificate of Incorporation to change the name of the Company to
"Panera Bread Company"; and
2. To transact such other business as may properly come before the
meeting.
If you are unable to attend the meeting personally, please be sure to date,
sign and return the enclosed proxy card in the envelope provided to: Boston
EquiServe Limited Partnership, 150 Royall Street, Canton, Massachusetts 02021.
Only stockholders of record on the books of the Company at the close of
business on January 11, 1999, are entitled to notice of and to vote at the
meeting.
By Order of the Board of Directors,
Walter D. Wekstein, Secretary
Dated: January 25, 1999
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AU BON PAIN CO., INC.
EXECUTIVE OFFICES:
19 FID KENNEDY AVENUE
BOSTON, MASSACHUSETTS 02210
PROXY STATEMENT
VOTING PROCEDURES AND GENERAL INFORMATION
This proxy statement and the accompanying proxy card are first being mailed
to stockholders commencing on or about January 25, 1999. The accompanying proxy
is solicited by the Board of Directors of Au Bon Pain Co., Inc. (the "Company"
or "Au Bon Pain"), for use at the Special Meeting of Stockholders to be held on
February 22, 1999, and any adjournment or adjournments thereof (the "Special
Meeting"). The cost of soliciting proxies will be borne by the Company.
Directors, officers and employees of the Company may assist in the solicitation
of proxies by mail, telephone, telegraph and personal interview without
additional compensation. In addition, the Company has retained Innisfree M&A,
Inc. to solicit proxies on behalf of the Board of Directors, at a cost of
$8,500, plus reasonable out-of-pocket expenses.
The purpose of the Special Meeting is to consider the following matters, as
more particularly described herein:
1. To consider the approval of: (1) the terms and conditions of the Stock
Purchase Agreement, as amended and supplemented (the "Agreement"), by
and among the Company, ABP Holdings, Inc., a Delaware corporation and
wholly owned subsidiary of the Company ("ABPH"), and ABP Corporation,
a Delaware corporation and an affiliate of Bruckmann, Rosser, Sherrill
and Co., L.P. (the "Buyer") which 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 "ABP Division or
the "Au Bon Pain Division"), for a purchase price of $73,000,000,
subject to adjustments, (b) the merger of ABP Newco with and into
ABPH, with ABPH being the surviving corporation and (c) the sale of
all of the capital stock of ABPH to the Buyer, whereby the Buyer will
become the owner of the Au Bon Pain Division (the "Sale"); and (2) the
amendment to the Company's Certificate of Incorporation to change the
name of the Company to Panera Bread Company (the "Amendment")
(collectively, the "Sale Proposal"); and
2. To transact such other business as may properly come before the
Special Meeting.
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When a proxy card is returned properly signed, the shares represented
thereby will be voted by the persons named as proxies in accordance with the
stockholder's directions. You are urged to specify your choices on the enclosed
proxy card. If a proxy card is signed and returned without specifying choices,
the shares will be voted `FOR' Proposal 1, the Sale Proposal, and in the
discretion of the persons named as proxies in the manner they believe to be in
the best interests of the Company as to other matters that may properly come
before the Special Meeting. A stockholder giving a proxy may revoke it at any
time before it is voted at the Special Meeting by written notice to the Company,
by oral notice to the Secretary at the Special Meeting or by submitting a later
dated proxy.
The Board of Directors of the Company (sometimes referred to herein as the
"Board" or the "Board of Directors") has fixed January 11, 1999 as the record
date for the Special Meeting. Only stockholders of record on the record date are
entitled to notice of and to vote at the Special Meeting. On the record date,
there were 10,518,213 shares of Class A Common Stock (each of which is entitled
to one vote), and 1,557,658 shares of Class B Common Stock (each of which is
entitled to three votes) of the Company issued and outstanding. As of the record
date, the holders of the Class A Common Stock held approximately 69% of the
outstanding votes and the holders of the Class B Common Stock held approximately
31% of the outstanding votes. The Class A and Class B Common Stock are referred
to in this proxy statement as the "Common Stock." The holders of Common Stock do
not have cumulative voting rights.
Holders of the Company's Common Stock are not entitled to appraisal rights
with respect to the Sale because neither the Certificate of Incorporation of the
Company nor the Delaware General Corporation Law provides for appraisal rights
for the transactions contemplated by the Sale.
For all proposals considered at the Special Meeting, the holders of a
majority in interest of the combined voting power of the Class A and Class B
Common Stock issued and outstanding and entitled to vote and present in person
or represented by proxy, will constitute a quorum. Shares represented by all
proxies received, including proxies that withhold authority and/or abstain from
voting on a proposal, as well as "broker non-votes," discussed below, count
toward establishing the presence of a quorum.
Assuming the presence of a quorum, the Sale Proposal must be approved by
affirmative vote of a majority of the combined voting power of the shares of
Class A and Class B Common Stock issued and outstanding as of the record date.
Under applicable rules, brokers who hold shares of the Company's Common
Stock in street name have the authority to vote the shares in the broker's
discretion on "routine" matters if they have not received specific instructions
from the beneficial owner of the shares. The Sale Proposal is NOT a "routine"
matter for this purpose. With respect to matters which are determined by the
appropriate broker-dealer regulatory organization to be "non-routine," such as
the Sale Proposal, brokers may not vote shares held in street name without
specific instructions from the beneficial owner. If a broker holding shares in
street name submits a
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proxy card on which the broker physically lines out the matter, whether it is
"routine" or "non-routine", or does not indicate a specific choice ("for,"
"against" or "abstain") on a matter that is "non-routine," that action is called
a "broker non-vote" as to that matter. Broker "non-votes" with respect to
"routine" matters or "non-routine" matters (such as Proposal 1) are not counted
in favor of such matters. THEREFORE, IF YOU WISH TO VOTE IN FAVOR OF THE SALE
PROPOSAL, YOU MUST INDICATE ON THE PROXY CARD THAT YOU VOTE IN FAVOR OF THE SALE
PROPOSAL AND NOT MERELY SIGN THE PROXY CARD.
On August 12, 1998, the date preceding the public announcement of the Sale,
the high and low sale prices of the Company's Class A Common Stock on the Nasdaq
National Market were $8.875 and $8.375, respectively.
A representative of PricewaterhouseCoopers LLP, the Company's independent
accountants for the current year and for the most recently completed fiscal
year, is expected to be present at the Special Meeting and will have the
opportunity to make a statement if he or she desires to do so, and is expected
to be available to respond to appropriate questions.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
Statements made or incorporated in this Proxy Statement include a number of
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
statements containing the words "estimates," "projects," "anticipates,"
"believes," "expects," "intends," "future," and words or information of similar
import which express management's belief, expectations or intentions regarding
the Company's future performance. The Company believes that such statements are
protected by the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties. The Company's
actual results could differ materially from those set forth in the
forward-looking statements. The amount of 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 Division bakery cafes. Additionally, the
Company's operating results may be affected by many factors, including but not
limited to, materially adverse changes in economic conditions in the markets
served by the Company, significant delay in the expected closing of the Sale,
future regulatory actions and conditions in the Company's operating areas,
competition in the marketplace, lack of consumer demand for the Company's
products, variations in the number and timing of bakery cafe openings and public
acceptance of such new bakery cafes, and other factors that may affect retailers
in general.
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THE SALE PROPOSAL
(PROPOSAL 1 ON PROXY CARD)
BOARD OF DIRECTORS RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS
THAT THE SHAREHOLDERS VOTE `FOR' THE SALE PROPOSAL AS DESCRIBED HEREIN. THE
BOARD HAS DETERMINED THAT THE TRANSACTIONS INCLUDED IN THE SALE PROPOSAL ARE IN
THE BEST INTERESTS OF THE SHAREHOLDERS.
THE TRANSACTION
Reasons for the Transaction
The Company and its subsidiaries today operate two retail bakery cafe and
franchising businesses under the concept names "Au Bon Pain" and "Saint Louis
Bread Co." The Company believes that it does not have sufficient access to the
capital and human resources required to both revitalize the Au Bon Pain Division
and grow the Saint Louis Bread Co. Division which has shown significant
potential to date. The Company believes that growing the Saint Louis Bread Co.
Division presents the greatest opportunity to enhance shareholder value among
the alternatives available to the Company over the foreseeable future. See
"Background of the Transaction" below for a discussion of other alternatives
considered and the basis for this belief. Accordingly, the Board of Directors
has unanimously voted to recommend to the stockholders of the Company that they
approve the sale of the Au Bon Pain Division. In reaching this determination,
the Board considered, among other factors, the opinion of NationsBanc Montgomery
Securities LLC ("NMS") regarding the financial terms of the proposed Sale. See
"NMS Opinion." The other material factors presented by management of the Company
and considered by the Board of Directors in reaching such determination are:
1. Management believes that as a result of the Sale, the single focus of
management and capital resources on the Saint Louis Bread Co. Division
will enhance the likelihood of a successful national rollout of that
concept and the resulting enhancement of shareholder value;
2. Management believes that the significant improvement in the Company's
balance sheet from the repayment of all outstanding debt (estimated to
be $62 million, assuming a closing date in February, 1999), will fuel
the Company's ability to grow the Saint Louis Bread Co. Division; and
3. Management believes that the Sale will further increase the likelihood
of being able to utilize more quickly its existing tax assets of
approximately $12.2 million.
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Summary of the Transaction
The following discussion is only a summary of the material terms of the
Stock Purchase Agreement and amendments appended as Annex A to this Proxy
Statement (the "Agreement") and is qualified in its entirety by reference to the
Agreement. See "Terms of the Transaction and the Transaction Agreement" below.
The Agreement. The Company, together with its wholly-owned subsidiary ABP
Holdings, Inc. ("ABPH") has 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. See "The Buyer" below for a
description of the Buyer.
Sale of the Au Bon Pain Division. Pursuant to the Agreement, the Company
has agreed (i) to transfer, in the aggregate, 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") substantially all of the
assets and liabilities of the Au Bon Pain Division business (the "Au Bon Pain
Division"), (ii) to merge ABPH and ABP Newco, with ABPH being the surviving
corporation of such merger, and (iii) to sell all of the outstanding capital
stock of ABPH to the Buyer. Thus, upon consummation of the Sale, the Buyer will
become the owner of the Au Bon Pain Division by virtue of its ownership of the
capital stock of ABPH. Included among the assets expected to be transferred to
ABPH and ABP Newco, as of December 26, 1998, are the 151 Company-owned Au Bon
Pain Division bakery cafes and the Au Bon Pain Division franchise business,
consisting of 114 franchisee-owned and operated Au Bon Pain Division bakery
cafes in the United States, Europe, South America and Asia.
Upon the consummation of the Sale, the Company will retain ownership of all
of the issued and outstanding capital stock of Saint Louis Bread Co., Inc. (the
"Saint Louis Bread Co. Division"), consisting of 71 Company-owned and 45
franchisee-owned and operated Saint Louis Bread Co. Division bakery cafes as of
December 26, 1998. As of December 26, 1998, the Saint Louis Bread Co. Division
had executed 31 Area Development Agreements providing for the future development
by franchisees of more than 500 additional Saint Louis Bread Co. Division bakery
cafes. See, "Information About the Company - Business - Franchises - Saint Louis
Bread Co."
Pursuant to the terms of the Agreement, upon the consummation of the Sale,
the Company will amend its Certificate of Incorporation to change its name to a
name which does not include "Au Bon Pain." The Company intends to change its
name to "Panera Bread Company."
Purchase Price. The purchase price for the sale of the stock of ABPH to the
Buyer is $73,000,000, subject to adjustment as described below.
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Background of the Transaction
In 1996, the Company was unable to access the capital needed: (a) to grow
the Saint Louis Bread Co. Division so that it might realize its potential of
becoming a nationally dominant brand; and (b) to simultaneously revitalize the
Au Bon Pain Division through the Company's ABP 2000 remodeling program. The
factors contributing to this situation included:
(1) the continued declining performance of the Au Bon Pain Division;
(2) a significant debt burden, exacerbated by the additional debt incurred
related to a newly constructed manufacturing facility; and
(3) a significant increase in manufacturing overhead expenses associated
with the new facility.
Accordingly, beginning in late 1996 and continuing into 1997, with the
support of the Board of Directors, the Company's senior management began to
explore various strategic initiatives to address these issues. The principal
strategies considered were to: (1) maintain the status-quo, with the Company
continuing as it then existed; (2) internally restructure the Company by
consolidating certain operational and administrative functions of the Au Bon
Pain Division with the Saint Louis Bread Co. Division; (3) operate the Au Bon
Pain Division on a stand-alone basis (assuming a disposition of a part of the
Saint Louis Bread Co. Division); and (4) operate the Saint Louis Bread Co.
Division on a stand-alone basis (assuming the sale of the Au Bon Pain Division
and the Mexico Plant) and rapidly expand the concept.
The option of maintaining the status quo was rejected because this option
does not address the Company's capital needs for the development and growth of
the Saint Louis Bread Co. Division and the Company's ABP 2000 remodeling program
simultaneously.
The internal consolidation option would have required integrating the
duties for supporting the Company's Au Bon Pain and Saint Louis Bread concepts
among employees that historically have been assigned to only one of the
Company's two operating units (that is, either to the Au Bon Pain Division or
the Saint Louis Bread Co. Division). Management was concerned that combining
these responsibilities would reduce the effectiveness of the support provided to
each Division and the growth of each individual concept. In addition, although
this option would have reduced the cost of administration and overhead, this
option would not have addressed the Company's significant debt burden which was
inhibiting the capital expenditures needed to grow the Saint Louis Bread Co.
Division and simultaneously to expand the Company's ABP 2000 remodeling program.
Accordingly, the internal consolidation option was rejected because the
potential financial gains from the reduction of overhead and administration were
considered to be more than offset by the risks associated with a loss of focus
on the individual needs of each Division and the continued competition between
them for capital and management resources.
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The principal approach considered in operating the Au Bon Pain Division on
a stand-alone basis was through a public offering of stock of the Saint Louis
Bread Co. Division. This option was rejected principally because operating two
potentially competitive affiliated businesses as separate public companies
created the potential for conflict between the boards of directors of the two
companies in respect of the duties owed to their respective shareholder
constituencies and because this option would have resulted in significant
additional legal, accounting and administrative expenses. In addition, the Saint
Louis Bread Co. Division was considered too early in its development during the
1997-98 time frame to pursue this option effectively. Similarly, the Company's
management rejected a complete sale of the Saint Louis Bread Co. Division
because management believed that the Division had significant growth potential
and it was too early in its development in the 1997-98 time frame to pursue the
option.
Finally, management considered the option of operating the Saint Louis
Bread Co. Division as a stand-alone business. With its mass market growth
potential, higher average sales per store than the Company had experienced in
the Au Bon Pain Division, and overall alignment with current consumer demand for
high quality, fresh-baked breads and bread products, management concluded that
the Saint Louis Bread Co. Division would provide a greater opportunity to
increase shareholder value than other options, assuming the plan could be
properly financed and executed. In addition, the sale of the Au Bon Pain
Division would allow the Company to repay all of its outstanding debt and
provide it with the management focus and the ability to concentrate its
resources on the roll out of the Saint Louis Bread Co. Division concept
nationally.
For these reasons, management recommended to the Board and the Board
concluded that operating the Saint Louis Bread Co. Division as a stand-alone
business presented the best alternative to maximize shareholder value. As a
result, the Company decided to pursue a strategy of accelerating the growth of
the Saint Louis Bread Co. Division by selling most of the assets of the Company
except the Saint Louis Bread Co. Division, thereby eliminating the Company's
debt. The assets to be sold included: (1) the Au Bon Pain Division, including
its Mexico, Missouri bakery products manufacturing facility (the "Mexico Plant")
for cash and a commitment from the buyer of the Mexico Plant to continue to
supply frozen dough and other bakery products to the Company; (2) its preferred
stock investment in The Peet's Companies, Inc. (consummated in October, 1997);
and (3) its office building in Woburn, Massachusetts (consummated in November,
1997).
The Company retained the investment banking firm of Peter J. Solomon
Company Limited ("PJSC") in December 1996 to identify a buyer for the Au Bon
Pain Division, which at the time included the Mexico Plant. The Company decided
that efforts to sell the Au Bon Pain Division should be focused principally on
"financial" buyers, as opposed to "strategic" buyers already in the bakery cafe
or quick service restaurant business. This decision was based on the concern
that, although the Au Bon Pain Division and the Saint Louis Bread Co. Division
are distinct bakery cafe concepts: (1) similarities between the concepts would
make a "strategic" buyer of the Au Bon Pain Division a potentially greater
competitive threat to the remaining Saint Louis Bread Co. Division and, (2) if
the buyer of the Au Bon Pain Division
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also purchased the Mexico Plant, a potential competitor in the Company's core
retail business would become a key supplier of frozen dough and other bakery
products to the Company and have access to confidential information concerning
product development and manufacturing. During its initial inquiries, PJSC
contacted more than thirty potential buyers. In April 1997, PJSC sent an
information memorandum, prepared by the Company, that described the operations
and financial results of the Au Bon Pain Division to 17 potential buyers. Seven
of the potential buyers proceeded to interview members of the Company's
management, and three subsequently performed extensive due diligence with
respect to the Company during the summer of 1997.
During this period, the Company's senior management also engaged a
consultant with substantial experience in the baked goods manufacturing industry
to advise the Company about alternative buyers for the Mexico Plant. The Company
retained this consultant to advise the Company whether the value of the Mexico
Plant would be maximized by a sale to a buyer in the wholesale baked goods
manufacturing industry. The consultant identified companies whose principal
business was manufacturing who (unlike a strategic or financial buyer for the Au
Bon Pain Division's retail operations) would value the Mexico Plant's
substantial excess capacity to service wholesale customers other than the
Company, and who would agree to supply frozen dough to the Company on more
favorable terms than would any buyer of the Au Bon Pain Division due to the
ability of a buyer in the baked goods manufacturing industry to allocate the
fixed overhead costs associated with the Mexico Plant across a greater base of
sales.
In September, 1997, working with the consultant it had retained to advise
it with respect to the Mexico Plant, the Company solicited expressions of
interest for the purchase of the Mexico Plant from potential buyers in the baked
goods manufacturing industry. Based on the responses received from these
solicitations, the Company determined that selling the Mexico Plant separately
from the sale of the retail operations of the Au Bon Pain Division would be more
favorable to the Company both in terms of the purchase price, as well as in
respect to the terms for a supply contract for the subsequent purchase of
products by the Company. Specifically, the Company recognized from its
discussions with potential buyers of the Au Bon Pain Division (including the
Mexico Plant) that the bids from these potential buyers (which are discussed in
greater detail below) did not ascribe significant value to the Mexico Plant.
Conversely, the initial expressions of interest in the Mexico Plant from
potential buyers in the baked goods manufacturing industry ascribed significant
value to the Mexico Plant due to its excess capacity. In addition, as the
Company anticipated having the purchaser of the plant supply frozen dough and
other bakery products to the Saint Louis Bread Co. Division, the Company
believed it would realize an additional strategic competitive benefit from a
sale of the Mexico Plant to a buyer whose core business was manufacturing for
sale in the wholesale markets and not to a potential strategic competitor of its
retail business.
The three parties that were preparing bids for the Au Bon Pain Division
(which included the Mexico Plant) submitted bids during September, 1997 in the
amounts of: $87,000,000, $92,500,000, and $100,000,000, respectively. The
Company then asked each bidder to re-submit bids for the Au Bon Pain Division
without the Mexico Plant. Two of
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these parties, including the Buyer and another party (the "Other Party"),
subsequently submitted new bids for the Au Bon Pain Division without the Mexico
Plant in early October, 1997. These bids were made in the amounts of $86,000,000
(subsequently unilaterally increased to $92,000,000) and $86,500,000,
respectively. The latter bid, from the Buyer, required the Company to remit a
portion of the proceeds received by it upon a sale of the Mexico Plant (the
first $6,000,000 plus 70% of proceeds in excess of $15,000,000). Both of these
rounds of bidding were based on a forecast of the operating results of the Au
Bon Pain Division for the 1997 fiscal year.
The Company continued negotiations with the Buyer and the Other Party to
clarify any questions concerning the terms of their respective offers, including
the potential competitive consequences of the transaction on the Saint Louis
Bread Co. Division. However, since the Other Party involved a financial buyer
and an affiliated company in the quick service restaurant industry, the Company
considered the competitive threat of the Other Party to be too great and
determined to negotiate exclusively with the Buyer.
Late in October 1997, the Board voted to retain Nationsbanc Montgomery
Securities LLC ("NMS") to review the financial aspects of the proposed
transaction and present its analysis and opinion to the Board with respect to
the proposed Au Bon Pain Division transaction as finally negotiated. The Board
also instructed management to proceed with the separate negotiations for the
sale of the Au Bon Pain Division and the Mexico Plant.
In November 1997, the Buyer withdrew from the negotiation process before
the signing of a definitive agreement for the sale of the Au Bon Pain Division.
The Company did not receive any formal written notice of the Buyer's withdrawal
from negotiations. Rather, a representative of the Buyer telephoned the
Company's chief executive officer and informed him that the decision was not
predicated on the failure of the Buyer and the Company to agree upon material
terms of the transaction, but rather that the Buyer simply was not prepared to
go forward with the transaction at that time.
Meanwhile, the Company continued to negotiate the terms of a sale of the
Mexico Plant with Bunge Foods Corporation ("Bunge Foods"). The Company decided
to discontinue temporarily its efforts to sell the Au Bon Pain Division so that
it could concentrate on successfully concluding a sale of the Mexico Plant. On
February 11, 1998, the Company entered into a definitive agreement with Bunge
Foods for the sale of the Mexico Plant, which included a five year commitment on
the part of Bunge Foods to manufacture and supply most of the frozen dough
requirements of the Au Bon Pain Division and the Saint Louis Bread Co. Division
at prices significantly more favorable than had been achieved by the Company
while it had operated the Mexico Plant. The Company completed the sale of the
Mexico Plant to Bunge Foods on March 23, 1998. Net proceeds from the sale to the
Company were approximately $13,000,000 in cash plus the cash generated from
approximately $2,000,000 of related accounts receivable.
In April 1998, the Company asked PJSC to again solicit buyers for the Au
Bon
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Pain Division. In early May 1998, PJSC contacted a number of potential buyers
for the Au Bon Pain Division, including the Buyer. During June 1998, the Company
considered various expressions of interest for the acquisition of the Au Bon
Pain Division submitted through PJSC. The Company received expressions of
interest from four parties (including the Buyer) indicating their interest in an
acquisition at the levels of $80,000,000, $80,000,000, $84,000,000, and
$90,000,000, none of which constituted firm or definitive offers, and Management
began preliminary discussions with each of them. In late June 1998, the Board
met and considered a report from PJSC with respect to its search for a buyer of
the Au Bon Pain Division and the level of interest expressed by potential
buyers. Subsequently, negotiations were discontinued with two of the potential
buyers. The Company was informed verbally by a representative of one of the
potential buyers who had expressed an interest at the level of $90,000,000 that
it was forced to withdraw because of an inability within the buyer's group to
resolve certain financial and organizational matters. The Company decided to
suspend discussions with one of the other potential buyers who had expressed an
interest at the level of $80,000,000 because of a concern over that potential
buyer's ability to obtain the necessary financing to consummate a transaction.
As a result, the Company continued negotiations only with the Buyer and one
additional bidder.
During July, 1998, the Company continued negotiations with both of these
bidders. During this period, the Buyer's base offering price remained at
$84,000,000, while the other bidder's base offering price stood at $80,000,000.
However, aside from the base offering price, other material terms of the two
offers differed significantly. With respect to the Lease Loss Adjustment and the
Lease Fee Adjustment (see discussion of Adjustments to Purchase Price), the
Buyer's proposal during this period consistently contemplated an adjustment
multiple of five (5), while the negotiations with the other party focused on a
range of three and one-half (3 1/2) to four and one-half (4 1/2). In addition,
the other party demanDED control over the Landlord consent process, which
directly affected the purchase price adjustment exposure of the Company, whereas
Buyer's proposal allowed the Company to control the Landlord consent process.
Further, the other party resisted honoring restrictions and rights of first
refusal on the development of Au Bon Pain bakery cafes that the Company had
granted to its Saint Louis Bread franchisees, while the Buyer expressed its
willingness to honor those agreements. With respect to any Alternative
Transaction for which the Company would have to terminate the sale transaction
(see discussion of Termination), the Buyer proposed a fixed termination fee of
$2,500,000, while the other party was seeking a variable termination fee tied to
the value of the Alternative Transaction. Because of these differences, and also
in order to maintain an alternative if the other bidder dropped out, the Company
maintained negotiations with both bidders. At the end of July, 1998, the Buyer
reduced its base offering price from $84,000,000 to $78,000,000 based on a
forecast of the operating results of the Au Bon Pain Division for the 1998
fiscal year.
At a meeting of the Board on August 3, 1998, the Company's senior
management reported that negotiations of the terms for the sale of the Au Bon
Pain Division to the Buyer were substantially complete, whereas negotiations
with the other bidder had reached an impasse with respect to the material terms
of the transaction described above and had been suspended. The Board again
considered alternatives to the sale of the Au Bon Pain Division, and the
potential financial consequences of these alternatives to the Company, including
the
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potential of a spin-off of the Au Bon Pain Division to the Company's
shareholders and the sale of Company-owned and operated Au Bon Pain Division
bakery cafes to franchisees. After discussion, the Board rejected the spin-off
alternative as inferior to a sale transaction with the Buyer, in part because of
the longer period of time that the Company believed would be required to
implement the strategy, in part because it did not address the capital needs of
the two Divisions and in part because of the less favorable tax aspects of the
transaction. The franchising alternative was set aside largely due to the
projected time delay in completing multiple sale transactions with franchisees
and in part due to the uncertainty of proceeds to be generated. An additional
factor considered by the Board in its deliberations was the length of time that
had been required for the Company to implement the strategy of selling the Au
Bon Pain Division and the concern that additional delay caused by pursuing other
alternatives would slow the Company's ability to grow and develop the Saint
Louis Bread Co. Division. Accordingly, the Board unanimously concluded that a
sale transaction was in the best interests of the Company and its shareholders,
and instructed management to complete its negotiations for a definitive
agreement with the Buyer.
On August 12, 1998, the Board met to review and consider the final terms
for the sale of the Au Bon Pain Division to the Buyer. Also present at the
meeting were representatives of PJSC, the Company's legal counsel, and a
representative of NMS. A representative of PJSC described its efforts during the
marketing of the Au Bon Pain Division. A representative of NMS presented to the
Board its analysis of the financial terms of the proposed sale of the Au Bon
Pain Division and delivered its opinion addressed to the Board that was later
reconfirmed on October 28, 1998 and (as reconfirmed) is attached as Annex B
(these opinions of NMS are more fully described in the section entitled "NMS
Opinion"). The scope of the NMS Opinion was limited solely to the financial
terms of the proposed Sale and the fairness of the purchase price offered in the
Sale transaction to the Company from a financial point of view. The NMS Opinion
was delivered to the members of the Board solely for their personal use (in
their capacity as members of the Board) in connection with their review and
evaluation of the merits of the proposed sale. At the August 12, 1998 meeting,
each member of the Board acknowledged that he understood the terms of the Sale
and the Board of Directors agreed unanimously that the proposed sale of the Au
Bon Pain Division to the Buyer was in the best interests of the Company and its
shareholders and voted unanimously to approve the execution of the Agreement in
substantially the form presented at the meeting. The Board believed that the
sale of the Au Bon Pain Division for $78,000,000, in addition to the prior sale
of the Mexico Plant for $13,000,000 in cash plus the cash generated from
approximately $2,000,000 in related accounts receivable, was consistent with the
previously established corporate strategy to monetize the assets of the Company
to support a rapid rollout of the Saint Louis Bread concept. The form of the
Agreement approved by the Board contained a purchase price of $78,000,000 for
the Au Bon Pain Division, which was subsequently amended to $73,000,000, subject
to adjustment, as discussed below.
In early October 1998, representatives of the Buyer discussed with the
Company's management concerns regarding the projected weaker than anticipated
results reported to it relative to the Au Bon Pain Division for fiscal 1998 and
the deteriorating credit conditions in the marketplace. Revised projections for
fiscal 1998 at the end of the Company's third quarter
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for fiscal 1998 showed a $1,500,000 decrease in the Au Bon Pain Division's total
net earnings before interest, taxes, depreciation and amortization ("EBITDA")
for the fiscal year as compared to the Company's previous projections. In
connection with such concerns, the parties also discussed a proposed amendment
to the Agreement with respect to the purchase price. On October 19, 1998, the
Board met to review and consider a proposed change in the purchase price from
$78,000,000 to $73,000,000, subject to adjustment, as well as certain other
amendments to the Agreement.
The material amendments to the Agreement included a change in the structure
of the Agreement (1) to provide that certain assets and liabilities of the Au
Bon Pain Division that were to be transferred to ABPH under the original
Agreement would instead be transferred to ABP Newco; and (2) to provide for the
subsequent merger of ABP Newco with and into ABPH immediately prior to the
consummation of the Sale. Prior to this amendment, the Agreement provided that
all assets and liabilities of the Au Bon Pain Division would be transferred to
ABPH prior to the consummation of the Sale. In addition, the amendment extended
from six to twelve months the period of time in which ABPH would agree to
provide financial and accounting and management information services to the
Company after the Closing pursuant to the terms of a Transition Services
Agreement to be entered into between the Company and ABPH at the Closing, which
is described in greater detail below.
Management described the Buyer's concerns regarding the weaker than
projected performance of the Au Bon Pain Division and the tightening of the
credit markets in light of the Agreement's conditions to Closing that Buyer
obtain the financing necessary to consummate the Sale and that there be no
material adverse change to the Au Bon Pain Division since July 11, 1998. The
Board was advised that NMS had advised management that it was prepared to
reconfirm its opinion based on the modified financial terms of the proposed Sale
that the aggregate consideration to be received by the Company was fair to the
Company from a financial point of view (subject to certain important
qualifications, assumptions made, matters considered, areas of reliance on
others, and limitations on the review undertaken in connection with NMS's
Opinion). Following a full discussion of the impact of the amendment, and
alternatives available to the Company, the meeting adjourned. On October 22,
1998, the Board unanimously approved the amendment to the Agreement.
The foregoing discussion of the information and factors considered by the
Company's Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered by the Company's Board of Directors. In
view of the wide variety of information and factors considered, the Company's
Board of Directors did not find it practical to, and did not, assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors.
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Terms of the Transaction and the Transaction Agreement
The following discussion is only a summary of the material terms of the
Stock Purchase Agreement and amendments appended as Annex A to this Proxy
Statement (the "Agreement") and is qualified in its entirety by reference to the
Agreement.
The Agreement. The Company, together with its wholly-owned subsidiary ABP
Holdings, Inc. ("ABPH") has 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. See "The Buyer" below for a
description of the Buyer.
Sale of the Au Bon Pain Division. Pursuant to the Agreement, the Company
has agreed (i) to transfer, in the aggregate, 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") substantially all of the
assets and liabilities of the Au Bon Pain Division, (ii) to merge ABPH and ABP
Newco, with ABPH being the surviving corporation of such merger, and (iii) to
sell all of the outstanding capital stock of ABPH to the Buyer. Thus, upon
consummation of the Sale, the Buyer will become the owner of the Au Bon Pain
Division by virtue of its ownership of the capital stock of ABPH. Included among
the assets expected to be transferred to ABPH and ABP Newco, as of December 26,
1998, are the 151 Company-owned Au Bon Pain Division bakery cafes and the Au Bon
Pain Division franchise business, consisting of 114 franchisee-owned and
operated Au Bon Pain Division bakery cafes in the United States, Europe, South
America and Asia.
Upon the consummation of the Sale, the Company will retain ownership of all
of the issued and outstanding capital stock of Saint Louis Bread Co., Inc. which
owns the Company's Saint Louis Bread Co. Division, consisting of 71
Company-owned and 45 franchisee-owned and operated Saint Louis Bread Co.
Division bakery cafes as of December 26, 1998. As of December 26, 1998, the
Saint Louis Bread Co. Division had executed 31 Area Development Agreements
providing for the future development by franchisees of more than 500 additional
Saint Louis Bread Co. Division bakery cafes.
Pursuant to the terms of the Agreement, upon the consummation of the Sale,
the Company will amend its Certificate of Incorporation to change its name to a
name which does not include "Au Bon Pain." The Company intends to change its
name to "Panera Bread Company."
Purchase Price. The purchase price for the sale of the stock of ABPH to the
Buyer is $73,000,000, subject to adjustment as described below.
Adjustments to Purchase Price.
THE LEASE FEE ADJUSTMENT. In the event that, prior to the Sale, the Company
enters into an amendment to any of its bakery cafe leases increasing or
decreasing the rent or other
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occupancy costs for any such lease following the Sale from the rent or other
occupancy costs that would otherwise be payable by the Company under any such
lease then the purchase price shall be decreased (in the event of a net increase
in occupancy costs) or increased (in the event of a net decrease in occupancy
costs), as the case may be, by an amount equal to five (5) multiplied by the
difference between: (1) the total base and percentage rent plus all other
occupancy expenses prior to the amendment of the lease for the year commencing
on the closing date of the Sale; and (2) the total base and percentage rent plus
all other occupancy expenses for the year commencing on the closing date of the
Sale under such amended leases. For purposes of calculating percentage rent in
each of the above-mentioned cases, the sales of the relevant store shall be
assumed to be the sales of that store for the four consecutive full fiscal
quarters of the Company immediately preceding the closing of the Sale.
THE LEASE LOSS ADJUSTMENT. In the event that, at or prior to the closing of
the Sale, any of the Company's bakery cafe leases is neither (a) transferred by
the Company to ABPH with all consents from landlords necessary to permit such
transfers in connection with the Sale, nor (b) with respect to certain specified
stores, is franchised to a designee of the Buyer, the purchase price shall be
adjusted downward by an amount equal to five (5) multiplied by the total EBITDA
of all such stores during the Company's 1997 fiscal year. Lesser adjustments are
required relative to certain leases specified by the Agreement.
NET WORTH ADJUSTMENT. The purchase price will also be adjusted by changes
in the net worth of the Au Bon Pain Division from April 18, 1998 until the
closing of the Sale. If the "Net Worth Adjustment" (as defined in the Agreement)
is positive (up to Three Million Dollars ($3,000,000)), it shall be added to the
purchase price. If the Net Worth Adjustment is negative, it shall be deducted
from the purchase price.
Transfer of Leases. The transfer of certain bakery cafe stores to ABPH for
the purposes contemplated by the Agreement requires the consent of the
respective landlords for such bakery cafes. The Company has contacted all of its
landlords whose consent is required in order for the leases from such landlords
to be transferred as contemplated by the Agreement. As of January 15, 1999, the
Company had not received all of the landlord consents that it has requested;
however, the Company is continuing its efforts to secure those consents which
are necessary to complete the Sale.
In the event that the Company is unable to obtain the necessary consents,
the Company and the Buyer may agree that upon the Sale ABPH shall undertake the
management of certain bakery cafes (the "Management Stores") until the earlier
of the date on which such lease expires or the Company is able to obtain the
consent to transfer the lease to ABPH. In such event, the Buyer shall pay to the
Company at the closing of the Sale an amount equal to three and one-half (3 1/2)
multiplied by the total net EBITDA of all Management Stores during the Company's
1997 fiscal year. IF any Management Stores are subsequently transferred to ABPH,
the Buyer shall pay the Company one and one-half (1 1/2) multiplied by the total
net EBITDA of all such Management Stores during the Company's 1997 fiscal year.
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In the event that the Company is unable to obtain a consent necessary to
transfer any bakery cafe to ABPH and the Company and the Buyer do not agree to
treat such bakery cafe as a Management Store, the Company shall continue to own
and operate such bakery cafe as a franchisee of ABPH following the closing of
the Sale pursuant to the ABPH's standard franchise agreement with the following
exceptions: (1) the term of each franchise agreement shall expire upon the
expiration of the lease applicable to such bakery cafe operating under said
franchise agreement; (2) bakery products manufactured by Bunge Foods pursuant to
its Bakery Product Supply Agreement with the Company shall be sold to the
Company at Buyer's cost under such Agreement; (3) there shall be no royalty or
franchise fees; and (4) there shall be no noncompetition provisions applicable
to the Company. At such time after the closing of the Sale as the Company shall,
if ever, obtain the consents necessary to transfer such bakery cafe to ABPH, the
Company shall transfer such leases to ABPH, and Buyer or ABPH shall pay to the
Company, in exchange therefor, an amount equal to five (5) multiplied by the
total net EBITDA of such bakery cafe: (x) during the Company's 1997 fiscal year,
in the event that such transfer is made during the first six (6) months
following the closing of the Sale; and (y) for any transfer thereafter, during
the applicable fifty-two (52) week period ending immediately prior to delivery
of each such consent, [multiplied by a fraction the numerator of which is the
number of months then remaining on the relevant lease from the date of transfer
(including option periods) and the denominator of which is the number of months
remaining on the relevant lease] (including option periods) as of the closing of
the Sale.
The Agreement provides that the Company may, pending the closing of the
Sale discontinue any Au Bon Pain Division bakery cafe for which it cannot obtain
any consent necessary to transfer the relevant lease to ABPH, provided that the
Company shall not operate, and shall not permit its subsidiaries or Saint Louis
Bread Co. Division's franchisees to operate a Saint Louis Bread Co. Division
bakery cafe at the location of any such bakery cafe within one (1) year after
the termination of the lease for such Au Bon Pain Division bakery cafe. If ABPH
or any of its affiliates enters into a lease or license for the operation of an
Au Bon Pain Division bakery cafe at the location of any discontinued store
within one (1) year of the termination of any such discontinued store, Buyer or
ABPH shall pay to the Company an amount equal to five (5) multiplied by the
total net EBITDA of such discontinued store during the most recent fifty-two
(52) week period during which such store was operated by the Company.
The Closing. The Agreement contemplates a closing of the Sale on a date
which is at least one business day after the day on which the last of the
conditions to the Sale specified in the Agreement is fulfilled or waived or such
later date as is agreed by the parties. Such conditions include the following:
(1) Any applicable waiting period (or extensions thereof) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and all
regulations promulgated thereunder relating to the transactions contemplated by
the Agreement shall have expired without any adverse action having been taken by
the Federal Trade Commission or the U.S. Department of Justice (or Buyer or
Seller shall have received notice of early termination);
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<PAGE> 18
(2) A majority-in-voting-interest of the Company's shareholders shall have
duly approved the transactions contemplated by the Agreement;
(3) The total amount of the Lease Fee Adjustments and the Lease Loss
Adjustments shall not exceed Twelve Million Five Hundred Thousand Dollars
($12,500,000) in the aggregate; and
(4) There shall have been no material adverse change since October 3, 1998
in the business, assets, condition (financial or otherwise), operating results,
customers, supplier and employer relations, or business prospects of the Au Bon
Pain Division or ABPH taken as a whole; and
(5) The Buyer shall have received financing pursuant to its financing
commitments referred to in the Agreement.
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 above, 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 Agreement requires the Company to call a special meeting of its
shareholders for the purpose of seeking approval of the Sale. The Company's
Co-Chairmen, Louis I. Kane and Ronald M. Shaich, have entered into stock voting
agreements pursuant to which they agree to vote in favor of the Sale.
Concurrently with the closing of the Sale, the Company shall amend its
Certificate of Incorporation to change its name to Panera Bread Company.
Representations, Warranties, Covenants and Contingencies. In the Agreement,
the Company makes various representations and warranties with respect to the ABP
Division. The representations and warranties survive the closing of the Sale,
and the Company is required to indemnify the Buyer for any breaches of any
representations and warranties.
The Agreement requires the Company to carry on its ABP Division business in
the normal course prior to the closing of the Sale and restricts the Company
from taking certain actions during the period from the signing of the Agreement
until the closing.
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Buyer's Restrictive Covenants.
During the twenty-four (24) month period following the closing of the Sale,
neither ABPH nor any of its affiliates shall open, and shall not permit any of
its franchisees to open, within the continental United States, more than sixty
(60) bakery cafes. Such sixty (60) store limit shall be exclusive of: (1) stores
opened anywhere outside of the continental United States; (2) stores opened in
"Trade Channel Locations" (as that term is defined below); and (3) stores
located within the corporate limits of each of the following cities and
counties: City of Boston; City of Cambridge, Massachusetts; New York City; the
District of Columbia; City of Chicago; City of Pittsburgh; City of Philadelphia;
and Dade County, Florida. As used herein, the term "Trade Channel Locations"
shall mean hospitals, hotels, on-campus universities, airport, bus and railroad
terminals, gasoline stations and sports arenas.
During the eighteen (18) month period following the closing of the Sale,
ABPH shall not engage in or be the subject of any transaction or series of
transactions resulting in a "Change of Control" (as defined below) (including,
but not limited to, a Change of Control resulting from one or more sales of
assets and/or capital stock, the franchising and/or licensing of the business
concept and ancillary intellectual property rights, or otherwise). As used
herein the term "Change of Control" shall mean any transaction or series of
transactions in which as a result (a) ABPH or a substantial portion of its
business, directly or indirectly, through one or more intermediaries, is
controlled by (whether by a sale of assets or capital stock, franchise
agreement, joint venture or otherwise), any Person in the food service and/or
bakery cafe business with at least 300 owned and/or franchised units, or its
Affiliate, other than BRS; or (b) ABPH or a substantial portion of its business,
together with any person in the retail food service and/or bakery cafe business
with at least 300 owned and/or franchised units, or its Affiliate, is under
common control (whether by a sale of assets or capital stock, franchise
agreement, joint venture or otherwise) by BRS; or (c) ABPH ceases to own
substantially all of the assets used or useful in the ownership and operation of
the principal business concept utilized by ABPH. The foregoing notwithstanding,
nothing contained herein shall restrict in any way Buyer or any of its
affiliates from purchasing or acquiring any interest in any business: (1) which
does not own or operate or franchise any bakery cafe, restaurant or food service
business in which the retail sale of baked goods (meaning breads, muffins,
bagels, cookies and other baked sweet goods, but excluding pizza dough) and
coffee constitutes less than twenty-five percent (25%) of the sales of such
business, without regard to the number of units owned and/or franchised by such
business; or (2) in which more than fifty percent (50%) of its sales consist of
bagels, without regard to the number of units owned and/or franchised by such
business.
Under the Agreement, ABPH is also required by the terms of a Restriction
Agreement (as defined in the Agreement) to honor certain provisions of the Area
Development Agreements between the Company and its Saint Louis Bread Co.
Division area developers which restrict the Company from opening Au Bon Pain
Division bakery cafes in certain territories where Saint Louis Bread Co.
Division area developers have the right to open or are operating Saint Louis
Bread Co. Division bakery cafes.
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Provisions Regarding Employees. Although none of the Company's employees
have entered into agreements with Buyer other than Louis I. Kane, the Company's
Co-chairman, it is anticipated that substantially all employees of the Company
who historically have spent a substantial portion of their time working for the
Au Bon Pain Division will become employees of ABPH following the Closing, except
for Ronald M. Shaich, the Company's other Co-chairman. Substantially all
employees who historically have spent a substantial portion of their time
working for the Saint Louis Bread Co. Division will remain with the Company. In
addition, it is intended that certain employees who historically have worked for
both Divisions, principally in the finance, accounting and MIS departments of
the Company, will become employees of ABPH after the Closing. Of these, the
employees who are key to the Company are Mr. Kane and Anthony J. Carroll, the
Company's chief financial officer. The Company has already hired, in the Saint
Louis Bread Co. Division, an individual who it anticipates will become the chief
financial officer of the Company following the Closing. If, immediately upon the
Sale, ABPH does not employ any of the twenty (20) employees listed in the
Agreement each of whom earns an annual base salary exceeding $80,000, and the
Company thereafter terminates such employees within six (6) months following the
Closing and makes a severance payment to such Employee pursuant to the terms of
an employment or severance agreement in effect as of the date hereof and
disclosed in the Agreement, then, except with respect to any so-called "stay
bonuses" (as defined in Section 7.06 of the Agreement), Buyer shall reimburse
the Company the full amount of any such severance payment in the event that ABPH
or any of its affiliates subsequently employs such employee in connection with
the Au Bon Pain Division business within one (1) year after the Sale.
The Agreement prohibits the Company and its affiliates for two (2) years
after the Sale from directly or indirectly soliciting any person who is an
employee (with a salary in excess of $40,000) of ABPH at any time on or after
the date of the Agreement to terminate his or her relationship with ABPH.
The Agreement also prohibits the Buyer and its affiliates for two (2) years
after the Sale from directly or indirectly soliciting any person who is an
employee (with a salary in excess of $40,000) of the Company or any of its
subsidiaries on or after the date of the Agreement to terminate his or her
relationship with the Company or any of its subsidiaries.
Termination. The Agreement provides that it may be terminated: (a) by
agreement of the parties, (b) by either party if the Sale is not consummated on
or before the 180th day following the date of the Agreement or (c) by the
Company if, after a receipt of a proposal for an "Alternative Transaction" (as
defined in the Agreement) the Board of Directors of the Company shall have
withdrawn or modified its recommendation of consummating the Sale. (The
Agreement defines an Alternative Transaction as an unsolicited proposal or offer
for a merger, consolidation, business combination, sale or transfer of
substantial assets or shares of capital stock (whether by tender offer or
otherwise) involving the Company or ABPH. In the event of the termination by the
Company in accordance with (c), the Company shall be required to pay the Buyer
$2,500,000. If the Agreement is terminated by the Company as a result of the
inability to satisfy certain conditions relating to the total amount of Lease
Fee Adjustments or by the Buyer due to a material breach of the Agreement by the
Company, the
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Company shall reimburse the Buyer for its expenses incurred in connection with
the transactions contemplated by the Agreement up to $500,000.
Transition Services. At the Closing, the Company and ABPH will enter into a
transition services agreement in which ABPH will agree to provide to the Company
financial and accounting and management information services for up to twelve
months after the Closing, and human resource services for up to six months after
the Closing. The fee to be paid for these services will be determined by a
formula based upon the total direct costs of providing those services, pro-rated
over the total number of Saint Louis Bread Co. Division bakery cafes owned by
the Company relative to the number of Au Bon Pain Division bakery cafes owned
and operated by ABPH.
In addition, pursuant to the Transition Services Agreement, ABPH will also
agree to continue to manufacture for the Company's Saint Louis Bread Co.
Division certain products at its Boston commissary for up to six months after
the Closing, at the same internal transfer prices that the Company internally
has accounted for such products prior to the Closing.
The Buyer. The Buyer is a Delaware corporation with executive offices
located at 156 East 56th Street, New York, New York 10022, telephone
212-521-3700. The Buyer is a privately held company formed specifically to
acquire the stock of ABPH, and is controlled by Bruckmann, Rosser, Sherrill &
Co., L.P. ("BRS"), a private equity investment firm based in New York. The
Company has had no material relationship with the Buyer or BRS, other than as
described in "Background of the Transaction."
BRS is a private equity investment firm (formed in 1995) with $400 million
of committed capital. The principals of BRS, including -Bruce Bruckmann, Harold
Rosser, Stephen Sherrill and Stephen Edwards - are former senior officers of
Citicorp Venture Capital, Ltd. where they worked from the mid 1980's until
forming their own firm. At Citicorp Venture Capital, they completed 25
acquisitions, including Mohawk Industries Inc., Chromcraft-Revington
Corporation, Cort Furniture Rental Corp., J&L Speciality Products Corporation,
Catherines Stores Corporation, Farm Fresh, Inc., Del Monte Foods Corporation,
Gilbarco, Inc., Reliance Electric Company, Galey & Lord, Inc., Fox Photo, Inc.,
DavCo Restaurants, Inc., Steak and Ale/Benningans Restaurant Corporation,
AmeriSource Distribution Corporation, Hancor, Inc., Zataraom's Brands, Inc.,
Smith Alarm Systems, Inc., Triumph Group, Inc. and Polyfibron Technologies, Inc.
BRS currently has twelve portfolio companies (three of which have completed
significant acquisitions under BRS ownership): Jutney-Jungle Stores of America,
Inc., the largest supermarket chain in Mississippi and second largest in
Alabama; Windy Hill Pet Food Holdings, Inc., a manufacturer of dog and cat food;
Town Sports International, Inc., a multi-regional chain of fitness centers; B&G
Foods, Inc., a processor and marketer of pickles, peppers, bagel chips, vinegar,
syrups and other food products under various brand names; Anvil Knitwear, Inc.,
one of the largest manufacturers of activewear for the imprinted market,
California Pizza Kitchen, Inc., a specialty pizza and pasta restaurant chain;
HealthPlus Corporation, a multi-hospital system focused on urban and suburban
locations; American
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Paper Group, Inc., a manufacturer and marketer of specialty religious products;
Alliance Laundry Systems LLC, the leading manufacturer of commercial laundry
equipment in North America; Media Incorporated, the largest critical care and
life support movable medical equipment rental business in the U.S.; Acapulco
Restaurants, Inc., a Mexican restaurant chain; and Penhall International, Inc.,
one of the largest operated equipment rental companies in the U.S.
RIGHTS OF SECURITY HOLDERS FOLLOWING THE TRANSACTION
There will be no material differences in the rights of the Company's
security holders following the consummation of the Sale. If the Sale Proposal is
approved, the Company will amend its Certificate of Incorporation to change the
name of the Company to Panera Bread Company. Following such amendment, any new
stock certificates issued by the Company will bear the new name of the Company.
Stockholders holding stock certificates bearing the name "Au Bon Pain Co., Inc."
will continue to be stockholders of the Company and will not be required to
exchange their stock certificates with the Company's transfer agent for
certificates bearing the Company's new name.
ACCOUNTING TREATMENT OF THE TRANSACTION
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.
The Company intends to repay all of its outstanding debt with the proceeds
from the Sale. 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.
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
In General. The following summary of the anticipated federal income tax
consequences to the Company of the Sale is not intended as tax advice and is not
intended to be a complete description of the federal income tax consequences of
the proposed transaction.
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<PAGE> 23
This summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), as presently in effect, the rules and regulations promulgated
thereunder, current administrative interpretations and court decisions. No
assurance can be given that future legislation, regulations, administrative
interpretations or court decisions will not significantly change these
authorities (possibly with retroactive effect).
No rulings have been requested or received from the Internal Revenue
Service ("IRS") as to the matters herein discussed and there is no intent to
seek any such ruling. Accordingly, no assurance can be given that the IRS will
not challenge the tax treatment of certain matters discussed or, if it does
challenge the tax treatment, that it will not be successful.
Federal Income Tax Consequences to the Company. The sale of the ABP
Division of the Company pursuant to the Agreement will be a taxable sale by the
Company upon which gain or loss may be recognized by the Company. The amount of
gain or loss recognized by the Company with respect to the sale of a particular
asset will be measured by the difference between the amount realized by the
Company on the sale of that asset and the Company's tax basis in that asset. The
amount realized by the Company on the sale of the ABP Division will include the
amount of cash received, the fair market value of any other property received
and the amount of liabilities of the Company assumed by the Buyer. For purposes
of determining the amount realized by the Company with respect to specific
assets, the total amount realized by the Company will generally be allocated
among the assets according to the rules prescribed under the Code. The Company's
basis in its assets is generally equal to their cost, as adjusted for certain
items, such as depreciation.
The determination of whether gain or loss is recognized by the Company will
be made with respect to each of the assets to be sold. Accordingly, the Company
may recognize gain on the sale of certain assets and loss on the sale of certain
others, depending on the amount of consideration allocated to an asset as
compared with the basis of that asset. The gains and losses may offset, except
that capital losses may be used to offset only capital gains. A tax benefit of
$5.4 million was recorded in the third quarter of 1998 related to the
non-recurring, non-cash charge of $24.2 million recorded to reflect a write-down
under Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of"
("SFAS 121"). 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.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and the rules promulgated thereunder by the FTC, the Sale may
not be consummated until notifications have been given and certain information
has been furnished to the FTC and the Antitrust Division of the Department of
Justice (the "Antitrust Division") and specified waiting period requirements
have been satisfied. The Company filed notification and report forms under the
HSR Act with the FTC and the Antitrust Division on January 19, 1999. Although
management considers any FTC or Antitrust Division action
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<PAGE> 24
unlikely at any time before or after consummation of the Sale, the Antitrust
Division or the FTC could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
consummation of the Sale or seeking divestiture of stores or other assets of the
Company or the Buyer. In addition, at any time after the consummation of the
Sale, any state could take such action under its antitrust laws as it deems
necessary or desirable in the public interest. Such action could include seeking
to enjoin the consummation of the Sale or seeking divestiture of stores or other
assets of the Company or the Buyer. Private parties may also seek to take legal
action under the antitrust laws under certain circumstances.
Based on information available to it, the Company believes that the Sale
can be effected in compliance with federal and state antitrust laws. However, no
assurance can be given that a challenge to the consummation of the Sale on
antitrust grounds will not be made or that, if such a challenge were made, the
Company would prevail or would not be required to accept certain conditions,
including the divestiture of stores or other assets and/or commitments as to
future business practices and other matters, in order to consummate the Sale.
NMS OPINION
The Board of Directors of the Company (the "Board") retained NationsBanc
Montgomery Securities LLC ("NMS") to review the proposed Sale (referred to in
this part of the proxy statement, after giving effect to the amendment dated
October 28, 1998, as the "Transaction") and render an opinion as investment
bankers to the Board as to the fairness from a financial point of view of the
consideration to be received by the Company pursuant to the Transaction. NMS was
not retained to act as financial advisor to the Company or the Board in
connection with the Transaction, and NMS was not retained or requested to
consider any strategic or financial alternatives to the Transaction or to seek
indications of interest from other potential buyers in connection with rendering
its opinion. The Company selected and retained NMS for this assignment on the
basis of NMS's experience and expertise in acquisition transactions, and its
reputation in the restaurant industry and the investment banking community. NMS
is a nationally recognized investment banking and financial advisory firm and,
as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with merger
transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes.
In connection with the consideration by the Board of the merits of the
Transaction, NMS was asked under the terms of its engagement to perform various
financial analyses and deliver to the Board its opinion based on such analyses,
which opinion is more fully described below. At the August 12, 1998 meeting of
the Board, NMS delivered its oral opinion described below to the Board, which
was subsequently confirmed in writing as of such date and was reconfirmed in
writing on October 28, 1998. THE OPINIONS OF NMS WERE ADDRESSED SOLELY TO THE
BOARD FOR ITS CONSIDERATION IN CONNECTION WITH THE TRANSACTION, AND ARE NOT A
RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW
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<PAGE> 25
SUCH HOLDER SHOULD VOTE WITH RESPECT TO THE TRANSACTION. THE FULL TEXT OF THE
WRITTEN OPINION OF NMS DATED OCTOBER 28, 1998, REGARDING THE TRANSACTION IS
ATTACHED HERETO AS ANNEX B, AND SETS FORTH CERTAIN IMPORTANT QUALIFICATIONS,
ASSUMPTIONS MADE, MATTERS CONSIDERED, AREAS OF RELIANCE ON OTHERS, AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH SUCH OPINION.
The summary description of NMS's opinion set forth below regarding the
Transaction is qualified in its entirety by the full text of the opinion
attached hereto as ANNEX B.
In connection with its opinion, NMS, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including the consolidated financial statements of the Company and the pro forma
financial statements of the Au Bon Pain Division for recent years, and certain
other relevant financial and operating data relating to the Company and the Au
Bon Pain Division made available to NMS from published sources and from the
internal records of the Company; (ii) reviewed the financial terms and
conditions of the Agreement; (iii) compared the Au Bon Pain Division from a
financial point of view with certain other companies in the restaurant industry
which NMS deemed to be relevant; (iv) considered the financial terms, to the
extent publicly available, of selected recent business combinations involving
companies in the restaurant industry which NMS deemed to be comparable, in whole
or in part, to the Transaction; (v) reviewed and discussed with representatives
of the management of the Company certain information of a business and financial
nature regarding the Au Bon Pain Division including financial forecasts and
related assumptions of the Company pertaining to the Au Bon Pain Division
furnished to NMS by management of the Company; (vi) made inquiries regarding and
discussed the Transaction, the Agreement and other matters related thereto with
the Company's counsel; and (vii) performed such other analyses and examinations
as NMS deemed appropriate.
Based upon its review of the foregoing, but subject to the limitations set
forth below and in reliance upon the assumptions set forth below, NMS provided
the Board with its opinion as investment bankers that as of the date of its
opinion (as reconfirmed on October 28, 1998), the aggregate consideration to be
received by the Company pursuant to the Transaction was fair to the Company from
a financial point of view. The terms of the Transaction and the amount of the
consideration to be received by the Company thereunder was determined pursuant
to negotiations between the Company and the Buyer and not pursuant to
recommendations of NMS. No limitations were imposed by the Company on NMS with
respect to the investigations made or procedures followed in rendering its
opinion; however, as set forth above, NMS was not retained or authorized by the
Company to seek indications of interest from other potential buyers in
connection with rendering its opinion.
In connection with its review, NMS did not assume any obligation
independently to verify the foregoing information reviewed by it, and relied on
its being accurate and complete in all material respects. With respect to the
financial forecasts for the Au Bon Pain Division provided to NMS by management
of the Company, NMS assumed for purposes of its opinion
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<PAGE> 26
that the forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of management of the Company as to
the future financial performance of the Au Bon Pain Division and that they
provided a reasonable basis upon which NMS could form its opinion. NMS also
assumed that there had been no material changes in the Company's or the Au Bon
Pain Division's assets, financial condition, results of operations, business or
prospects since the respective dates of the most recent consolidated and pro
forma financial statements made available to NMS (except that the Company has
provided NMS with a revised cash flow forecast for the fiscal year ending
December 28, 1998 that was lower than the cash flow forecast earlier provided to
NMS in connection with its review of the financial condition of the Au Bon Pain
Division prior to August 12, 1998). NMS relied on advice of the independent
accountants to the Company as to all tax and financial reporting matters with
respect to the Company, the Au Bon Pain Division, the Transaction and the
Agreement. NMS assumed that the Transaction will be consummated in a manner that
complies in all respects with the Securities Exchange Act of 1934, as amended,
and all other applicable federal and state statutes, rules and regulations. In
addition, NMS did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of the Au Bon Pain Division, nor was NMS furnished
with any such appraisals. Finally, NMS's opinion was based on economic, monetary
and market and other conditions as in effect on, and the information made
available to NMS as of, the date of the opinion (as reconfirmed on October 28,
1998). Accordingly, although subsequent developments may affect this opinion,
NMS did not assume and does not have any obligation to update, revise or
reaffirm this opinion.
NMS also assumed that the Transaction will be consummated in accordance
with the terms described in the Agreement, without any further amendments
thereto, and without waiver by the Company of any of the conditions to its
obligations thereunder. The full text of the Agreement is attached hereto as
ANNEX A and the terms described in the Agreement and the conditions to the
Company's obligations thereunder should be reviewed and understood by the
Company's shareholders in connection with their consideration of the
Transaction.
Set forth below is a brief summary of the report presented by NMS to the
Board on August 12, 1998, in connection with its opinion that was reconfirmed on
October 28, 1998.
Comparable Public Company Analysis. Using public and other available
information, NMS calculated a range of implied values for the Au Bon Pain
Division based on a comparison of the last twelve months' revenues ("LTM
Revenues"), the last twelve months' earnings before interest, taxes,
depreciation and amortization ("LTM EBITDA"), the last twelve months' earnings
before interest and taxes ("LTM EBIT") and the estimated 1998 and 1999 earnings
per share ("1998E EPS" and "1999E EPS", respectively), of the Au Bon Pain
Division and thirteen other publicly traded comparable growth restaurant
companies with performance issues (the "Comparable Restaurants"). The Comparable
Restaurants used in this analysis were Applebee's, Buffets, Cooker Restaurant
Corp., Friendly Ice Cream Corp., Garden Fresh Restaurant Corp., NPC
International, Pollo Tropical, Rock Bottom Restaurants, Ryan's Family
Steakhouse, Shoneys, Sbarro, Taco Cabana and Uno Restaurant Corp. The August 7,
1998 stock prices of the Comparable Restaurants reflected mean and
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<PAGE> 27
median multiples of 0.9x and 0.9x LTM Revenues, 6.2x and 6.3x LTM EBITDA, 11.5x
and 10.2x LTM EBIT, 13.1x and 13.2x 1998E EPS and 11.2x and 11.6x 1999E EPS,
respectively. NMS applied the mean and median multiples for the Comparable
Restaurants of LTM Revenues, LTM EBITDA, LTM EBIT, 1998E EPS and 1999E EPS to
the applicable results and estimates for the Au Bon Pain Division to determine
the implied equity value of the Au Bon Pain Division. The range of values
produced from these calculations was then weighted and narrowed by NMS to
reflect its assessment of the appropriate reasonable range for the implied
equity value of the Au Bon Pain Division (which was $60 million to $90 million
based on this analysis of comparable public company data).
Comparable M&A Transaction Analysis. NMS reviewed the consideration paid in
certain comparable sale and merger transactions in the restaurant industry
involving the purchase of individual restaurant concepts that have been
announced since February 1992. The comparable transactions used in this analysis
were the sale of Ground Round Restaurants to Boston Ventures, the sale of Casa
Bonita to CKE Restaurants, the sale by Brinkler International of Grady's and
Spaggedies to Quality Dining, the sale by NRH Corp. of Tony Roma's to National
Pizza Co., and the sale by Foodmaker, Inc. of Chi-Chi's to a private investor
group. NMS analyzed the consideration paid in these transactions as a multiple
of aggregate value to the target companies' LTM Revenues, LTM EBITDA and last
twelve months' net income ("LTM NI"). Such analysis yielded a range of mean and
median multiples of 0.54x and 0.59x LTM Revenues, 5.4x and 5.5x LTM EBITDA and
20.9x and 20.1x LTM NI, respectively. NMS then applied the foregoing multiples
to the Au Bon Pain Division's LTM Revenues, LTM EBITDA and LTM NI to determine
the implied equity value of the Au Bon Pain Division. The range of values
produced from these calculations was then weighted and narrowed by NMS to
reflect its assessment of the appropriate reasonable range for the implied
equity value of the Au Bon Pain Division (which was $70 million to $90 million
based on this analysis of comparable M&A transaction company data).
No company or transaction used in the comparable public company analysis or
the comparable M&A transaction analysis as a comparison is identical to the Au
Bon Pain Division or the Transaction. Accordingly, an analysis of the results of
the foregoing is not mathematical; rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that could affect the public trading value of
the companies to which the Au Bon Pain Division and the Transaction are being
compared.
Discounted Cash Flow Analysis. NMS also performed a discounted cash flow
analysis using financial forecasts for 1998 through 2003 provided by the
Company's management. In conducting this discounted cash flow analysis, NMS
first calculated the estimated future streams of free cash flows that the
Company would produce through 2003 and then estimated the Company's terminal
value at the end of 2003 by applying a range of exit multiples from 4.0x to 6.0x
to the Company's estimated LTM EBITDA in 2003. Such cash flow streams and
terminal values were discounted to present values using discount rates ranging
from 13% to 17%, chosen to reflect reasonable ranges of the Company's cost of
capital. The range of values produced from such calculations was approximately
$72.6 million to $106.7 million, which
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<PAGE> 28
range was then narrowed by NMS to reflect its assessment of the appropriate
reasonable range for the implied equity value of the Au Bon Pain Division (which
was $75 million to $100 million based on this analysis). As described above,
during the month of October, 1998, NMS was provided with revised financial
forecasts for 1998 through 2003 by the Company's management that reflected lower
projected cash flows than the financial forecasts previously provided to NMS
that are referenced above in this paragraph. Using these revised financial
forecasts, and the same methodology of calculating the terminal value at the end
of 2003 and discounting calculated cash flow streams and terminal values to
present value using discount rates of 13% to 17%, the revised range of values
for the implied equity value of the Au Bon Pain Division produced from such
calculations was approximately $68 million to $100 million.
While the foregoing summary describes all analyses and examinations that
NMS deemed material to the preparation of its opinion to the Board, it does not
purport to be a comprehensive description of all analyses and examinations
actually conducted by NMS. The preparation of a fairness opinion necessarily is
not susceptible to partial analysis or summary description; and selecting
portions of the analyses and of the factors considered by NMS, without
considering all analyses and factors, would create an incomplete or misleading
view of the process underlying the analyses set forth in the presentation of NMS
to the Board on August 12, 1998. In addition, NMS may have given some analyses
more or less weight than other analyses, and may have deemed various assumptions
more or less probable than other assumptions. Accordingly, the ranges of
valuations resulting from any particular analysis described above should not be
taken to be NMS's view of the actual value of the Au Bon Pain Division. To the
contrary, NMS expressed no opinion on the actual value of the Au Bon Pain
Division, and its opinion that is addressed and limited to the Board extends
only to the belief expressed by NMS that the immediate value to the Company,
from a financial point of view under the Transaction, is within the range of
values that might fairly be ascribed to the Au Bon Pain Division as of the date
of the opinion of NMS (as reconfirmed by NMS on October 28, 1998).
In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by NMS are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. Such analyses were prepared solely as part of NMS's
analysis for the Board of the fairness of the Transaction to the Company from a
financial point of view, and were provided solely to the Board in connection
with its consideration of the Transaction. The analyses do not purport to be
appraisals or to reflect the prices at which any company might actually be sold
or the prices at which any securities may trade at any time in the future. NMS
used in its analyses various projections of future performance prepared by or
adopted by the management of the Company. The projections are based on numerous
variables and assumptions, which are inherently unpredictable and in large part
are beyond the control of the Company and its advisors. Accordingly, actual
results could vary significantly from those set forth in such projections.
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<PAGE> 29
As described above, the opinion of NMS and the presentation to the Board
summarized above were among the many factors taken into consideration by the
Board in making its determination to approve and adopt, and to recommend that
its shareholders approve and adopt, the Transaction. NMS, however, does not make
any recommendation to any of the Company's shareholders (or to any other person
or entity) as to whether the Transaction is in such shareholder's best
interests.
In accordance with the terms of the engagement letter pursuant to which NMS
agreed to provide the fairness opinion (the "Engagement Letter"), the opinion of
NMS is addressed solely to the Board for the personal use of the directors (in
their capacity as members of the Board) in connection with their review and
evaluation of the Transaction and neither the opinion nor NMS's underlying
financial analysis may be relied upon by any person other than the directors (in
their capacity as members of the Board) without the prior written consent of
NMS. Accordingly, under the Engagement Letter, no shareholder of the Company may
rely or allege any reliance on NMS's opinion or analysis in connection with such
shareholder's consideration of the merits of the Transaction or otherwise. It is
NMS's position that its duties in connection with its fairness opinion are
solely to the Board, and that it has no legal responsibility to any other
persons, including the Company's shareholders, under California state law (the
governing law of the Engagement Letter). NMS would likely assert the substance
of the foregoing disclaimer as a defense to claims (if any) that might be
brought against it by any shareholder of the Company with respect to its
fairness opinion. However, since no California state court has definitively
ruled on the availability to a financial advisor of an express disclaimer as a
defense to shareholder liability with respect to its fairness opinion, this
issue necessarily would have to be resolved by a court of competent
jurisdiction. Furthermore, there can be no assurance that a court of competent
jurisdiction would apply California state law to the resolution of this issue if
it were to be presented. In any event, the availability or non-availability of
such a defense will have no effect on NMS's rights and responsibilities under
the federal securities laws, or the rights and responsibilities of the Board
under governing state law or under the federal securities laws.
Pursuant to the Engagement Letter, the Company agreed to pay NMS a fee of
$350,000 payable upon the delivery of the written opinion to the Board that is
described above. The payment of this fee was not conditioned on the outcome of
NMS's opinion or on whether such opinion was deemed favorable or unfavorable by
the Company or the Board, nor is it conditioned on the consummation of the
Transaction. The Engagement Letter also calls for the Company to reimburse NMS
for its reasonable out-of-pocket expenses. Pursuant to an agreement attached to
and made a part of the Engagement Letter, the Company has agreed to indemnify
NMS, its affiliates, their respective partners, directors, officers, agents,
consultants, employees and controlling persons against certain liabilities,
including liabilities under the federal securities laws, relating to or arising
out of the engagement of NMS.
In the ordinary course of NMS's business, NMS trades the equity securities
of the Company for NMS's own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
NMS has also acted as an underwriter in connection with offers of securities of
the Company.
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<PAGE> 30
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Concurrent with the consummation of the Sale, ABPH will enter into a
Severence and Benefits Letter Agreement with Louis I. Kane, currently
Co-Chairman of the Company. Under the terms of such Agreement, Mr. Kane will be
employed by ABPH (which, at the time of the Closing of the Sale, will be owned
by the Buyer) for a three year period at an annual salary of $250,000 (which is
equal to his current annual salary). Mr. Kane will no longer be employed by the
Company upon consummation of the Sale.
In connection with the Board of Directors' approval of the Sale, the Board
of Directors approved amendments to the outstanding stock options held by those
employees who are employed on the closing date by the Company but will no longer
be employed by the Company following the Sale (the "Terminated Employees"). The
amendments will become effective concurrently with the Sale. Currently, all
employee options, other than those issued to each of the Co-Chairmen of the
Company, provide for termination either immediately or within up to 90 days
following the employee's termination of employment with the Company. Effective
with the Sale, all options held by Terminated Employees will be amended to
permit their exercise for a period of up to 2 years following the Closing date
dependent upon an employee's years of service with the Company. In addition, any
unvested options held by Terminated Employees will immediately vest and will
similarly have the extended period during which the options may be exercised. As
a result, Mr. Kane's then vested options will increase by 320,000 shares to a
total of 677,330 shares and will be exercisable in accordance with their
original terms which were 10 years from the date of issuance.
In addition, the vested options of the Company's executive officers,
excluding Mr. Kane, will increase by approximately 190,000 shares to a total of
approximately 372,000 shares and will be exercisable for a period of up to 2
years from the closing of the Sale. The vested options of all Terminated
Employees, including Mr. Kane and the executive officers, will increase by
approximately 850,000 to a total of approximately 1,540,000. The Board
determined to amend such options in order to provide an incentive to employees
to remain with the Company and to ensure the continuation of the business of the
Au Bon Pain Division in the ordinary course pending the Sale. In addition, the
Board has approved an amendment to each of Mr. Shaich's stock option agreements,
providing for the immediate vesting of all stock options held by Mr. Shaich upon
the closing of the Sale. As a result, Mr. Shaich's then vested options will
increase by 320,000 shares to a total of 677,330 shares. As of the date of this
proxy statement, substantially all of the affected options are issued at
exercise prices which are above the current market price.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
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<PAGE> 31
OTHER BUSINESS
In addition to the business described above, there will be remarks by the
Co-Chairmen of the Board and the Chief Executive Officer and a general
discussion period during which stockholders will have an opportunity to ask
questions about the Company.
As of the date of this proxy statement, the management of the Company knows
of no matter not specifically referred to above as to which any action is
expected to be taken at the meeting of stockholders. It is intended, however,
that the persons named as proxies will vote the proxies, insofar as they are not
otherwise instructed, regarding such other matters and the transaction of such
other business as may be properly brought before the meeting, as seems to them
to be in the best interest of the Company and its stockholders.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Proposals of stockholders of the Company (including director nominations)
intended to be presented at the 1999 Annual Meeting of Stockholders must be
received by the Company not later than December 31, 1998 to be included in the
Company's proxy statement and form of proxy relating to the 1999 Annual Meeting
of Stockholders. Nominations and proposals of stockholders may be submitted to
the Company for consideration at the 1999 Annual Meeting of Stockholders if
certain conditions set forth in the Company's By-laws are satisfied, although
such nominations and proposals will not be included in the proxy statement and
form of proxy relating to that annual meeting unless submitted in accordance
with the time limits and other requirements set forth above and in the related
rules of the Securities and Exchange Commission.
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<PAGE> 32
OWNERSHIP OF AU BON PAIN COMMON STOCK
The following table sets forth certain information as of December 1, 1998,
with respect to the Company's Class A and Class B Common Stock owned by (1) each
director of the Company, (2) each "named executive officer" as defined by Item
402 of Regulation S-K, (3) all directors and executive officers of the Company
as a group, and (4) each person who is known by the Company to beneficially own
more than five percent of the Company's capital stock. Unless otherwise
indicated in the footnotes to the table, all stock is owned of record and
beneficially by the persons listed in the table. +
<TABLE>
<CAPTION>
Name and, with respect to owner Class A Common Class B Common Combined Voting
of more than 5%, address Number Percent (1) Number Percent (2) Percentage (3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald M. Shaich.................................... 420,865(4) 3.9% 1,251,540 80.3% 27.0%
Co-Chairman, Director and
Chief Executive Officer
c/o Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, MA 02210
Louis I. Kane....................................... 373,580(5) 3.4% 74,406 4.8% 3.8%
Co-Chairman and Director
c/o Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, MA 02210
Francis W. Hatch.................................... 27,542(6)(7) * 64,351(8) 4.1% 1.5%
Director
George E. Kane...................................... 23,942(6)(9) * 20,000 1.3% *
Director
James R. McManus.................................... 23,542(6) * -- -- *
Director
Henry J. Nasella.................................... 20,080(10) * -- -- *
Director
Samuel H. Yong...................................... 74,715(11) * -- -- *
Executive Vice President and
President, Au Bon Pain Division
Richard C. Postle................................... 67,370(12) * -- -- *
Executive Vice President and
President, Saint Louis Bread Co.
Mark Borland........................................ 37,727(13) * -- -- *
Executive Vice President and
Chief Operating Officer,
Au Bon Pain Division
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
Name and, with respect to owner Class A Common Class B Common Combined Voting
of more than 5%, address Number Percent(1) Number Percent(2) Percentage(3)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All Directors and officers as
a group (12 persons)............................. 1,123,841(14) 9.8% 1,434,208 92.1% 33.5%
Morgan Stanley Group Inc........................... 1,332,385(15) 12.7% -- -- 8.8%
PG Investors, Inc.
Princes Gate Investors, L.P.
1251 Avenue of the Americas
New York, NY 10020
Wanger Asset Management, L.P....................... 634,000(16) 6.1% -- -- 4.2%
Wanger Asset Management Ltd.
Acorn Investment Trust
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Princeton Services, Inc............................ 1,166,800(17) 11.1% -- -- 7.7%
Fund Asset Management, L.P.
Merrill Lynch Special Value Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Brown Capital Management........................... 1,319,450(18) 12.6% -- -- 8.7%
809 Cathedral Street
Baltimore, MD 21201
</TABLE>
* Less than one percent.
(1) Percentage ownership of Class A Common Stock is based on 10,502,713 shares
issued and outstanding plus shares subject to options exercisable within
sixty days of December 1, 1998 held by the stockholder or group.
(2) Percentage ownership of Class B Common Stock is based on 1,557,658 shares
issued and outstanding plus shares subject to options exercisable within
sixty days of December 1, 1998 held by the stockholder or group.
(3) This column represents voting power rather than percentage of equity
interest, as each share of Class A Common Stock is entitled to one vote
while each share of Class B Common Stock is entitled to three votes.
(4) Consists of 63,535 shares owned by Mr. Shaich and options exercisable
within 60 days of December 1, 1998 for 357,330 shares.
(5) Consists of (a) 15,050 shares owned by Mr. Kane; (b) 1,200 shares owned by
Mr. Kane's spouse and as to which Mr. Kane disclaims beneficial ownership;
and (c) options exercisable within 60 days of December 1, 1998 for 357,330
shares.
(6) Includes options for 23,542 shares exercisable within 60 days of December
1, 1998 pursuant to the Directors' Plan for independent directors.
(7) Also includes 4,000 shares owned by Mr. Hatch.
(8) Consists of 42,013 shares owned by Mr. Hatch and 22,338 shares owned by Mr.
Hatch's spouse and as to which Mr. Hatch disclaims beneficial ownership.
(9) Also includes 400 shares owned by Mr. Kane.
-31-
<PAGE> 34
(10) Consists of 1,000 shares jointly owned by Mr. Nasella and his spouse and
options for 19,080 shares exercisable within 60 days of December 1, 1998
pursuant to the Directors' Plan for independent directors.
(11) Consists of 20 shares held in custodial accounts for Mr. Yong's minor
children and as to which Mr. Yong disclaims beneficial ownership and
options for 74,695 shares exercisable within 60 days of December 1, 1998.
(12) Consists of 36,458 shares owned by Mr. Postle and options for 30,912 shares
exercisable within 60 days of December 1, 1998.
(13) Consists of 970 shares owned by Mr. Borland and options for 36,757 shares
exercisable within 60 days of December 1, 1998.
(14) Consists of 124,162 shares of stock and options for 999,679 shares
exercisable within 60 days of December 1, 1998.
(15) Information included is based solely upon a Schedule 13D filed with the
Commission, jointly on behalf of Morgan Stanley Group Inc. ("MS Group"), PG
Investors, Inc. ("PGI") and Princes Gate Investors, L.P. ("Princes Gate
L.P."). PGI is a wholly-owned subsidiary of MS Group, and is the general
partner of Princes Gate L.P. On December 22, 1993, the Company issued to
several purchasers, including Princes Gate L.P., $30,000,000 in aggregate
principal amount of 4.75% Convertible Subordinated Notes due 2001 (the
"Notes"). The Notes are convertible into fully paid and non-assessable
shares of Class A Common Stock at a conversion price (subject to
adjustment) equal to $25.50 principal amount for each share of Class A
Common Stock, or currently 1,176,468 shares of Class A Common Stock in the
aggregate. The amount of shares disclosed includes (a) 317 shares of Class
A Common Stock owned by MS Group's wholly-owned subsidiary, Morgan Stanley
& Co. Incorporated ("MS & Co.") in its capacity as a market-maker in the
Company's Class A Common Stock, (b) 5,600 shares of Class A Common Stock
over which MS & Co. exercises discretionary authority on behalf of
customers, and (c) since PGI exercises investment management, voting and/or
disposition control over all of the Notes and the underlying shares of
Class A Common Stock obtainable upon conversion of the Notes, 1,176,468
shares of Class A Common Stock obtainable upon conversion of the Notes. In
connection with a financing transaction consummated in July 1996, the
number of shares also includes a Class A Common Stock purchase warrant
issued for 150,000 shares, exercisable at $5.62 per share through July 24,
2001. (With respect to Princes Gate, L.P., the total of 1,332,385 shares
includes 881,504 shares of Class A Common Stock obtainable upon conversion
of the Notes, and, in connection with the financing transaction consummated
in July 1996, includes a Class A Common Stock purchase warrant issued for
112,392 shares, exercisable at $5.62 per share through July 24, 2001).
(16) Wanger Asset Management, L.P. ("WAM") is an investment adviser registered
under section 203 of the Investment Advisers Act of 1940. Wanger Asset
Management Ltd. ("WAM Ltd.") is the general partner of WAM. Acorn
Investment Trust ("Acorn") is an investment company registered under
Section 8 of the Investment Company Act of 1940. Each of the foregoing
entities is deemed to be the beneficial owner of the 634,000 shares, which
have been acquired on behalf of discretionary clients of WAM, including
Acorn. Persons other than WAM and WAM Ltd. are entitled to receive all
dividends from, and proceeds from the sale of, those shares. Acorn is the
only such person known to be entitled to receive all dividends from, and
proceeds from, the sale of those shares to the extent of more than 5% of
the class. Each of the foregoing entities has shared voting and shared
dispositive power with respect to the shares. Information regarding
beneficial ownership of the shares has been obtained solely from the joint
Schedule 13G of WAM, WAM Ltd. and Acorn filed with the Commission on
February 5, 1998.
(17) Princeton Services, Inc. ("PSI") is a parent holding company in accordance
with the Securities and Exchange Act of 1934 and is the corporate managing
general partner of Fund Asset Management, L.P. Fund Asset Management, L.P.
d/b/a Fund Asset Management ("FAM") is an investment adviser registered
under section 203 of the Investment Advisers Act of 1940 (the "Advisers
Act"). Merrill Lynch Special Value Fund, Inc. (the "Fund") is an investment
company registered under Section 8 of the Investment Company Act of 1940
(the "Investment Company Act"). FAM acts as an investment
-32-
<PAGE> 35
adviser to investment companies registered under Section 8 of the
Investment Company Act and private accounts. With respect to securities
held by those investment companies and private accounts, several persons
have the right to receive, or the power to direct the receipt of dividends
from or the proceeds from the sale of such securities. The Fund, a
reporting person for which FAM serves as investment adviser, has an
interest that relates to more than 5% of the class of the class of
securities reported herein. No other person has an interest that relates to
more than 5% of the class of securities reported herein. PSI is deemed to
be the beneficial owner of, and has shared voting and dispositive power
with respect to 1,166,800 shares, and FAM and the Fund are deemed to be the
beneficial owners of, and have shared voting and dispositive power with
respect to 1,140,200 shares. Information regarding beneficial ownership of
the shares has been obtained solely from the joint Schedule 13G of PSI, FAM
and the Fund filed with the Commission on February 3, 1998.
(18) Information included is based solely upon a Schedule 13G dated January 8,
1999.
+ Does not include shares beneficially owned by Robert C. Taft, former
Executive Vice President of the Company and President of the Au Bon Pain
Division, who, as of March 31, 1998, beneficially owned 2,247 shares of
Class A Common Stock.
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<PAGE> 36
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following selected historical financial information has been derived
from the Company's respective historical financial statements and should be read
in conjunction with such consolidated financial statements and the notes thereto
included elsewhere in this Proxy Statement. The historical financial statement
information as of and for the periods presented below has been prepared on the
same basis as the historical information derived from audited financial
statements and, in the opinion of management, includes all material adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position and results of operations as of such dates and for
such periods.
The Selected Historical Financial Data under the captions Income Statement
Data and Balance Sheet Data as of and for the fiscal years ended December 25,
1993, December 31, 1994, December 30, 1995, December 28, 1996 and December 27,
1997 have been derived from financial statements audited by
PricewaterhouseCoopers LLP (formerly known as Coopers & Lybrand L.L.P.)
independent certified public accountants. The Selected Historical Financial data
as of and for the forty weeks ended October 3, 1998 has been derived from the
unaudited financial statements of the Company included elsewhere in this Proxy
Statement. The Selected Historical Financial Data and Selected Pro Forma
Consolidated Financial Data and the operating data set forth below should be
read in conjunction with the Company's consolidated financial statements and
notes thereto, the unaudited pro forma financial statements and notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," each included elsewhere in this Proxy Statement.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year 40 Weeks
--------------------------------------------------------------------- Ended
1993 1994 1995 (1) 1996 (1) 1997 October 3, 1998 (1)
--------------------------------------------------------------------- -------------------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 122,915 $ 182,886 $ 226,466 $ 236,934 $250,889 $ 189,248
Operating income (loss) 11,799 15,223 858 330 7,688 (20,624)
Provision (benefit) for income taxes 4,844 5,497 (2,813) (2,918) (1,492) (5,717)
Net income (loss) $ 6,821 $ 7,841 $ (1,614) $ (4,365) $ 1,807 $ (20,927)
=========== =========== ========= ========== ======== ===========
Net income (loss) per common share -
basic $ 0.62 $ 0.69 $ (0.14) $ (0.37) $ 0.15 $ (1.76)
=========== =========== ========= ========= ======== ===========
Net income (loss) per common share -
diluted $ 0.60 $ 0.68 $ (0.14) $ (0.37) $ 0.15 $ (1.76)
=========== =========== ========= ========= ======== ===========
Weighted average number of shares
outstanding - basic 11,042 11,429 11,621 11,705 11,766 11,897
=========== =========== ========= ========= ======== ==========
Weighted average number of shares
outstanding - diluted 11,353 11,624 11,621 11,705 11,913 11,897
=========== =========== ========= ========= ======== =========
EBITDA(a) $ 19,689 $ 26,956 $ 22,315 $ 20,610 $ 23,635 $ 16,249
=========== =========== ========= ========= ======== =========
</TABLE>
-34-
<PAGE> 37
(a) Calculation for EBITDA consists of net income plus interest, income taxes,
depreciation and amortization, non-cash non-recurring charges and expense
associated with the Company-owned life insurance. The Company recognizes
that there are alternative methods of measuring cash flow from operations.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------
1993 1994 1995 1996 1997 October 3, 1998 (2)
---------------------------------------------------------------- -------------------
Balance Sheet Data
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Working Capital $ 5,817 $ (3,439) $ 846 $ (1,748) $ (58) $ (66,053)
Total Assets 120,474 165,586 193,018 196,428 186,516 158,188
Long-term debt, less current
maturities 274 19,095 42,502 49,736 42,527 -
Convertible subordinated notes 30,000 30,000 30,000 30,000 30,000 -
Stockholders' Equity $ 76,098 $ 94,164 $ 93,238 $ 90,056 $ 92,274 $ 72,582
Company operated bakery cafes open 156 213 244 231 220 218
</TABLE>
(1) During fiscal years 1995 and 1996 and for the forty weeks ended October 3,
1998, results of operations include non-recurring pre-tax charges of $8.5
million, $4.4 million and $25.4 million respectively. These charges were
principally related to the closing of certain under-performing Au Bon Pain
Division restaurants and to account for the impairment of long-lived assets to
be disposed of. In addition, during the forty weeks ended October 3, 1998,
results of operations include a non-cash pre-tax loss of $734,000 related to the
sale of the Company's production facility in Mexico, MO.
(2) The Company intends to repay all of its outstanding debt with the proceeds
from the Sale. 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.
-35-
<PAGE> 38
The Selected Pro Forma Consolidated Financial Data is presented for
illustrative purposes only and is not necessarily indicative of operating
results or financial position that would have been achieved if the sale had been
consummated as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of the Company.
The pro forma income statement data is unaudited and was derived from the
statements of operations of the Company for the fiscal year ended December 27,
1997 and for the forty weeks ended October 4, 1997 and October 3, 1998,
respectively, and gives effect to the sale of the ABP Division and to the sale
of the Mexico, Missouri manufacturing facility prepared as if these transactions
had occurred at the beginning of the respective periods, with the manufacturing
cost associated with the Saint Louis Bread Co. Division based on the actual
costs incurred during the respective periods. Therefore, the pro forma income
statement data does not present pro forma results of operations based on the
manufacturing supply agreement with Bunge Foods Corp. prior to the execution of
the agreement on March 23, 1998. The pro forma balance sheet data is unaudited
and was derived from the balance sheet of the Company as of October 3, 1998 and
was prepared as if the transactions had occurred as of October 3, 1998. See
Notes to Unaudited Pro Forma Consolidated Financial Statements contained
elsewhere in this Proxy Statement.
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Income Statement Data 40 Weeks Ended
- --------------------- Fiscal Year Ended --------------------------------------------
Dec 27, 1997 October 4, 1997 October 3, 1998
--------------------- ------------------- -----------------
<S> <C> <C> <C>
Revenues $ 70,287 $ 51,350 $ 61,010
Operating income 4,404 2,967 3,040
Provision for income taxes 1,415 928 956
Net income $ 2,989 $ 2,039 $ 2,084
======== ======== ========
Net income per common share -
basic $ 0.25 $ 0.17 $ 0.18
======== ======== ========
Net income per common share -
diluted $ 0.25 $ 0.17 $ 0.17
======== ======== ========
Weighted average number of shares
outstanding - basic 11,766 11,757 11,897
======== ======== ========
Weighted average number of shares
outstanding - diluted 11,913 11,918 12,348
======== ======== ========
EBITDA (a) $ 8,606 $ 6,196 $ 6,793
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data October 3, 1998
- ------------------ -----------------
<S> <C>
Working Capital $ 2,535
Total Assets $ 81,294
Long-term debt, less current maturities -
Convertible subordinated notes -
Stockholders Equity $ 72,582
Company operated bakery cafes open 67
</TABLE>
(a) Calculation for EBITDA consists of net income plus interest, income taxes,
depreciation and amortization, non-cash non-recurring charges and expenses
associated with the Company-owned life insurance. The Company recognizes
that there are alternative methods of measuring cash flow from operations.
-36-
<PAGE> 39
COMPARATIVE PER SHARE DATA
(IN THOUSANDS EXCEPT BOOK VALUE DATA)
The following table sets forth certain unaudited historical per share data
and pro forma per share data on an unaudited pro forma basis after giving effect
to the sale of the ABP Division and to the sale of the Mexico, Missouri
manufacturing facility. This data should be read in conjunction with the
unaudited pro forma consolidated financial statements and the separate
historical financial information included elsewhere in this Proxy Statement. The
pro forma comparative per share data is presented for illustrative purposes only
and is not necessarily indicative of operating results or financial position
that would have been achieved if the above transactions had been consummated as
of the beginning of the periods presented, nor is it necessarily indicative of
the future operating results or financial position of the Company. The unaudited
pro forma consolidated data was derived from the statement of operations of the
Company for the fiscal year ended December 27, 1997 and for the forty weeks
ended October 4, 1997 and October 3, 1998, respectively, and gives effect to the
sale of the ABP Division and to the sale of the Mexico, Missouri manufacturing
facility prepared as if these transactions had occurred at the beginning of the
respective periods, with the manufacturing cost associated with the Saint Louis
Bread Co. Division based on the actual costs incurred during the respective
periods. Therefore, the pro forma income from continuing operations does not
present pro forma results of operations based on the manufacturing supply
agreement with Bunge Foods Corp. prior to the execution of the agreement on
March 23, 1998. The unaudited pro forma balance sheet was derived from the
balance sheet of the Company as of October 3, 1998 and was prepared as if the
transactions had occurred as of October 3, 1998.
<TABLE>
<CAPTION>
Fiscal year 40 Weeks Ended
Ended --------------------------------
Dec 27, 1997 October 4, 1997 October 3, 1998
(1) (1) (1)(2)
------------ --------------- ---------------
<S> <C> <C> <C>
Au Bon Pain Co., Inc. - Historical
- ----------------------------------
Income (loss) from continuing
operations $ 1,807 $ 1,310 $ (20,927)
Book Value $ 7.84 $ 7.79 $ 6.10
Cash Dividends Declared N/A N/A N/A
Au Bon Pain Co., Inc. - Pro Forma
- ---------------------------------
Income from continuing operations $ 2,989 $ 2,039 $ 2,084
Book Value $ 7.84 $ 7.79 $ 6.10
Cash Dividends Declared N/A N/A N/A
</TABLE>
- ----------
(1) See Notes to Unaudited Pro Forma Consolidated Financial Statements
contained elsewhere in this Proxy Statement.
(2) For the forty weeks ended October 3, 1998 the Company recorded non-cash
pre-tax charges of $25.4 million. These charges were related to the closing
of certain underperforming restaurants, the loss on the sale of the Mexico,
Missouri manufacturing facility and to record 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").
-37-
<PAGE> 40
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 27, 1997
FORTY WEEKS ENDED OCTOBER 3, 1998
FORTY WEEKS ENDED OCTOBER 4, 1997
The Agreement contemplates (i) the transfer from the Company to the
Subsidiaries of substantially all of the operating assets, store leases,
contracts and liabilities associated with the ABP Division and (ii) the sale of
all of the capital stock of the Subsidiaries to the Buyer, whereby the Buyer
will become the owner of the ABP Division (sometimes also referred to as the "Au
Bon Pain Division"). The Sale will become effective subject to the terms and
conditions of the Agreement, including, but not limited to, the approval of the
stockholders' of the Company, consents of certain landlords, governmental
approval, and consummation of financing pursuant to previously obtained
commitments from Buyer's lenders and investors, of which no assurances can be
given. The purchase price payable to the Company upon effectiveness of the Sale
shall be seventy three million dollars ($73,000,000), subject to certain
purchase price adjustments as described in the Agreement.
The unaudited pro forma balance sheet presents the pro forma financial
position of the Company and is derived from the balance sheet of the Company as
of October 3, 1998. The unaudited pro forma consolidated statements of
operations are derived from the consolidated statements of operations of the
Company for the fiscal year ended December 27, 1997 and for the 40 weeks ended
October 4, 1997 and October 3, 1998, respectively, and excludes a one-time
charge for the sale of the Company's Mexico, Missouri manufacturing facility
recorded in the 40 weeks ended October 3, 1998 and a one-time charge for the
loss on the sale of the ABP Division.
In the opinion of the Company's management, all adjustments necessary to
present fairly such unaudited pro forma financial statements have been made
based on the terms and structure of the sale of the ABP Division and the sale of
the Mexico, Missouri manufacturing facility. The Agreement requires that the
operations of the ABP Division continue in the ordinary course of business until
the Sale is consummated.
The unaudited pro forma consolidated financial statements are presented for
illustrative purposes only and are not necessarily indicative of the actual
results that would have occurred had the transaction taken place at the earliest
period presented, nor do they purport to indicate the results of future
operations or financial position of the company.
The unaudited pro forma consolidated financial statements have been derived
from and should be read in conjunction with the Company's audited historical
financial statements and notes thereto as of December 27, 1997 filed with the
Securities and Exchange Commission in its Form 10-K and the Company's unaudited
condensed historical financial statements and notes thereto for the quarters
ending April 18, 1998, July 11, 1998 and October 3, 1998, filed with the
Securities and Exchange Commission in its Form 10-Q.
Matters discussed in this unaudited consolidated financial information,
including any discussion of or impact, expressed or implied, on the Company's
anticipated operating results
-38-
<PAGE> 41
and future earnings per share contain forward-looking statements that involve
risks and uncertainties. The Company's results may differ significantly from the
results indicated by such forward looking statements. The Sale is subject to
several conditions including, but not limited to, the approval of the
stockholders of the Company, governmental approvals, consents of certain
landlords, and consummation of financing pursuant to previously obtained
commitments from Buyer's lenders and investors, of which no assurances can be
given.
-39-
<PAGE> 42
AU BON PAIN CO., INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET (a)
(IN THOUSANDS)
OCTOBER 3, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 680 $ 4,388 (b) $ 5,068
Accounts receivable 7,065 (6,151) (c) 914
Inventories 6,286 (4,756) (c) 1,530
Prepaid expenses 2,626 (1,786) (c) 840
Refundable income taxes 595 - 595
Deferred income taxes 2,300 - 2,300
--------- --------- --------
Total current assets 19,552 (8,305) 11,247
Property and equipment, less accumulated depreciation
and amortization 91,301 (56,238) (c) 35,062
Other assets:
Notes receivable 4,985 (4,945) (c) 40
Intangible assets, net of accumulated amortization 20,259 - 20,259
Deferred financing costs 902 (902) (c) -
Deposits and other 11,327 (6,503) (c) 4,824
Deferred income taxes 9,862 - 9,862
--------- --------- --------
Total other assets 47,335 (12,350) 34,985
--------- --------- --------
Total assets $ 158,188 $ (76,894) $ 81,294
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 7,165 $ (4,897) (c) $ 2,268
Accrued expenses 14,369 (7,925) (d) 6,444
Current maturities of long term debt 64,071 (64,071) (e) -
--------- --------- -------
Total current liabilities 85,605 (76,893) 8,712
Long term debt, less current maturities - - -
Convertible Subordinated Notes - - -
--------- --------- --------
Total liabilities 85,605 (76,893) 8,712
Minority interest 1 1 (c) -
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
1998 and 1997, respectively 1 - 1
Class B, shares authorized 2,000,000; issued
and outstanding 1,557,658 and 1,572,907 in
1998 and 1997, respectively - - -
Additional paid-in capital 69,720 - 69,720
Retained earnings 2,861 - 2,861
--------- --------- --------
Total stockholders' equity 72,582 - 72,582
--------- --------- --------
Total liabilities and stockholders' equity $ 158,188 $ (76,894) $ 81,294
========= ========= ========
</TABLE>
-40-
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(a) See the introductory paragraphs under "Unaudited Pro Forma Financial
Information": The unaudited pro forma balance sheet includes the balance of
the Company as of October 3, 1998 and was prepared as if the transaction
had occurred at the end of the respective date.
(b) To eliminate the Au Bon Pain Division Assets and Liabilities and to record
the net cash proceeds from the sale of the Au Bon Pain Division. The
pro-forma cash and cash equivalents as of October 3, 1998 is based on the
expected net proceeds of the sale transaction and the debt outstanding at
October 3, 1998. It does not purport to represent the cash and cash
equivalents expected to be available to the Company upon the closing of the
Sale.
(c) To eliminate Au Bon Pain Division Assets and Liabilities.
(d) To eliminate Au Bon Pain Division Assets and Liabilities and to establish a
reserve for expenses related to the sale of the Au Bon Pain Division.
(e) To record the retirement of debt from proceeds on the sale of the Au Bon
Pain Division.
-41-
<PAGE> 44
AU BON PAIN CO., INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
FORTY WEEKS ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical (1) Adjustments (2) October 3, 1998 (2)
-------------- --------------- -------------------
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 179,191 $ (122,192) (a) $ 56,999
Franchise sales & other - - -
revenues 10,057 (6,046) (b) 4,011
---------- ----------- ---------
189,248 (128,238) 61,010
Costs & expenses:
Cost of food & paper products 66,505 (45,235) (c) 21,270
Restaurant operating expenses:
Labor 50,611 (34,812) (d) 15,799
Occupancy 21,043 (16,931) (d) 4,112
Other 20,760 (14,237) (d) 6,523
---------- ----------- ---------
92,414 (65,980) 26,434
Depreciation & amortization 11,420 (7,667) (e) 3,753
General & administrative 14,088 (7,575) (f) 6,513
Non-recurring charges 25,445 (25,445) (g) -
---------- ----------- ---------
209,872 (151,902) 57,970
Operating income (loss) (20,624) (23,664) 3,040
Interest (income) expense, net 4,972 (4,972) (h) -
Other (income) expense, net 1,128 (1,128) (i) -
Minority interest (80) 80 (j) -
---------- ----------- ---------
Net income (loss) before provision
(benefit) for income taxes (26,644) 29,684 3,040
Provision (benefit) for income taxes (5,717) 6,673 (k) 956
---------- ----------- ---------
Net income (loss) $ (20,927) $ 23,011 $ 2,084
========== =========== =========
Net income (loss)
per common share - basic $ (1.76) $ - $ 0.18
========== =========== =========
Net income (loss)
per common share - diluted $ (1.76) $ - $ 0.17
========== =========== =========
Weighted average number of shares
outstanding - basic 11,897 - 11,897
========== =========== =========
Weighted average number of shares
outstanding - diluted 11,897 - 12,348
========== =========== =========
EBITDA (l) $ 16,249 $ (9,456) $ 6,793
========== =========== =========
</TABLE>
(1) During fiscal years 1995 and 1996 and for the forty weeks ended October 3,
1998, results of operations include non-recurring pre-tax charges of $8.5
million, $4.4 million and $25.4 million respectively. These charges were
principally related to the closing of certain under-performing Au Bon Pain
Division restaurants and to account for the impairment of long-lived assets to
be disposed of. In addition, during the forty weeks ended October 3, 1998,
results of operations include a non-cash pre-tax loss of $734,000 related to the
sale of the Company's production facility in Mexico, Missouri.
(2) The pro forma Consolidated Statement of Operations does not present pro
forma results of operations based on the manufacturing supply agreement with
Bunge Foods Corp. prior to the execution of the agreement on March 23, 1998.
-42-
<PAGE> 45
AU BON PAIN CO., INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
FORTY WEEKS ENDED OCTOBER 4, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments (1) October 4, 1997 (1)
---------- --------------- -------------------
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 177,930 $ (128,546) (a) $ 49,384
Franchise sales & other
revenues 12,568 (10,602) (b) 1,966
---------- ----------- ---------
190,498 (139,148) 51,350
Costs & expenses:
Cost of food & paper products 67,865 (50,200) (c) 17,665
Restaurant operating expenses:
Labor 48,885 (35,597) (d) 13,288
Occupancy 21,572 (17,997) (d) 3,575
Other 20,902 (15,446) (d) 5,456
---------- ----------- ---------
91,359 (69,040) 22,319
Depreciation & amortization 12,972 (9,743) (e) 3,229
General & administrative 12,571 (7,401) (f) 5,170
Non-recurring charge - - -
---------- ----------- ---------
184,767 (136,384) 48,383
Operating income 5,731 (2,764) 2,967
Interest (income) expense, net 5,424 (5,424) (h) -
Other (income) expense, net 146 (146) (i) -
Minority interest (income) expense 4 (4) (j) -
---------- ----------- ---------
Net income (loss) before
provision (benefit) for income taxes 156 2,810 2,967
Provision (benefit) for income taxes (1,154) 2,082 (k) 928
---------- ----------- ----------
Net income (loss) $ 1,310 $ 729 $ 2,039
========== =========== =========
Net income (loss)
per common share - basic $ 0.11 $ - $ 0.17
========== =========== =========
Net income (loss)
Per common share-diluted $ 0.11 $ - $ 0.17
========== =========== =========
Weighted average number of shares
outstanding - basic 11,757 - 11,757
========== =========== =========
Weighted average number of shares
outstanding - diluted 11,918 - 11,918
========== =========== =========
EBITDA (l) $ 18,373 $ (12,177) $ 6,196
========== =========== ==========
</TABLE>
(1) The pro forma Consolidated Statement of Operations does not present pro
forma results of operations based on the manufacturing supply agreement with
Bunge Foods Corp. prior to the execution of the agreement on March 23, 1998.
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<PAGE> 46
AU BON PAIN CO., INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 27, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments (1) December 27, 1997 (1)
---------- --------------- ---------------------
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 233,211 $ (166,023) (a) $ 67,188
Franchise sales & other
revenues 17,678 (14,579) (b) 3,099
---------- ---------- ----------
250,889 (180,602) 70,287
Costs & expenses:
Cost of food & paper products 90,385 (66,132) (c) 24,253
Restaurant operating expenses:
Labor 63,593 (45,564) (d) 18,029
Occupancy 28,514 (23,624) (d) 4,890
Other 27,430 (19,994) (d) 7,436
---------- ---------- ----------
119,537 (89,182) 30,355
Depreciation & amortization 16,861 (12,659) (e) 4,202
General & administrative 16,418 (9,345) (f) 7,073
Non-recurring charges - - -
---------- ---------- ----------
243,201 (177,318) 65,883
Operating income 7,688 (3,284) 4,404
Interest (income) expense, net 7,203 (7,203) (h) -
Other (income) expense, net 212 (212) (i) -
Minority interest (42) 42 (j) -
---------- ---------- ----------
Net income (loss) before
provision (benefit) for income taxes 315 4,089 4,404
Provision (benefit) for income taxes (1,492) 2,907 (k) 1,415
---------- ---------- ----------
Net income (loss) $ 1,807 $ 1,182 $ 2,989
========== ========== ==========
Net income (loss)
per common share - basic $ 0.15 $ - $ 0.25
========== ========== ==========
Net income (loss)
per common share - diluted $ 0.15 $ - $ 0.25
========== ========== ==========
Weighted average number of shares
outstanding - basic 11,766 - 11,766
========== ========== ==========
Weighted average number of shares
outstanding - diluted 11,913 - 11,913
========== ========== ==========
EBITDA (l) $ 23,635 $ (15,029) $ 8,606
========== ========== ==========
</TABLE>
(1) The pro forma Consolidated Statement of Operations does not present pro
forma results of operations based on the manufacturing supply agreement with
Bunge Foods Corp. prior to the execution of the agreement on March 23, 1998.
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<PAGE> 47
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended 40 Weeks Ended
12/27/97 10/3/98 10/4/97
-------- ------- -------
<S> <C> <C> <C>
(a) To eliminate Au Bon Pain Division restaurant sales $(166,023) $(122,192) $(128,546)
(b) To eliminate wholesale and Au Bon Pan Division manufacturing sales,
and to eliminate Au Bon Pain Division franchise royalties, store
opening fees, area development fees and other revenues
Au Bon Pain Division royalties, store opening
fees, area development fees and other revenues (6,532) (3,571) (4,617)
Wholesale and Au Bon Pain
Division manufacturing sales (8,047) (2,475) (5,985)
--------- --------- ---------
(14,579) (6,046) (10,602)
(c) To eliminate cost of goods sold related to the Au Bon
Division and wholesale sales (66,132) (45,235) (50,200)
(d) To eliminate Au Bon Pain Division restaurant operating expenses
Labor (45,584) (34,812) (35,597)
Occupancy (23,624) (16,931) (17,997)
Other (19,994) (14,237) (15,446)
--------- --------- ---------
(89,182) (65,980) (69,040)
(e) To eliminate depreciation and amortization associated
with the Au Bon Pain Division and wholesale (12,659) (7,667) (9,743)
(f) To eliminate Au Bon Pain Division general and administrative
expenses leaving pro forma Saint Louis Bread Co. Division corporate
overhead expenses on a stand alone basis (9,345) (7,575) (7,401)
(g) To eliminate the non-recurring charge related to the
Au Bon Pain Division cafes - (25,445) -
(h) To eliminate interest expense associated with debt
existing prior to the transaction (7,203) (4,972) (5,424)
(i) To eliminate Au Bon Pain Division other (income) expense, and to
eliminate the loss on the sale of the Mexico, Missouri facility in
1998
Au Bon Pain Division other
expense, net (212) (394) (146)
Loss on sale of Mexico, Missouri facility - (734) -
--------- --------- ---------
(212) (1,128) (146)
</TABLE>
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<PAGE> 48
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended 40 Weeks Ended
12/27/97 10/3/98 10/4/97
-------- ------- -------
<S> <C> <C> <C>
(j) To eliminate minority interest associated with the
Au Bon Pain Division $ 42 $ 80 $ (4)
(k) To eliminate federal and state income tax associated with the Au
Bon Pain Division and the loss on the sale of the Mexico, Missouri
manufacturing facility in 1998. 2,907 6,673 2,082
(l) Calculation for EBITDA consists of net income plus interest, income
taxes, depreciation and amortization, non-cash non-recurring charges
and expense associated with the Company-owned life insurance. The
Company recognizes that there are alternative methods of measuring
cash flow from operations.
</TABLE>
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<PAGE> 49
INFORMATION ABOUT THE COMPANY
BUSINESS
General
Au Bon Pain Co., Inc. ("the Company") was formed in March 1981 with three
Boston area bakeries and one cookie store serving croissants, breads and
cookies. As of December 26, 1998, the Company had grown to 222 Company-operated
and 159 franchised bakery cafes operating under two concepts: the Au Bon Pain
Division, with 151 Company-operated and 114 franchise-operated bakery cafes, and
the Saint Louis Bread Co. Division, which also does business as "Panera Bread"
outside of the Saint Louis area, with 71 Company-operated and 45
franchise-operated bakery cafes. Both concepts specialize in high quality food
for breakfast and lunch, including fresh baked goods, made-to-order sandwiches
on freshly baked breads, soups, salads, custom roasted coffees, and other cafe
beverages. The Au Bon Pain Division concept, with its major metropolitan
locations, serves customers where they work and shop. Saint Louis Bread Co.
Division reaches suburban dwellers and workers, offering a premium specialty
bakery and cafe experience with a neighborhood emphasis.
The Au Bon Pain Division bakery cafes are principally located in the
following cities: Baltimore, Boston, Chicago, Cleveland, Columbus, Hartford,
Minneapolis, New Haven, New York City, Pittsburgh, Providence and Washington,
DC. Internationally, franchise partners operate Au Bon Pain Division units in
Chile, the Philippines, Indonesia, Thailand, Brazil, the UK and Singapore. In
addition, domestic franchisees currently operate Au Bon Pain Division cafes in
Doubletree Hotels, airports and in certain West Coast and East Coast cities.
The Saint Louis Bread Co. Division bakery cafes are principally located in
suburban, strip mall and regional mall locations. The concept is currently
operating in Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Massachusetts,
Michigan, Missouri, Ohio, Oklahoma, South Carolina and Texas.
Concept and Strategy
The Au Bon Pain Division concept focuses on "niche" markets in high density
areas of pedestrian traffic. Target customers of the Au Bon Pain Division
include urban office employees, hospital employees and visitors, shoppers,
travelers, students and other adults who are time sensitive, yet desire a higher
quality breakfast and lunch experience than is typically found at quick service
restaurants. The concept's strategy is to create distinctive food offerings
based on fresh-baked breads and baked goods at reasonable prices. It strives to
offer products of fresher, higher quality and greater variety than those offered
by its competitors. In addition, the Company believes its operational
excellence, speed of service and convenient locations further differentiate the
Company from its competitors. Average revenue per Company-operated bakery cafe
open for the full fiscal year ended December 27, 1997 was approximately
$1,014,000 for the Au Bon Pain Division concept.
The Saint Louis Bread Co. Division concept focuses on the emerging
"Specialty Bread/Cafe" category. Its artisan sourdough breads and overall
award-winning bakery expertise are at the heart of the concept's menu. Bread and
baked goods account for
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approximately 25% of sales. The concept is designed to deliver against the key
baby boomer consumer trends of today, specifically the need for an efficient but
higher self-esteem experience than that offered by traditional fast food. The
concept aims to become a nationally recognized brand name, and in doing so,
hopes to reap the economic benefits that a strong brand name offers. Its menu,
prototype, operating systems, design and real estate strategy allow it to
compete successfully in four sub-businesses: lunch, breakfast, day-time "chill
out" and take home specialty retailing. Average revenue per Company-operated
bakery-cafe open for the full fiscal year ended December 27, 1997 was
approximately $1,200,000 for the Saint Louis Bread Co. Division concept.
The Company believes that excellence in execution is a key to success in
the restaurant industry. The distinctive nature of the Company's menu offerings,
the quality of its restaurant operations, the Company's unique cafe design and
the prime locations of its cafes are integral to the Company's success. The
Company will grow the Au Bon Pain Division concept selectively in its core urban
markets, special real estate situations (hospitals, transportation centers,
etc.) and through continued franchising abroad and domestically. In addition, it
will continue to implement its "ABP 2000" remodel program. The Saint Louis Bread
Co. Division concept has tremendous growth potential in the suburban markets
which will be realized through both Company and franchise efforts.
Menu
The menus across both concepts seek to provide the Company's target
customers with products which build on the strength of the Company's bakery
expertise and meet customers' new and ever-changing taste profiles. The key menu
groups are fresh baked goods, made-to-order sandwiches, soups and cafe
beverages. Included within these menu groups are: a variety of freshly baked
bagels, breads, croissants, muffins, scones, rolls and sweet goods; sandwiches
made-to-order; hearty, unique soups; custom roasted coffees and cafe beverages
such as espresso and cappuccino. A primary difference in menu between the two
concepts is the significant emphasis within the Saint Louis Bread Co. Division
concept on sophisticated artisan and sourdough breads, which supports its
significant take-home business.
The Company regularly reviews and revises its menu offerings to satisfy
changing customer preferences and to maintain customer interest amongst its
target customer groups - "the Trend-Setters" and "the Good Food
Traditionalists." Both of these target customers seek a quality experience that
reflects their discriminating tastes. The major characteristic that sets these
two groups apart is the more enthusiastic embrace of new and nutritional menu
items by the Trend-Setters. New menu items are developed in corporate test
kitchens and then introduced in a limited number of the Company's bakery cafes
to determine customer response and verify that preparation and operating
procedures maintain consistency, high quality standards and profitability. If
successful, they are introduced in all the Au Bon Pain Division or the Saint
Louis Bread Co. Division bakery cafes.
Marketing
The Company believes it competes on the basis of an entire experience
rather than price. Pricing is structured so that customers perceive good value
at both the Au Bon Pain Division and the Saint Louis Bread Co. Division and can
visit everyday (high quality food at
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reasonable prices). The average customer purchase for the fiscal year ended
December 27, 1997 was approximately $3.09 at the Au Bon Pain Division and $4.92
at the Saint Louis Bread Co. Division. Breakfast and lunch checks typically
average $2.12 and $4.23, respectively, at the Au Bon Pain Division and $3.51 and
$5.84, respectively, at the Saint Louis Bread Co. Division. The Company attempts
to increase its per location sales through menu development, promotions and by
sponsorship of local community charitable events.
To date, the Company has not advertised extensively; rather, it relies on
location, word of mouth, customer satisfaction and promotional programs to
encourage trial by new customers and to make existing customers aware of new
menu offerings.
Catering
The Au Bon Pain Division operates a catering program which offers a select
group of delivered breakfast and luncheon food items appropriate for on-site
consumption at corporate functions. Customers place orders by toll-free
telephone with trained customer service representatives at the Company's Boston
headquarters. Orders are immediately routed utilizing a computerized delivery
support system to the most appropriate bakery cafe for preparation and delivery.
In 1997, catering sales represented approximately 5.5% of the Au Bon Pain
Division-operated restaurant sales. At present, Saint Louis Bread Co. Division
does not offer catering services. With the predominance of Saint Louis Bread Co.
Division cafes in suburban locations, the Company believes that the potential to
develop significant catering business at the Saint Louis Bread Co. Division is
lower than at the Au Bon Pain Division.
Site Selection
For the Au Bon Pain Division concept, the Company seeks convenient
locations in high-visibility, high-traffic, densely populated areas which are
easily accessible to the target customers. Besides urban office buildings, the
Company also operates in transportation centers, universities and hospitals. The
Company believes that its menu, history of quality retail operations and bakery
cafe designs enable the Company to access locations which may not be available
to traditional quick service restaurants. Successful examples of the Au Bon Pain
Division real estate include the following locations: Copley Place, a shopping
mall/office building in Boston; Brigham and Women's Hospital, a leading medical
center in Boston; South Station, a transportation center in downtown Boston; the
Empire State Building in New York City; the Pittsburgh Airport in Pittsburgh and
George Washington University at 2000 Pennsylvania Avenue in Washington, D.C.
Saint Louis Bread Co. Division locations are typically in suburban strip malls,
free standing locations and regional malls such as the Galleria Mall in Saint
Louis and the Lenox Square Mall in Atlanta.
In 1997 the Company opened one Au Bon Pain Division bakery cafe in an
existing market, and franchised 11 of its existing Au Bon Pain bakery cafes in
the Philadelphia market. The Company's Au Bon Pain Division franchisees also
opened 38 new bakery cafes domestically and in Chile, the Philippines,
Indonesia, Thailand, Brazil and the UK.
During 1997, the Company expanded the number of Company-operated Saint
Louis Bread Co. Division bakery cafes by six to 60 locations in existing markets
and in the new Saint Louis Bread Co. Division markets of Boston and Detroit. The
Saint Louis Bread Co.
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Division franchise-operated locations expanded from 10 locations to 19 locations
including new market openings in Tulsa, OK, Columbus, OH, Louisville, KY and
Davenport, IA.
Both bakery cafe concepts rely on a substantial volume of repeat business.
In evaluating a potential location, the Company studies the surrounding trade
area, obtaining demographic information within that area and information on
quick service breakfast or lunch competitors. Management evaluates the Company's
ability to establish a dominant presence within that area in order to create
entry barriers to other bakery cafe competitors. Based on this information,
sales and return on investment are projected.
The Company uses sophisticated fixtures and materials in the bakery cafe
design for both concepts. The Company developed and designed a new prototype for
Saint Louis Bread Co. Division in 1996 which has exceeded all sales
expectations. The Au Bon Pain Division concept also has a new prototype, "ABP
2000," which is being successfully utilized as a remodel program. The design
visually reinforces the distinctive difference between the Company's bakery
cafes and other quick service restaurants serving breakfast and lunch. Many of
the Company's cafes also feature outdoor cafe seating. As of December 27, 1997
the estimated construction and equipment costs for a typical Au Bon Pain
Division bakery cafe outside of New York City are approximately $475,000 before
any landlord construction allowance. As of December 27, 1997 the estimated
construction and equipment cost for a typical Au Bon Pain Division bakery cafe
in New York City is approximately $830,000 before any landlord construction
allowance. As of December 27, 1997 the estimated construction and equipment cost
for a typical Saint Louis Bread Co. Division bakery cafe is approximately
$560,000 after any landlord allowance.
The average bakery cafe size for both concepts ranges between 2,500 and
4,000 square feet. Currently, all bakery cafes, including franchises, are in
leased premises. Lease terms are typically ten years with one or two five-year
renewal option periods thereafter. Leases typically have a minimum base
occupancy charge, charges for a proportionate share of building operating
expenses and real estate taxes, and contingent percentage rent based on sales
above a stipulated sales level.
Production
Breads, cookies and pastries sold at Au Bon Pain Division bakery cafes are
baked on premises from frozen dough. Saint Louis Bread Co. Division bakery cafes
use fresh dough for their sourdough breads, certain other breads and bagels, and
frozen dough for most other baked goods products. Baked goods prepared from
frozen dough products represent approximately 30% of the Au Bon Pain Division's
total bakery cafe sales and approximately 18% of the Saint Louis Bread Co.
Division's total bakery cafe sales.
During 1996, the Company completed construction of a state of the art
frozen dough production facility in Mexico, MO to supply frozen dough; this
replaced its original South Boston frozen dough facility which was out of
capacity. On March 23, 1998 the Company sold the Mexico, MO production facility
and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash. In conjunction with the sale, the Au Bon Pain
Division and the Saint Louis Bread Co. Division entered into five year supply
agreements with Bunge for the supply of substantially all their frozen dough
needs,
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excluding bagels, for their domestic bakery cafes. The net proceeds of
the sale were used to reduce debt. The Company recognized a pre-tax loss on the
sale of the facility of approximately $700,000 in the Company's results of
operations for the first quarter of 1998.
The sale of the frozen dough production facility provides economies of
scale in plant production which are reflected in the economics of the five-year
supply agreements and allows the Company to take advantage of Bunge's
significant purchasing power. The five year supply agreements allow the bakery
cafes to continue to offer the same high quality fresh baked goods, as the
frozen dough products purchased from Bunge will be made on the same equipment,
by the same management team, using the same proprietary processes and
specifications as prior to the sale to Bunge.
The Company also operates an Au Bon Pain Division Commissary in South
Boston which produces frozen dough bagels and certain other menu items. Each of
the Saint Louis Bread Co. Division bakery cafes is supported by a regional
commissary which daily provides fresh sourdough and bagel products for baking
and sale within the Saint Louis Bread Co. Division bakery cafes.
Competition
The Au Bon Pain Division and Saint Louis Bread Co. Division experience
competition from numerous sources in their respective trade areas. Au Bon Pain
Division bakery cafes compete within approximately a two city block radius with
other providers of breakfast and lunch. Saint Louis Bread Co. Division bakery
cafes compete with bread only stores, supermarkets and other bakeries that
supply high quality breads and with other restaurants that seek to use quality
breads to define a breakfast, lunch and light dinner menu. Both divisions
compete for leased space in desirable locations; methods of competition are
price, service and quality of products. Certain of the Company's competitors may
have capital resources exceeding those available to the Company.
Management Information Systems
Each Company-operated bakery cafe has computerized cash registers to
collect point-of-sale transaction data, which are used to generate pertinent
marketing information, including product mix and average check. All product
prices are programmed into the system from the Company's corporate office.
The Company's in-store personal computer-based management support system is
designed to assist in labor scheduling and food cost management, to provide
corporate and retail operations management quick access to retail data and to
reduce managers' administrative time. The system supplies sales, bank deposit
and variance data to the Company's accounting department in Boston on a daily
basis. The Company uses this data to generate weekly consolidated reports
regarding sales and other key elements, as well as detailed profit and loss
statements for each bakery cafe every four weeks. Additionally, the Company
monitors the average check, customer count, product mix and other sales trends.
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Distribution
The Company currently utilizes an independent distributor to distribute
frozen dough products and other materials to Company-operated Au Bon Pain
Division and Saint Louis Bread Co. Division bakery cafes. By contracting with an
independent distributor, the Company has been able to eliminate investment in
distribution assets and systems and to focus its managerial and financial
resources on its retail operations. The distributor picks up frozen dough
products throughout the week from the plants and delivers them to the bakery
cafes. Virtually all other supplies for retail operations, including paper
goods, coffee and small-wares, are contracted for by the Company and delivered
by the vendors to the distributor for delivery to the bakery cafes. The
individual bakery cafes order directly from the distributor two to three times
per week.
Franchised bakery cafes operate under individual contracts with either the
Company's distributor or other regional distributors.
Joint Ventures
The Company currently operates 14 Au Bon Pain Division bakery cafes in New
York City, which are owned under a joint venture agreement between the Company
and an independent investor group. Under the terms of this agreement, the
Company has an obligation to offer the group up to 49% of the equity in each
bakery cafe opened in the metropolitan tri-state area of New York City. The
equity participation percentage is based on the cost of the initial construction
upon opening of the bakery cafe. This equity percentage is fixed prior to the
date of the respective bakery cafe openings. The group has no obligation to
participate in any bakery cafe, and the percentage participation must be elected
by the group prior to the opening of the bakery cafe. Each joint venture bakery
cafe must purchase all of its frozen dough products from the Company's supplier
and is operated by the Company under a management agreement under which the
Company receives a management fee of 6% of sales of each joint venture bakery
cafe. The Company has agreed to provide a guaranty to one or more institutional
lenders acceptable to the Company to assist the group in financing its
acquisition of up to 5% of the equity in new bakery cafes opened after January
1, 1993. As of December 27, 1997, approximately $83,062 was outstanding under
this arrangement.
Franchises
Au Bon Pain Division
Domestic
As of September 30, 1998 the Company had domestic franchising agreements
with sixteen organizations: Northern Bakers, Inc., CA One, ABP Southern
California LLC, Wayne ABP, Inc., R.C. Menzer, Romallso, Inc., The Lauren Group,
Inc., FGR Food Group, Host Marriott Corp., Boston Concessions Group, Inc.,
Crowne Plaza Ravinia, ABP Delaware Valley, LLC, BP Oil Company, ABP Caribbean
Ltd., Statewide Management Group, Inc. and DoubleTree Hotels. In general, the
Company has two sources of revenue from its domestic Au Bon Pain Division
franchisees: fees for new locations and royalties on sales by franchisees. New
domestic locations, other than airport locations, to be developed by franchisees
typically require a $25,000 initial franchise fee per location and a 5% royalty.
Airport franchise fees
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range between $10,000 and $50,000, depending upon passenger traffic and the
Company's assistance in obtaining the concession. All domestic franchisees are
obligated to use Company-approved ingredients, including the Au Bon Pain
Division -approved frozen dough products.
In 1997, the Company sold 11 bakery cafes to ABP Delaware Valley for $2.6
million, in connection with the execution of a franchise area development
agreement covering certain portions of Pennsylvania, New Jersey and Delaware.
The purchase price was paid by delivery of a ten-year note payable to the
Company which bears interest at 8.25% per annum. Under the terms of the area
development agreement, the franchisee must open 17 new bakery cafes according to
a minimum opening schedule in order to maintain development exclusivity in the
territory and has the right to open either the Au Bon Pain Division or the Saint
Louis Bread Co. Division bakery cafes within the specified territory.
International
The Company currently has international franchise development agreements
with developers in Chile, Argentina, Brazil, Paraguay, Uruguay, Bolivia, Peru,
Thailand, Indonesia, the Philippines, Malaysia, Singapore, the United Kingdom
"Eastern Canada" and the Caribbean. Bakery cafes have been opened to date in
Chile, Indonesia, the Philippines, Thailand, Singapore, Brazil and England.
Under these agreements, the Company has granted exclusive development rights to
franchise and operate the Au Bon Pain Division bakery cafes in the respective
country or countries. The agreements generally require the payment of up front
development fees, which have ranged from $50,000 to $750,000, a franchise fee,
typically from $10,000 to $30,000 for each Au Bon Pain Division bakery cafe
opened, depending upon the size of the bakery cafe, and royalties from the sale
of products from each bakery cafe of 5% of sales. The developer is, in most
instances, required to open bakery cafes according to a specific minimum
schedule. The Company may also agree to provide advice, consultation and
training for the development and operation of a frozen dough plant. Currently,
the Company considers international franchising and licensing arrangements as a
means of business expansion for its Au Bon Pain Division concept and is actively
pursuing additional international franchising relationships.
Saint Louis Bread Co. Division
In connection with the Saint Louis Bread Co. Division acquisition in 1993,
the Company assumed two area development agreements pursuant to which Saint
Louis Bread Co. Division granted exclusive development rights to two
franchisees. One area development agreement covers the cities of Kansas City,
Saint Joseph and Topeka, Kansas and Kansas City, Missouri. The second area
development agreement covers various counties in Missouri and includes the City
of Springfield.
In 1996, the Company began a broad-based franchising program. The Saint
Louis Bread Co. Division franchise agreements typically require the payment of
an up-front franchise fee of $35,000 and continuing royalties of 4% to 5% on
sales from each bakery cafe. The franchisees are required to purchase all of
their dough products from sources approved by the Saint Louis Bread Co.
Division.
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The Company has entered into 31 separate franchise area development
agreements for a total of approximately 500 bakery cafes of which 45 have been
opened to date. The Company's strategy is to execute growth in a controlled and
disciplined manner. Under the terms of the franchise development agreements, a
schedule is determined with respect to a set number of franchise openings as to
which the developer pays a non-refundable fee. In the event that the schedule is
not adhered to, the developer will lose development exclusivity in the
territory.
Employees
As of December 27, 1997 the Company had approximately 1,378 full-time
employees, of whom approximately 170 were employed in general or administrative
functions principally at or from the Company's executive offices in Boston,
Massachusetts; approximately 84 were employed at the Boston commissary;
approximately 61 were employed in the Saint Louis Bread Co. Division corporate
office in Saint Louis, MO; approximately 91 were employed in the Saint Louis
Bread Co. Division production facilities in Saint Louis, MO, Chicago, IL,
Detroit, MI, and Atlanta, GA; and approximately 684 and 288 were employed in the
Au Bon Pain Division and Saint Louis Bread Co. Division retail operations,
respectively. The Company also had approximately 4,141 part-time employees as of
December 27, 1997, of whom 2,665 and 1,476 were employed in the Au Bon Pain
Division and the Saint Louis Bread Co. Division bakery cafes, respectively.
These totals include employees of the joint venture locations in New York City.
There are no collective bargaining agreements. The Company considers its
employee relations to be excellent.
Trademarks
The "Au Bon Pain" and "Au Bon Pain The Bakery Cafe" names are of material
importance to the Company and are trademarks registered with the United States
Patent and Trademark Office and in certain foreign countries. In addition, the
name "Saint Louis Bread Company" and "Panera Bread" are of material importance
to the Company. "Saint Louis Bread Company" is registered with the United States
Patent and Trademark Office. In addition, "Saint Louis Bread Company and design"
and "Panera Bread" and "Panera Bread and design" and various other marks of
lesser importance have been filed with the United States Patent and Trademark
Office.
Government Regulation
Each Company-operated and franchised bakery cafe is subject to regulation
by federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire, alcoholic beverage control and other departments.
Difficulties or failures in obtaining and retaining the required licensing or
approval could result in delays or cancellations in the opening of restaurants.
The Company is also subject to federal and a substantial number of state
laws regulating the offer and sale of franchises. Such laws impose registration
and disclosure requirements on franchisors in the offer and sale of franchises
and may also apply substantive standards to the relationship between franchisor
and franchisee. The Company does not believe that current or potential future
regulations of franchises have or will have any material
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impact on the Company's operations. The Company is subject to the Fair Labor
Standards Act and various state laws governing such matters as minimum wages,
overtime and other working conditions.
The Company's Boston commissary and the Saint Louis Bread Co. Division
commissaries are subject to various federal, state and local environmental
regulations. Compliance with applicable environmental regulations is not
believed to have any material effect on capital expenditures, earnings or
competitive position of the Company. Estimated capital expenditures for
environmental compliance matters are not material.
The Americans With Disabilities Act prohibits discrimination in employment
and public accommodations on the basis of disability. Under the Americans With
Disabilities Act, the Company could be required to expend funds to modify its
bakery cafes to provide service to, or make reasonable accommodations for the
employment of, disabled persons. The Company believes that compliance with the
requirements of the Americans With Disabilities Act will not have a material
adverse effect on its financial condition, business or operations.
PROPERTIES
All Company-operated bakery cafes are located in leased premises with lease
terms typically for ten years with one or two five-year renewal option periods
thereafter. Leases typically have a minimum base occupancy charge, charges for a
proportionate share of building operating expenses and real estate taxes and
contingent percentage rent based on sales above a stipulated sales level. The
joint venture bakery cafes operate in leased premises under similar lease
arrangements.
In 1983, the Au Bon Pain Division established its plant and headquarters in
South Boston, Massachusetts. The executive offices occupy approximately 17,000
square feet and the production facility an additional 25,000 square feet. The
Company leases the land and building from the City of Boston. The annual rent is
approximately $180,000. The lease expires, assuming exercise of renewal options,
in 2017.
In 1997, the Company leased short-term office space in Waltham, MA to house
its Accounting and Development functions.
In 1997, the Saint Louis Bread Co. Division leased new office space in
Webster Grove, MO for its corporate offices. The space occupies approximately
10,300 square feet. The annual rent is approximately $144,000. The lease
expires, assuming exercise of renewal options, in 2007.
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are used.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth the percentage relationship to total
revenues of certain items included in the Company's consolidated statements of
operations for the periods indicated:
<TABLE>
<CAPTION>
For the For the
For the fiscal years ended 12 weeks ended 40 weeks ended
------------------------------------ ------------------- -------------------
Dec. 30, Dec. 28, Dec. 27, Oct. 3, Oct. 4, Oct. 3, Oct. 4,
1995 1996 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales 95.6% 95.2% 93.0% 95.5% 93.3% 94.7% 93.4%
Franchise sales and
other revenues 4.4 4.8 7.0 4.5 6.7 5.3 6.6
----- ----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
Costs and expenses:
Cost of food and paper
products 34.1% 36.1% 36.0% 33.7% 35.3% 35.2% 35.6%
Restaurant operating
expenses 49.5 48.7 47.7 51.0 48.7 48.8 48.0
Depreciation and
amortization 6.6 6.8 6.7 3.8 6.6 6.1 6.8
General and administrative 5.7 6.3 6.5 7.1 6.5 7.4 6.6
Non-recurring charge 3.7 1.9 -- 41.7 -- 13.4 --
----- ----- ----- ----- ----- ----- -----
99.6 99.8 96.9 137.3 97.1 110.9 97.0
----- ----- ----- ----- ----- ----- -----
Operating margin 0.4 0.2 3.1 (37.3) 2.9 (10.9) 3.0
Interest expense, net 1.5 2.2 2.9 2.5 2.8 2.6 2.8
Other (income) expense, net 0.9 1.0 0.1 0.3 (0.6) 0.2 0.1
Loss of sale on assets -- -- -- -- -- 0.4 --
Minority interest -- -- -- (0.2) -- -- --
----- ----- ----- ----- ----- ----- -----
Income (loss) before (benefit)
from income taxes (2.0) (3.0) 0.1 (39.9) 0.7 (14.1) 0.1
Benefit from income taxes (1.3) (1.2) (0.6) (8.6) (1.7) (3.0) (0.6)
----- ----- ----- ----- ----- ----- -----
Net income (loss) (0.7)% (1.8)% 0.7% (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 and fresh dough products to franchisees and others, royalty income and
franchise fees. Certain expenses (cost of food and paper products, restaurant
operating expenses and depreciation and amortization) relate primarily to
restaurant sales, while general and administrative expenses relate to all areas
of revenue generation.
The Company's fiscal year ends on the last Saturday in December. The fiscal
years from 1995 through 1997 ended on December 30, 1995, December 28, 1996 and
December 27, 1997 and included 52, 52 and 52 weeks, respectively. The Company's
fiscal year normally consists of 13 four-week periods, with the first, second
and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into
the fiscal year.
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RESULTS OF OPERATIONS
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
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 Co. Division increased 17.2% to $19.6 million,
while total revenues at the Au Bon Pain Division decreased 11.3% to $38.6
million. The increase in the Saint Louis Bread Co. Division 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 the Saint Louis
Bread Co. Division 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
Division, 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 Division 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 Division of 1.5%, as the
Saint Louis Bread Co. Division contribution was $55,000 higher in the third
quarter of 1998 versus the comparable quarter of 1997. The lower contribution in
the Au Bon Pain Division 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
Division was significantly impacted by extraordinarily high market prices for
butter, increasing food costs. On average, the Company utilizes approximately
22,000 pounds of butter per week with approximately two thirds allocated to the
Au Bon Pain Division and the remaining one third for use within the Saint Louis
Bread Co. Division. The Company's cost of butter was approximately $1.20 higher
per pound in the third quarter of 1998 than the comparative cost for the third
quarter of 1997. In addition, the level of franchise income from the Au Bon Pain
International & Trade Channels area was reduced by 0.4% due both to the Asian
economic crisis and to the pending sale of the Au Bon Pain Division overall.
Contribution in the Saint Louis Bread Co. Division 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 which increased approximately
0.4% over the third quarter of 1997 as a percentage of restaurant sales and the
commissary infrastructure which increased expenses approximately 35% for the
third quarter of 1998 over the comparable quarter in 1997, in response to the
Company's projected growth in 1998.
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During the third quarter of 1998, four Saint Louis Bread Co. Division
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 Co. Division bakery cafes were opened in the third quarter of 1998,
including two company-owned cafes and six franchise-operated cafes. Within the
Au Bon Pain Division, 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 Accounting 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.)
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Total restaurant sales from Company-operated bakery cafes increased 3.1% to
$233 million in 1997 from $226 million in 1996 due to several factors.
Incremental sales of $7.6 million were generated from the opening of 6 new Saint
Louis Bread Co. Division-operated bakery cafes opened throughout 1997 and 3 Au
Bon Pain Division and 2 Saint Louis Bread Co. Division-operated bakery cafes
opened throughout 1996. In addition, comparable restaurant sales increases in
the Saint Louis Bread Co. Division and the Au Bon Pain Division contributed to
the sales growth. Restaurant sales increased 18.3% in the Saint Louis Bread Co.
business due to the store openings and strong comparable restaurant sales of
9.3%, which were slightly offset by the sale of one Saint Louis Bread Co.
Division -operated restaurant in connection with the execution of a franchise
area development agreement. Sales from Company-owned restaurants in the Au Bon
Pain Division declined 1.7% as the sales from new Company-operated restaurants
and an increase in comparable restaurant of 1.6% sales were more than offset by
the effect of the disposition throughout 1997 of a number of underperforming
bakery cafes.
Other revenues increased to $17.7 million in 1997 from $11.3 million in
1996, principally from growth in wholesale sales to $8.0 million in 1997, from
$5.7 million in 1996 and an increase in franchise revenue to $9.4 million in
1997, from $5.5 million in 1996. The wholesale sales increase was due to
additional customers and distribution. The franchise revenue increase was driven
by the execution of new franchise area development agreements, fees from opening
new franchise locations and higher royalty income.
Operating income increased to $7.7 million in 1997 from $330,000 in 1996.
Operating income in 1996 included a non-recurring charge recorded by the Company
of $4.4 million ($3.8 million after-tax), related principally to the write-down
of certain assets under FAS #121. Before the non-recurring charge, operating
income increased 61% in 1997 to $2.9 million above 1996, driven by increased
sales and contribution, especially in the Saint Louis Bread Co. Division, where
a significant increase in franchise contribution of $1.3 million combined with
sales growth and operational efficiencies drove Saint Louis Bread Co. Division's
operating income to $8.0 million which was nearly double 1996. In addition,
manufacturing
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contribution improved by $1.6 million versus 1996, as the new production
facility opened in 1996 in Mexico, MO stabilized its operating performance.
Operating margin in the Au Bon Pain Division declined by .5 points in 1997
versus 1996, due to higher food and paper costs of 1.2 points caused by higher
commodity costs for butter and the use of less than full capacity in the
manufacturing facility in Mexico, Missouri. Restaurant operating expenses
decreased by .7 points as sales growth and the closing of unprofitable
restaurants provided leverage against occupancy of 0.4 points and store overhead
costs of 0.38 points. Depreciation and amortization and general and
administrative expenses as a percentage of revenue remained flat with the prior
year.
Operating margin in the Saint Louis Bread Co. Division increased by 4.3
points or $3.9 million versus the prior year, as higher sales leveraged the
fixed costs within the operational expenses and significantly higher franchise
contribution increased operating margin. Food and paper costs were .4 points
lower in 1997 versus 1996, as operational efficiencies offset commodity cost
increases. Restaurant operating expenses as a percentage of revenue declined by
1.3 points with the sales improvement providing leverage against occupancy
costs, which declined by .5 points, overhead costs, which declined by .1 points
and labor, which declined by .6 points. Franchise contribution grew by over
700%, increasing margin by 1.5 points in 1997 versus 1996, as the broad-based
franchise program initiated in 1996 for the Saint Louis Bread Co. Division
successfully expanded the number of committed stores to 356 total stores.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Restaurant sales from Company-operated bakery cafes increased 4.2% to $226
million in 1996 from $216 million in 1995, due principally to several factors:
incremental sales in 1996 over 1995 from the 15 Au Bon Pain Division and 20
Saint Louis Bread Co. Division-operated bakery cafes opened throughout 1995,
strong comparable restaurant sales in the Saint Louis Bread Co. Division and
sales from the 3 Au Bon Pain Division and 2 Saint Louis Bread Co.
Division-operated bakery cafes opened throughout 1996. Company-operated
restaurant sales decreased 2.9% in the Au Bon Pain Division, as additional sales
stemming from the new Company-operated bakery cafes opened in 1995 and 1996 were
more than offset by the effect on sales of the disposition throughout 1996 of a
series of underperforming bakery cafes under an initiative begun in late 1995.
Company-operated restaurant sales increased 33.6% in the Saint Louis Bread Co.
Division in 1996 over 1995, due to sales stemming from the new Company-operated
bakery cafes opened in 1995 and 1996 and from strong comparable restaurant
sales. Comparable restaurant sales in 1996 decreased 1.3%, or $1.96 million, in
the Au Bon Pain Division. In the Saint Louis Bread Co. Division comparable
restaurant sales increased 10.2%, or $3.32 million, in 1996 over the previous
year driven by a highly successful bagel product line introduction.
Operating income declined to $330,000 in 1996 from $858,000 in 1995.
Operating income was significantly affected by separate non-recurring charges
recorded by the Company of $4.4 million ($3.7 million after-tax) in 1996 and of
$8.5 million ($5.3 million after-tax) in 1995. The non-recurring charge recorded
in 1996 related principally to the write-down of certain assets in accordance
with FAS #121. The non-recurring charge recorded in 1995 related principally to
the closure of certain under-performing bakery cafes. Before the non-recurring
charges, operating margin decreased in 1996 to 2.0% from 4.1% in 1995, as
operating
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margin improvements at the Saint Louis Bread Co. Division were more than offset
by lower operating margins in the Au Bon Pain Division, driven primarily by
costs associated with the start-up of a new frozen dough manufacturing facility
opened during 1996 in Mexico, Missouri which were approximately $2.1 million.
Operating margin in the Au Bon Pain Division declined by 4.3 points in 1996
versus 1995, due principally to start-up costs and inefficiencies related to the
opening of the new manufacturing facility and significantly higher commodity
costs for butter and flour in 1996 versus the previous year. In total, these
manufacturing related costs constituted the majority of the 2.6 point increase
in cost of food and paper as a percentage of revenues in the Au Bon Pain
Division compared to the prior year. Restaurant operating expenses increased by
.4 points in 1996 versus 1995, as percentage increases in occupancy costs due to
negative leverage stemming from the slight comparable restaurant sales decline
more than offset percentage improvements in both labor costs and controllable
expenses at the retail store level. Depreciation and amortization expense as a
percentage of revenues increased by .4 points in 1996 due to incremental
depreciation related to the new Missouri manufacturing facility and the negative
leverage associated with the comparable restaurant sales decline. General and
administrative expenses as a percentage of revenues increased by .9 points in
1996 versus 1995 due primarily to greater investment in infrastructure in the
international franchise area, information systems and other overhead areas.
At the Saint Louis Bread Co. Division, operating margin improved by 4.8
points in 1996 versus 1995, as the new management team established at the end of
1995 improved operational focus and control throughout 1996 and the
significantly positive comparable restaurant sales increase in 1996 leveraged
many of the largely fixed costs within the operations. Percentage food and paper
costs decreased by .4 points in 1996 compared to 1995, despite higher allocated
costs associated with frozen dough provided by the new manufacturing facility
opened during the year. Percentage restaurant operating expenses decreased by
4.2 points driven by improved management controls surrounding labor costs and
store-level controllable expenses. Depreciation and amortization expense and
general and administrative expenses each decreased by .2 points versus the
previous year due to leverage from the significantly higher sales in 1996.
BENEFIT FROM INCOME TAXES
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company had a benefit from income taxes of $2.8 million, $2.9 million
and $1.5 million for the years ended December 30, 1995, December 28, 1996 and
December 27, 1997, respectively, due to federal and state net operating loss
carryforwards, tax credit carryforwards and the fact that the Company has
incurred net losses. As of December 27, 1997, the Company had federal and state
net operating loss carryforwards of approximately $40.0 million, as well as
approximately $3.1 million of tax credit carryforwards available for income tax
purposes. Approximately $13.1 million of these carryforwards expire in the years
2000-2002, while the remaining $26.9 million expires in the years 2010-2012. For
the year ended December 31, 1997, the Company provided a valuation allowance of
$1.3 million to reduce its deferred tax assets to a level which, more likely
than not, will be realized. The valuation
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allowance is primarily attributable to the potential expiration of charitable
contribution deduction carryforwards and certain state net operating loss
carryforwards. The Company reevaluates the positive and negative evidence
impacting the realization of its deferred tax assets on an annual basis.
NET INCOME (LOSS)
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
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.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Higher operating income in 1997 versus 1996 and deferred tax assets
generated during 1997 from federal net operating loss carryforwards and tax
credit carryforwards (see "Benefit from Income Taxes"), partially offset by
higher interest costs incurred in 1997, produced a significant increase in net
income for the year ended December 27, 1997 versus a net loss of $4.3 million
for the year ended December 28, 1996, which included a non-recurring charge of
$3.8 million.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
The lower operating income in 1996 versus 1995, combined with higher
interest expense and other expenses, resulted in a net loss of $4.4 million in
1996, as compared with a net loss of $1.6 million in 1995. The higher interest
expense was due primarily to higher average long-term debt outstanding, as
higher average interest rate due to the issuance of $15 million senior
subordinated debentures in July, 1996 which carry a significantly higher coupon
rate than the other outstanding long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
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.
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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 Co. Division bakery cafes and commissaries and the remodeling of existing
the Au Bon Pain Division 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 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
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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.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Cash and cash equivalents decreased to $853,000 at December 27, 1997 from
$2.6 million at December 28, 1996. The Company's principal requirements for cash
are capital expenditures for constructing and equipping new bakery cafes and
maintaining or remodeling existing bakery cafes and working capital. To date,
the Company has met its requirements for capital with cash from operations,
proceeds from the sale of equity and debt securities and bank borrowings.
Net cash provided by net income plus depreciation was $17.3 million in 1997
versus $10.3 million in 1996. A total of $13.5 million was provided by operating
activities in 1997 compared to $14.8 million in 1996. In 1997, funds provided by
operating activities were primarily the result of an increase in accrued
expenses, offset by growth in accounts receivable and a decrease in accounts
payable. In 1996, funds provided by operating activities were primarily the
result of an increase in accounts payable and accrued expenses, offset by growth
in accounts receivable and inventories.
The Company utilized $7.7 million and $21.8 million for investing
activities in 1997 and 1996, respectively. The investing activities in 1997
resulted primarily from three transactions. In the third quarter of 1997, the
Company sold its interest in Peet's Coffee and Teas, Incorporated back to Peet's
for $2 million in cash, resulting in a pre-tax gain of $930,000. Also in the
third quarter of 1997, the Company sold a Saint Louis Bread Co. Division cafe
for $1.1 million in cash in conjunction with the execution of a franchise area
development agreement, resulting in a pre-tax gain of $325,000. In the fourth
quarter of 1997 the Company sold its Woburn, MA office building for $4.9 million
in cash, resulting in a gain of $660,000. The pre-tax gains on these
transactions were recognized as a component of other expense, net in the
Company's consolidated financial statements for the year ended December 27,
1997. The Company used the proceeds of $3.3 million from these transactions to
reduce debt during 1997.
Total capital expenditures in 1997 of $14.7 million were related primarily
to the opening of one Au Bon Pain Division and six Saint Louis Bread Co.
Division new Company-
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operated bakery cafes and to the construction of four new local Saint Louis
Bread Co. Division commissaries. The expenditures were mainly funded by net cash
from operating activities of $13.5 million and cash proceeds from the
non-operating transaction described above.
The Company utilized $7.5 million and generated $3.2 million from financing
activities in 1997 and 1996, respectively. The financing activities in 1997 and
1996 resulted primarily from proceeds from and principal payments on long-term
debt, and the issuance of common stock under the Company's employee stock option
and employee stock purchase plans.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements made or incorporated in this Proxy Statement include a number of
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include, without limitation,
statements containing the words "estimates," "projects," "anticipates,"
"believes," "expects," "intends," "future," and words of similar import which
express management's belief, expectations or intentions regarding the Company's
future performance. The Company believes that such statements are protected by
the safe-harbor for forward looking statements contained in the Private
Securities Litigation Reform Act of 1995. The forward-looking statements involve
known and unknown risks and uncertainties. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Additionally, the Company's operating results may be affected by many factors,
including but not limited to, variations in the number and timing of bakery cafe
openings and public acceptance of new bakery cafes, competition and other
factors that may affect retailers in general.
The "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.
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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 store
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 cost 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 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".
-65-
<PAGE> 68
AU BON PAIN CO., INC.
YEAR 2000 SUMMARY FOR IT SYSTEMS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ESTIMATED
ESTIMATED CONTINGENCY CONTINGENCY
AREA/SYSTEM PHASES STATUS TIMETABLE COST PLAN/RISKS COST
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PAYROLL - Software vendor to provide In process 1/99 $ 0 Outsource payroll $100,000
updated Year 2000 compliant processing to third party.
version of currently used This process would begin
software in June 1999 and constitutes
the worst case scenario.
- Review software code to In process 2/99 $60,000
identify non-compliant
components
- Test upgraded software for Upon completion 3/99 $ 0
operational effectiveness of code scan
- Vendor to complete If necessary 3/99 $ 0
remediation
- Remediation Upon completion of 4/99 $ 0
Integration testing
- Implementation Upon completion of 4/99 -
remediation
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL - Software vendor to provide Complete - $ 0 Outsource services to
SYSTEM updated Year 2000 compliant third party. This process
version of currently used would begin June 1999 and
software constitutes the worst case
scenario.
- Review software code to Complete - $60,000 $500,000
identify non-compliant
components
- Test upgraded software for Upon completion of 2/99 $ 0
operational effectiveness code scan
- Implementation Upon completion 4/99 $65,000
code scan
</TABLE>
-66-
<PAGE> 69
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ESTIMATED
ESTIMATED CONTINGENCY CONTINGENCY
AREA/SYSTEM PHASES STATUS TIMETABLE COST PLAN/RISKS COST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NETWORK - Evaluate all individual Complete - $ 0 Many of the subsystems $150,000
INTEGRATION systems for Year 2000 are not critical in day
SYSTEMS compliance to day operations. If not
internal remediation is
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.
- Remediate internally In process 10/99 $100,000
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTER - Upgrade currently used Complete - $ 0 As a remediate software $ 0
SYSTEMS software to be Year currently exists, a contingency
(SAINT LOUIS 2000 compliant plan is not necessary at this
BREAD CO. time.
DIVISION) - Test upgraded software for In progress 3/99 $ 0
operational effectiveness
- Implementation Upon completion of 6/99 $ 60,000
integration testing
- ------------------------------------------------------------------------------------------------------------------------------------
STORE - Upgrade currently used In progress 5/99 $ 0 This is an internally used $150,000
MANAGEMENT software to be reporting software that is
SYSTEMS Year 2000 compliant considered non-critical to
(SAINT LOUIS day to day operations. Year 2000
BREAD CO. - Test upgraded software for Upon completion of 6/99 $ 0 compliant replacement software
DIVISION) operational effectiveness remediation is known to be available and
could be rolled out.
- ------------------------------------------------------------------------------------------------------------------------------------
REGISTER AND - Selection of Replacement Complete - $ 0 As compliant hardware/software $ 0
STORE Hardware/software currently exists, a contingency
MANAGEMENT plan is not necessary at this time.
SYSTEMS
(AU BON PAIN
DIVISION) - Pilot test of new In progress 3/99 The new
hardware/software systems
are
expected
to be
leased
at the
same
annual
cost as
the
current
leased
systems.
- Complete rollout Upon completion 8/99
of Pilot Test
Program
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-67-
<PAGE> 70
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for annual
periods beginning after December 15, 1997 and the Company will adopt its
provisions in fiscal 1998. Reclassifications for earlier periods is required for
comprehensive purposes. Management does not expect the statement to have an
impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting standards ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the manner in which public
companies report information about their operating segments. SFAS No 131 which
is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
geographic locations in which the entity holds assets and reports revenues.
Management is currently evaluating the effects of this change on its reporting
of segment information. The company will adopt SFAS No. 131 for its fiscal year
ending December 26, 1998.
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED MATTERS
(a) MARKET INFORMATION.
The Company's Class A Common Stock is traded on The Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol ABPCA. The following table sets
forth the high and low sale prices as reported by Nasdaq for the fiscal periods
indicated.
1996 HIGH LOW
- ---- ---- ---
First quarter ................ 9-5/16 6-3/4
Second quarter ............... 9 6-7/8
Third quarter ................ 7-1/4 6-1/8
Fourth quarter ............... 8-1/4 5-1/2
1997
- ----
First quarter................. 8-7/16 5-7/8
Second quarter ............... 7-3/8 6
Third quarter ................ 10-1/4 7
Fourth quarter ............... 9-13/16 7-1/4
-68-
<PAGE> 71
1998
- ----
First quarter................. 8-5/8 7-1/2
Second quarter................ 11-5/8 8
Third quarter................. 11-5/8 4-1/4
Fourth quarter................ 7-5/16 4-1/8
On January 11, 1999, the last sale price for the Class A Common Stock, as
reported on the Nasdaq National Market System, was $6.625.
(b) HOLDERS.
On January 11, 1999, the Company had approximately 1,398 holders of record
of its Class A Common Stock and approximately 86 holders of its Class B Common
Stock.
(c) DIVIDENDS.
The Company has never paid cash dividends on its capital stock and has no
intention of paying cash dividends in the foreseeable future.
-69-
<PAGE> 72
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets as of December 28, 1996 and
December 27, 1997..........................................................F-3
Consolidated Statements of Operations for the fiscal years ended
December 30, 1995, December 28, 1996 and December 27, 1997.................F-4
Consolidated Statements of Cash Flows for the fiscal years ended
December 30, 1995, December 28, 1996 and December 27, 1997.................F-5
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 30, 1995, December 28, 1996 and December 27, 1997...........F-7
Notes to Consolidated Financial Statements.................................F-9
Consolidated Balance Sheets as of October 3, 1998 and December 27, 1997....F-25
Consolidated Statements of Operations for the twelve and forty
weeks ended October 3, 1998 and October 4, 1997............................F-26
Consolidated Statements of Cash Flows for the forty weeks
ended October 3, 1998 and October 4, 1997..................................F-27
Notes to Consolidated Financial Statements.................................F-28
F-1
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Au Bon Pain Co., Inc.:
We have audited the accompanying consolidated financial statements and the
financial statement schedules of Au Bon Pain Co., Inc. as of December 27, 1997
and December 28, 1996, and for each of the three fiscal years in the period
ended December 27, 1997. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance as to whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Au Bon Pain Co., Inc. as of December 27, 1997 and December 28, 1996, and the
consolidated results of its operations and cash flows for each of the three
fiscal years in the period ended December 27, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included herein.
/s/ PricewaterhouseCoopers LLP
--------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1998, except for Note 17,
as to which the date is March 23, 1998.
F-2
<PAGE> 74
AU BON PAIN CO., INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Dec. 28, Dec. 27,
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 2,579 $ 853
Accounts receivable, less allowance of $104 and
$134 in 1996 and 1997, respectively .................... 7,730 9,427
Inventories (Note 3) .................................... 8,997 9,117
Prepaid expenses ........................................ 2,353 775
Refundable income taxes ................................. 2,117 596
Deferred income taxes (Note 11) ......................... 488 600
-------- --------
Total current assets ............................... 24,264 21,368
-------- --------
Property and equipment, net (Note 4) ..................... 121,733 112,232
-------- --------
Other assets:
Notes receivable (Note 5) ............................... 2,291 4,743
Intangible assets, net of accumulated amortization
of $4,702 and $6,121 in 1996 and 1997, respectively .... 32,657 31,361
Deferred financing costs ................................ 1,382 953
Deposits and other (Note 12) ............................ 9,110 9,097
Deferred income taxes (Note 11) ......................... 4,991 6,762
-------- --------
Total other assets ................................. 50,431 52,916
-------- --------
Total assets ....................................... $196,428 $186,516
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 11,141 $ 7,071
Accrued expenses (Note 7) ............................... 14,169 13,917
Current maturities of long-term debt (Note 8) ........... 702 438
-------- --------
Total current liabilities .......................... 26,012 21,426
Long-term debt (Note 8) .................................. 49,736 42,527
Convertible subordinated notes (Note 9) .................. 30,000 30,000
-------- --------
Total liabilities .................................. 105,748 93,953
Commitments and contingencies (Notes 8 and 10)
Minority interest ........................................ 624 289
Stockholders' equity (Note 13):
Preferred stock, $.0001 par value:
Class B, shares authorized 2,000,000;
issued and outstanding 20,000 and 0 in
1996 and 1997, respectively ........................... -- --
Common stock, $.0001 par value:
Class A, shares authorized 50,000,000;
issued and outstanding 10,066,671 and
10,187,042 in 1996 and 1997, respectively ............. 1 1
Class B, shares authorized 2,000,000; issued and
outstanding 1,647,354 and 1,610,038 convertible
to Class A, in 1996 and 1997, respectively ............ -- --
Additional paid-in capital .............................. 68,075 68,486
Retained earnings ....................................... 21,980 23,787
-------- --------
Total stockholders' equity ......................... 90,056 92,274
-------- --------
Total liabilities and stockholders' equity ......... $196,428 $186,516
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 75
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
for the fiscal years ended
-----------------------------------
Dec. 30, Dec. 28, Dec. 27,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Restaurant sales ...................... $ 216,411 $ 225,625 $ 233,212
Franchise sales and other
revenues ............................ 10,055 11,309 17,678
--------- --------- ---------
226,466 236,934 250,890
Costs and expenses:
Cost of food and paper products ....... 77,250 85,631 90,385
Restaurant operating expenses:
Labor ............................... 57,860 60,266 63,593
Occupancy ........................... 26,709 28,529 28,514
Other ............................... 27,592 26,569 27,430
--------- --------- ---------
112,161 115,364 119,537
Depreciation and amortization ......... 14,879 16,195 16,861
General and administrative ............ 12,818 14,979 16,418
Non-recurring charge (Note 6) ......... 8,500 4,435 --
--------- --------- ---------
225,608 236,604 243,201
--------- --------- ---------
Operating income ........................ 858 330 7,689
Interest expense, net ................... 3,363 5,140 7,204
Other expense, net (Notes 12 and 15) .... 2,016 2,513 212
Minority interest (income) .............. (94) (40) (42)
--------- --------- ---------
Income (loss) before benefit
from income taxes ..................... (4,427) (7,283) 315
Benefit from income
taxes (Note 11) ....................... (2,813) (2,918) (1,492)
--------- --------- ---------
Net income (loss) ....................... $ (1,614) $ (4,365) $ 1,807
========= ========= =========
Net income (loss) per common share
- basic ................................ $ (.14) $ (.37) $ .15
========= ========= =========
Net income (loss) per common share
- diluted .............................. $ (.14) $ (.37) $ .15
========= ========= =========
Weighted average number of shares
outstanding - basic ................... 11,621 11,705 11,766
========= ========= =========
Weighted average number of shares
outstanding - diluted ................. 11,621 11,705 11,913
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 76
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
for the fiscal years ended
---------------------------------
Dec. 30, Dec. 28, Dec. 27,
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss) ....................... $ (1,614) $ (4,365) $ 1,807
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ......... 14,879 16,195 16,861
Amortization of deferred
financing costs ..................... 77 308 619
Provision for losses on
accounts receivable ................. 73 44 49
Minority interest ..................... (94) (40) (42)
Deferred income taxes ................. (4,234) (430) (1,883)
Non-recurring charge .................. 7,770 4,435 --
Gain on sale of investment ............ -- -- (930)
Gain on sale of property and
equipment ........................... -- -- (986)
Loss on disposal of property and
equipment ........................... 31 -- 308
Changes in operating assets and
liabilities:
Accounts receivable ................... 119 (1,178) (1,747)
Inventories ........................... (1,779) (1,221) (294)
Prepaid expenses ...................... (355) 343 1,514
Refundable income taxes ............... 289 (1,423) 1,521
Accounts payable ...................... (154) 820 (4,070)
Accrued expenses ...................... 771 1,287 769
--------- -------- --------
Net cash provided by operating
activities ........................ 15,779 14,775 13,496
--------- -------- --------
Cash flows from investing activities:
Additions to property and equipment ... (38,650) (17,062) (14,681)
Proceeds from sale of property
and equipment ....................... -- -- 6,044
Proceeds from sale of investment ...... -- -- 2,000
Payments received on notes
receivable .......................... 59 82 139
Increase in intangible assets ......... (50) (73) (122)
Decrease (increase) in deposits
and other ........................... 1,450 (4,321) (1,058)
Increase in notes receivable .......... (951) (475) --
--------- -------- --------
Net cash used in investing
activities ........................ (38,142) (21,849) (7,678)
--------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 77
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
for the fiscal years ended
---------------------------------
Dec. 30, Dec. 28, Dec. 27,
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Exercise of employee stock options .... 241 184 168
Issuance of warrants .................. -- 679 --
Proceeds from long-term debt
issuance ............................ 115,418 87,561 57,530
Principal payments on long-term debt .. (87,713) (83,958) (65,003)
Proceeds from issuance of
common stock ........................ 346 320 243
Increase in deferred financing costs .. (152) (1,211) (189)
Decrease in minority interest ......... (349) (342) (293)
--------- -------- --------
Net cash provided by (used
in) financing activities .......... 27,791 3,233 (7,544)
Net increase (decrease) in cash
and cash equivalents .................... 5,428 (3,841) (1,726)
Cash and cash equivalents, at
beginning of period ..................... 992 6,420 2,579
--------- -------- --------
Cash and cash equivalents, at
end of period ........................... $ 6,420 $ 2,579 $ 853
========= ======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest ............................. $ 4,097 $ 4,637 $ 6,602
Income taxes ......................... $ 1,543 $ 370 $ 700
Satisfaction of Notes Receivable
in exchange for PP&E ................. $ -- $ 356 $ --
Note received from sale of
property and equipment ............... $ -- $ -- $ 2,591
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 78
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
DECEMBER 30, 1995, DECEMBER 28, 1996 AND DECEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
$.0001 Par Value $.0001 Par Value
Class A Class B Class B Additional Total
--------------- --------------- ---------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 26, 1994 9,828 $ 1 1,732 $ - 20 $ - $66,204 $27,959 $94,164
Exercise of employee stock options 45 241 241
Income tax benefit related to
stock option plan 101 101
Issuance of common stock 31 346 346
Conversions of Class B to Class A 25 (25)
Net loss (1,614) (1,614)
------ ----- ------ ----- --- ----- ------- ------- -------
Balance, Dec. 30, 1995 9,929 $ 1 1,707 $ - 20 $ - $66,892 $26,345 $93,238
------ ----- ------ ----- --- ----- ------- ------- -------
Exercise of employee stock options 30 147 147
Income tax benefit related to
stock option plan 37 37
Issuance of common stock 48 320 320
Warrants Issued for debt financing 679 679
Conversions of Class B to Class A 60 (60)
Net loss (4,365) (4,365)
------ ----- ------ ----- --- ----- ------- ------- -------
Balance, Dec. 28, 1996 10,067 $ 1 1,647 $ - 20 $ - $68,075 $21,980 $90,056
------ ----- ------ ----- --- ----- ------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-7
<PAGE> 79
<TABLE>
<CAPTION>
Common Stock Preferred Stock
$.0001 Par Value $.0001 Par Value
Class A Class B Class B Additional Total
--------------- --------------- ---------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of employee stock options 23 152 152
Income tax benefit related to
stock option plan 16 16
Issuance of common stock 40 243 243
Conversions of Class B to Class A 37 (37)
Conversions of preferred stock
to Class A common stock 20 (20)
Net loss 1,807 1,807
------ ----- ------ ----- --- ----- ------- ------- -------
Balance, Dec. 27, 1997 10,187 $ 1 1,610 $ - 0 $ - $68,486 $23,787 $92,274
====== ===== ====== ===== === ===== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-8
<PAGE> 80
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Au Bon Pain Co., Inc. and its subsidiaries operate two retail bakery
cafe businesses and two franchising businesses under the concept names "Au Bon
Pain" and "Saint Louis Bread Co." Certain Saint Louis Bread Co. Division stores
began operating under the name "Panera Bread" during 1997. Included in franchise
sales and other revenues are sales of product to franchisees and others of $7.4
million, $8.3 million and $11.7 million for the fiscal years ended December 30,
1995, December 28, 1996 and December 27,1997, respectively. Included in costs
and expenses are charges related to franchise sales of approximately $1.3
million, $1.9 million and $2.6 million for the fiscal years ended December 30,
1995, December 28, 1996 and December 27, 1997, respectively.
2. Summary of Accounting Policies
Principles of Consolidation
The consolidated statements include the accounts of Au Bon Pain Co.,
Inc., ABP Holdings, Inc., a wholly owned subsidiary, Saint Louis Bread Co., Inc.
("Saint Louis Bread Co."), a wholly owned subsidiary, ABP Midwest Manufacturing,
a wholly owned subsidiary, and investments in joint ventures in which a majority
interest is held (the "Company"). All intercompany balances and transactions
have been eliminated.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain items in the prior year financial statements have been
reclassified to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity
at the time of purchase of three months or less to be cash equivalents.
F-9
<PAGE> 81
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Property, Equipment and Depreciation
Property and equipment are stated at cost Upon retirement or sale,
the cost of assets disposed of and their related accumulated depreciation are
removed from the accounts. Any resulting gain or loss is credited or charged to
operations. Maintenance and repairs are charged to expense when incurred, while
betterments are capitalized. Depreciation is computed over the estimated useful
lives of the assets using the straight-line method. Leasehold improvements are
amortized over the terms of the leases (including available option periods) or
over their useful lives, whichever is shorter. The estimated useful lives used
for financial statement purposes are:
Machinery and equipment 3-10 years
Furniture and fixtures 3-10 years
Leasehold improvements 10-23 years
Signs 10 years
Interest is capitalized in connection with the construction of new
locations or facilities. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest amounted to $792,000, $581,000 and $70,780 in 1995,
1996 and 1997 respectively.
Intangible Assets
Intangible assets consist of goodwill arising from the excess cost
over the value of net assets of joint ventures, businesses and stores acquired,
as well as the original acquisition of the Company. Goodwill is amortized on a
straight-line basis over periods ranging from twenty-five to forty years.
Periodically management assesses, based on undiscounted cash flows, if there has
been a permanent impairment in the carrying value of its intangible assets and,
if so, the amount of any such impairment, by comparing anticipated discounted
future operating income from acquired businesses with the carrying value of the
related intangibles. In performing this analysis, management considers such
factors as current results, trends, future prospects and other economic factors.
Income Taxes
The provision for income taxes is determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred taxes are determined based on the
difference between the financial statements and the tax bases of assets and
liabilities using enacted income tax rates in effect in the years in which the
differences are expected to reverse. The Company's temporary differences consist
primarily of depreciation and amortization and reserves.
F-10
<PAGE> 82
Deferred Financing Costs
Costs incurred in connection with obtaining debt financing are
amortized over the terms of the related debt.
Franchise and Development Fees
Franchise fees are the result of sales of area development rights and
the sale of individual franchise locations to third parties, both domestically
and internationally. Fees from the sale of area development rights are 100%
recognized as revenue upon completion of all commitments related to the
agreements. Fees from the sale of individual franchise locations are 100%
recognized as revenue upon the commencement of franchise operations.
Capitalization of Certain Development Costs
The Company capitalizes certain expenses associated with the
development and construction of new store locations. Capitalized costs of $2.4
million and $2.7 million as of December 28, 1996 and December 27, 1997,
respectively, are recorded as part of the asset to which they relate and are
amortized over the asset's useful life.
Advertising Costs
Advertising costs are expensed when incurred.
Pre-Opening Costs
All pre-opening costs associated with the opening of new retail
locations are expensed when incurred.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December.
Fiscal years for the consolidated financial statements included herein include
52 weeks for the fiscal years ended December 30, 1995, December 28, 1996 and
December 27, 1997.
Income Per Share Data
Earnings per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect, if
any, for common stock equivalents, including stock options, warrants and
preferred stock. Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", requires dual presentation of basic and diluted EPS. SFAS 128 has
been adopted in the Company's 1997 financial statements with comparable
disclosures for the prior year.
F-11
<PAGE> 83
Fair Value of Financial Instruments
The carrying amount of the Company's long term debt, including
current maturities, approximates fair value because the interest rates on these
instruments change with market interest rates. The carrying amounts for accounts
receivable and accounts payable approximate their fair values due to the short
maturity of these instruments.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". This statement requires that changes in comprehensive
income be shown in a financial statement that is displayed with the same
prominence as other financial statements. The statement is effective for annual
periods beginning after December 15, 1997 and the Company will adopt its
provisions in fiscal 1998. Reclassifications for earlier periods is required for
comprehensive purposes. Management does not expect the statement to have a
material impact on its financial position or results of operations.
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 revenues.
Management is currently evaluating the effects of this change on its reporting
of segment information. The company will adopt SFAS No. 131 for its fiscal year
ending December 26, 1998.
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1996 1997
------------ ------------
<S> <C> <C>
Production $3,071 $3,389
Retail stores 1,762 1,680
Paper goods 456 392
Smallwares 3,161 3,008
Other 547 648
------ ------
$8,997 $9,117
====== ======
</TABLE>
F-12
<PAGE> 84
4. Property and Equipment
Major classes of property and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 91,161 $101,619
Machinery and equipment 59,414 63,319
Furniture and fixtures 19,063 18,603
Construction in progress 19,585 1,083
Signage 3,634 3,515
-------- --------
192,857 188,139
Less accumulated depreciation
and amortization 71,124 75,907
-------- --------
Property and equipment, net $121,733 $112,232
======== ========
</TABLE>
In the fourth quarter of 1997, the Company sold its Woburn, MA office
building for $4.9 million in cash, resulting in a gain of $660,000. The gain was
recognized as a component of other expense, net.
In the third quarter of 1997, the Company sold a Saint Louis Bread
Co. Division cafe for $1.1 million in cash in conjunction with the execution of
a franchise area development agreement, resulting in a pre-tax gain of $325,000.
The gain was recognized as a component of other expense, net.
The Company recorded depreciation expense related to these assets of
$13.4 million, $14.7 million and $15.4 million in 1995, 1996 and 1997,
respectively.
5. Notes Receivable
Notes receivable relate to the sale of certain retail locations and
to the funding for the opening of new locations of a franchisee. In the third
quarter of fiscal 1997 the Company franchised 11 of its existing ABP stores in
the Philadelphia market to ABP Delaware Valley LLC. As part of the sale the
Company received a note receivable in the amount of $2.6 million which bears
interest at the rate of 8.25% per annum. There was no gain or loss recognized on
the transaction. The note requires monthly principal and interest payments of
$28,765 commencing in November 1997 which reflect an interest rate of 6.00%. The
difference of 2.25% interest shall accrue with respect to the outstanding
principal amount of this note. Commencing November 4, 1999, ABP Delaware Valley
LLC will make the scheduled payment plus any accrued interest until it is paid
in full. The note matures August 11, 2007.
In addition, the Company holds five additional notes receivable with
two other franchisees with an outstanding principal balance of $2.2 million at
December 27, 1997. These notes bear interest at between 8.00% and 9.25%. Two of
these notes require monthly
F-13
<PAGE> 85
payments while the remaining three notes require payments of interest with a
balloon payment of $1.4 million due in 2004. The notes mature between 2003 and
2004.
6. Non-Recurring Charges
During the third quarter of fiscal 1996, the Company recorded a
non-recurring charge of $4.4 million principally to reflect a write-down under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed
of." SFAS 121, adopted at the beginning of fiscal year 1996, establishes
accounting standards for recognizing and measuring the impairment of long-lived
assets and requires reducing the carrying amount of any impaired asset to fair
value. The charge was taken as a result of continued less than expected
performance results at certain Au Bon Pain Division restaurants. The $4.4
million non-cash charge included a $1.4 million goodwill write-down, a $0.6
million fixed asset write-down and a $1.4 million write-down of an office
building held for resale. The charge represented a reduction of the carrying
amounts of the assets to their estimated fair values as determined by using
discounted estimated future cash flows. In addition, the $4.4 million charge
included a $1.0 million charge to write-down the book value of six restaurants
whose leases expired in 1997 and which were not renewed. For the fifty-two weeks
ended December 28, 1996 and December 27, 1997 the restaurants included in the
reserve had sales of $3,096,000 and $1,559,000, respectively and a pre-tax loss
of $578,000 and $313,000, respectively.
During the third quarter of fiscal 1995, the Company recorded a
non-recurring pre-tax charge of $8.5 million principally to cover the expected
costs of closing certain under-performing restaurants. The components of the
non-recurring charge included cash costs of approximately $2.1 million for lease
obligations, professional and consulting services, employee relocation and
termination costs and non-cash charges of approximately $6.4 million related to
fixed asset disposals. The store closures were completed in fiscal 1996 for a
total cost of approximately $221,000. For the fifty-two weeks ended December 28,
1996 and December 27, 1997 the stores included in the reserve had sales of
$4,247,000 and $0, respectively and a pre-tax loss of $946,000 and $209,000,
respectively.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1996 1997
------------ ------------
<S> <C> <C>
Accrued insurance $ 1,310 $ 1,384
Rent 3,503 3,799
Payroll and related taxes 2,554 2,182
Interest 1,319 1,390
Other 5,483 5,162
------- -------
$14,169 $13,917
======= =======
</TABLE>
F-14
<PAGE> 86
8. Long-term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 28, December 27,
1996 1997
----------- ------------
<S> <C> <C>
Revolving credit line at prime + .5%
(9.00% at December 27, 1997) $22,000 $18,326
Term loan - variable rate 3,533 -
Industrial development bond for
Mexico, Missouri plant at weekly
floating rate (4.25% at
December 27, 1997) 8,300 7,900
Loan at prime less .75%
(7.75% at December 27, 1997) 2,000 2,000
Term loan at 7.0% payable in
annual installments of $50,000
including interest, due January 2001 205 169
Senior Subordinated Debenture (13.00%
at December 27, 1997) 14,400 14,570
------- -------
Total debt 50,438 42,965
Less current maturities 702 438
------- -------
Total long-term debt $49,736 $42,527
======= =======
</TABLE>
As of both December 28, 1996 and December 27, 1997, the Company had a
$28 million unsecured revolving line of credit. The revolving credit agreement
contains restrictions relating to future indebtedness, liens, investments,
distributions, the merger, acquisition or sale of assets and certain leasing
transactions. The agreement also requires the maintenance of certain financial
ratios and covenants, the most restrictive being a debt to net worth ratio.
There is a fee of 3/8% of the unused portion of the revolving line of credit.
Available unused borrowings totaled approximately $5.1 million at December 28,
1996 and $8.5 million at December 27, 1997. At December 28, 1996 and December
27, 1997 the Company had outstanding letters of credit against the revolving
line of credit aggregating $0.9 million and $1.2 million, respectively. Interest
is calculated on the $3.5 million term loan at the lower of prime plus .5% or
LIBOR plus an amount ranging from 1.25% to 3.0% depending on certain financial
tests. Interest-only payments are due under the revolving credit line monthly,
in arrears, with principal balance payable at maturity September 30, 1999.
In March 1995, the Company signed a note for the purpose of
purchasing a building in Woburn, MA. The Company had originally planned to move
their corporate offices to this location. Principal and interest on the note
were paid quarterly, with interest being calculated based on the applicable
Eurodollar rate plus .75%. Under the term loan, the Company had the right, at
its election, to repay the outstanding amount as a whole or in part, at any time
F-15
<PAGE> 87
without penalty or premium. The Company sold the building in December of 1997
and retired the note which had a balance of $3.2 million.
In July, 1995 the Company obtained an industrial development bond
issued by the City of Mexico, Missouri, secured by a $8.7 million letter of
credit with a commercial bank. The bond matures in July, 2000 and interest is
payable monthly at a weekly floating rate, which was 4.25% on December 27, 1997.
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 from 11.25% to 14.0%. In connection
with the private placement, warrants with an exercise price of $5.62 per share
were issued to purchase between 400,000 and 580,000 shares of the Company's
Class A Common Stock, depending on the term which the debentures remain
outstanding and certain future events. At December 27, 1997, 400,000 warrants
were issued and outstanding, all of which were vested.
The Company has recognized interest expense of $3.4 million, $5.1
million and $7.2 million as of December 30, 1995, December 28, 1996, and
December 27, 1997, respectively.
The Company is prohibited from paying dividends based on the terms
and conditions to the Revolving Line of Credit Agreement.
Maturities of debt outstanding at December 27, 1997 (including the
convertible subordinated notes) are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 438
1999 20,867
2000 15,013
2001 30,447
2002 500
Thereafter 5,700
-------
$72,965
=======
</TABLE>
9. Convertible Subordinated Notes
In December 1993, the Company issued $30.0 million of its unsecured
4.75% Convertible Subordinated Notes due 2001 ("1993 Notes"). The 1993 Notes are
convertible at the holders' option into shares of the Company's Class A Common
Stock at $25.50 per share. In December 1997, the Company could have, at its
option, redeemed all or a part of the outstanding 1993 Notes upon payment of a
premium. The Company did not redeem all or part of the outstanding notes. The
note agreement requires the Company to maintain minimum permanent capital, as
therein defined.
F-16
<PAGE> 88
10. Commitments
The Company is obligated under noncancelable operating leases for a
production facility, a commissary and retail stores. Lease terms are generally
for ten years with renewal options at certain locations and generally require
the Company to pay a proportionate share of real estate taxes, insurance, common
area and other operating costs. Substantially all store leases provide for
contingent rental payments based on sales in excess of specified amounts.
Aggregate minimum requirements under these leases are, as of
December 27, 1997, approximately as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 20,047
1999 18,473
2000 17,217
2001 15,010
2002 12,914
Thereafter 40,907
--------
$124,568
========
</TABLE>
Rental expense under long-term leases was approximately $22.3
million, $29.3 million and $24.5 million in 1995, 1996 and 1997, respectively,
which included contingent rentals of approximately $2.9 million, $3.0 million
and $3.0 million, respectively.
11. Income Taxes Payable
The benefit from income taxes in the consolidated statements of
operations is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 30, December 28, December 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 1,202 $(1,650) $ 259
State 219 (838) 132
------- ------- -------
1,421 (2,488) 391
------- ------- -------
Deferred:
Federal (3,597) (365) (1,433)
State (637) (65) (450)
------- ------- -------
(4,234) (430) (1,883)
------- ------- -------
Total benefit from income taxes $(2,813) $(2,918) $(1,492)
======= ======= =======
</TABLE>
F-17
<PAGE> 89
A reconciliation of the statutory federal income tax rate and the
effective tax rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Statutory rate (benefit) (34.0)% (34.0)% 34.0%
State income taxes, net of
federal tax benefit (4.0) 2.2 (432.8)
Utilization of tax credits (2.8) - -
Charitable contributions (4.0) (3.7) (89.9)
Company-owned Life Insurance (See Note 12) (28.8) (15.4) (451.0)
Non-deductible goodwill and meals
and entertainment 5.7 9.1 51.0
Other, net 4.3 1.8 (.4)
Change in valuation allowance - - 415.4
----- ----- ------
(63.6)% (40.0)% (473.7)%
===== ===== ======
</TABLE>
The tax effects of the significant temporary differences which
comprise the deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Receivables reserve $ 42 $ 56
Accrued expenses 368 544
Other reserves 78 -
------- -------
488 600
Non-current assets/liabilities:
Property, plant and equipment 799 443
Accrued expenses 1,073 1,135
Goodwill (1,325) (1,648)
Tax credit carried forward 2,862 3,368
Net operating loss carried forward 1,363 4,484
Charitable contribution carried forward 219 296
Other reserves - (8)
------- -------
4,991 8,070
Total deferred tax asset 5,479 8,670
Valuation allowance - (1,308)
------- -------
Total net deferred tax asset $ 5,479 $ 7,362
======= =======
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets
to a level which, more likely than not, will be realized. The valuation
allowance is primarily attributable to the potential expiration of charitable
contribution deduction carryforwards and certain state net operating loss
carryforwards. The Company estimates that after filing its federal income tax
returns for the year ended December 27, 1997, it will have net operating losses
of
F-18
<PAGE> 90
$5,844,000 which can be carried forward from thirteen to fifteen years to offset
Federal taxable income. The Company also estimates that after filing its state
income tax returns for the year ended December 27, 1997 it will have state net
operating losses of $13,142,000 which can be carried forward from three to five
years and $20,693,000 which can be carried forward from thirteen to fifteen
years to offset state taxable income. The Company has Federal jobs tax credit
carryforwards of approximately $594,000 which expire in twelve to thirteen
years. In addition, the Company has Federal alternative minimum tax credit
carryforwards of approximately $2,499,000 which are available to reduce future
regular Federal income taxes over an indefinite period. The Company reevaluates
the positive and negative evidence impacting the realizability of its deferred
income tax assets on an annual basis.
12. Deposits and Other
During fiscal 1997, the Company established a $4.3 million deposit
with its distributor. This financial arrangement allows the Company to receive
lower distribution costs. The savings exceed the carrying value of the deposit.
The deposit is flexible and the Company may at times decrease the amount on
deposit, at its discretion.
In the third quarter of 1997, the Company sold its interest in Peet's
Coffee and Teas, Incorporated back to Peet's for $2 million in cash, resulting
in a pre-tax gain of $930,000. The gain was recognized as a component of other
expense, net.
During fiscal year 1994, the Company established a company-owned life
insurance program ("COLI") covering a substantial portion of its employees. At
December 27, 1997, the cash surrender value and prepaid premiums of $75.9
million and the insurance policy loans of $74.8 million were netted and included
in other assets on the consolidated balance sheet. The loans are collateralized
by the cash values of the underlying life insurance policies and require
interest payments at a rate of 10.3%. Tax law changes adopted as part of the
Health Insurance Portability and Accountability Act significantly reduced the
level of tax benefits recognized under the Company's COLI program in the third
quarter of 1996. The Company included $.5 million of expenses in other (income)
expense, net, relating to COLI in 1997.
13. Stockholders' Equity
Class B Preferred Stock
In April 1994, the Company issued 20,000 shares of Class B Preferred
Stock (Series 1) as part of the ABP Midwest acquisition. In 1997 these shares
were converted to Class A Common Stock.
Common Stock
Each share of Class B Common Stock has the same dividend and
liquidation rights as each share of Class A Common Stock. The holders of Class B
Common Stock are entitled to three votes for each share owned. The holders of
Class A Common Stock are entitled to one
F-19
<PAGE> 91
vote for each share owned. Each share of Class B Common Stock is convertible, at
the shareholder's option, into Class A Common Stock on a one-for-one basis. The
Company had reserved at December 27, 1997, 7,589,719 shares of its Class A
Common Stock for issuance upon conversion of Class B Common Stock and exercise
of awards granted under the Company's 1992 Equity Incentive Plan, Formula Stock
Option Plan for Independent Directors and conversion of the 1993 Notes (see
Note 9).
Registration Rights
Certain holders of Class A and Class B Common Stock, pursuant to
stock subscription agreements, can require the Company, under certain
circumstances, to register their shares under the Securities Act of 1933 or have
included in certain registrations all or part of such shares, at the Company's
expense.
1992 Equity Incentive Plan
In May 1992, the Company adopted its Equity Incentive Plan ("Equity
Plan") to replace its Non-Qualified Incentive Stock Option Plan. Under the
Equity Plan, a total of 950,000 shares of Class A Common Stock was initially
reserved for awards under the Equity Plan. The Equity Plan was amended by the
Board of Directors and the stockholders in May 1994 and June 1997 to increase
the number of shares available thereunder from 950,000 to 2,500,000, and from
2,500,000 to 4,300,000 respectively. Awards under the Equity Plan can be in the
form of stock options (both qualified and non-qualified), stock appreciation
rights, performance shares, restricted stock or stock units.
Activity under the Equity Plan and its predecessor is summarized
below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding at December 31, 1994 1,407,313 $18.50
Granted 1,543,052 $ 7.47
Exercised (45,425) $ 5.30
Canceled (1,473,503) $17.88
----------- ------
Outstanding at December 30, 1995 1,431,437 $ 7.32
Granted 742,345 $ 7.67
Exercised (30,200) $ 4.87
Canceled (211,548) $ 7.92
----------- ------
Outstanding at December 28, 1996 1,932,034 $ 7.42
Granted 1,226,169 $ 7.49
Exercised (23,148) $ 6.56
Canceled (143,537) $ 8.05
----------- ------
Outstanding at December 27, 1997 2,991,518 $ 7.44
========== ======
</TABLE>
Options vest over a five year period and must be exercised within ten
years from the date of the grant. Of the options at December 27, 1997, 1,168,134
were vested and exercisable.
F-20
<PAGE> 92
Formula Stock Option Plan for Independent Directors
On January 27, 1994, the Company's Board of Directors authorized the
Formula Stock Option Plan for Independent Directors, as defined in the
agreement. This plan authorized a one-time grant of an option to purchase 10,000
shares of the Company's Class A Common Stock at its closing price on January 26,
1994. The plan also allows for independent directors elected after that time to
receive a similar option at the closing price for the day immediately preceding
the individual's election to the board.
Each independent director who is first elected as such after the
effective date of the Directors' Plan shall receive, as of the date he or she is
so elected, a one-time grant of an option to purchase 5,000 shares of Class A
Common Stock at a price per share equal to the closing price of the Class A
Common Stock as reported by the NASDAQ/National Market System for the trading
day immediately preceding the date of the person's election to the board.
In addition, all independent directors serving in such capacity as of
the last day of each fiscal year commencing with the fiscal year ending December
31, 1994 receive an option to purchase 5,000 shares of Class A Common Stock at
the closing price for the prior day.
Each option granted is fully vested at the grant date, and is
exercisable, either in whole or in part, for 10 years following the grant date.
The Company has granted 113,248 options under this plan as of December 27, 1997.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation", which is effective for the Company's financial
statements for fiscal years beginning after December 15, 1995. SFAS 123 allows
companies to either account for stock-based compensation under the new
provisions of SFAS 123 or under the provisions of Accounting Principles Board
Opinion No. 25 ("APB25"), "Accounting for Stock Issued to Employees", but
requires pro-forma disclosure in the footnotes to the financial statements as if
the measurement provisions of SFAS 123 had been adopted. The Company has elected
the disclosure-only alternative and, accordingly, no compensation costs have
been recognized for the stock option plans. Had compensation costs for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1995 and 1996 consistent with the provisions of
SFAS 123, the Company's net loss for the years ended December 28, 1996 and
December 27, 1997 would have been increased to the pro forma amounts indicated
below:
F-21
<PAGE> 93
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------- -------------------------- ---------------------------
Net Loss Net Loss Net Loss Net Loss Net Income Net Income
(in thousands) Per Share (in thousands) Per Share (in thousands) Per Share
<S> <C> <C> <C> <C> <C> <C>
As Reported $(1,614) $(.14) $(4,365) $(.37) $1,807 $.15
Pro Forma $(1,819) $(.16) $(4,965) $(.42) $ 953 $.08
</TABLE>
The effects of applying SFAS 123 in this pro-forma disclosure are not
likely to be representative of the effects on reported net income for future
years. SFAS 123 does not apply to awards prior to 1995 and additional awards in
future years are anticipated.
The fair value of the options granted during 1995, 1996 and 1997 is
$3.20 per share, $3.46 per share and $3.69 per share, respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 35% in 1995 and 1996 and 40% in
1997, risk-free interest rate of 6.14% in 1995, 5.99% in 1996 and 6.38% in 1997,
and an expected life of 6 years.
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Price Exercisable Price
- ------------ ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 4.50- 6.75 259,013 6.13 $ 6.16 141,780 $ 6.04
$ 6.75-10.13 2,711,240 8.20 $ 7.51 1,020,003 $ 7.32
$10.13-15.19 20,089 8.36 $13.07 5,812 $12.91
$15.19-21.25 1,176 6.92 $21.25 539 $23.16
--------- ---- ------ --------- ------
2,991,518 7.93 $ 7.44 1,168,134 $ 7.20
</TABLE>
1992 Employee Stock Purchase Plan
In May 1992, the Company adopted its 1992 Employee Stock Purchase
Plan ("1992 Purchase Plan") to replace its Employee Stock Purchase Plan. The
1992 Purchase Plan was amended in June 1997 by the Board of Directors and
Stockholders to increase the number of shares of Class A Common Stock reserved
for issuance from 150,000 to 350,000. The 1992 Purchase Plan gives eligible
employees the option to purchase Class A Common Stock (total
F-22
<PAGE> 94
purchases in a year may not exceed 10% of an employee's prior year compensation)
at 85% of the fair market value of the Class A Common Stock at the date of
purchase.
14. Employee Benefit Plans
Employee Savings Plan
The Au Bon Pain Employee 401(k) Plan ("Savings Plan") was adopted by
the Company in 1991 under Section 401(k) of the Internal Revenue Code of 1986,
as amended. All employees of the Company, including executive officers, are
eligible to participate in the Savings Plan. A participating employee may elect
to defer on a pre-tax basis up to 15% of his or her salary. This amount is
contributed to the Savings Plan. All amounts vest immediately and are invested
in various funds as directed by the participant. The full amount in a
participant's account will be distributed to a participant upon termination of
employment, retirement, disability or death. The Company does not currently
contribute to the Savings Plan.
The Saint Louis Bread Co. Division Employee 401(k) Plan ("Saint Louis
Bread Co. Division Savings Plan") adopted by the former Saint Louis Bread Co.
Division in 1993 under Section 401(k) of the Internal Revenue Code of 1986, as
amended. In 1997 the "Saint Louis Bread Co. Division Savings Plan" was merged
into the Au Bon Pain "Savings Plan". Plan participants of the "Saint Louis Bread
Co. Division Savings Plan" retained the matching contributions made through 1996
with a vesting schedule of seven years. There has been no further matching as of
December 27, 1997.
15. Legal Proceedings
During the third quarter of 1997, the Company entered into a
definitive agreement to settle a lawsuit filed by a former vendor of the
Company. The Company recognized a charge of $675,000 in the third quarter of
1997 as a component of other expense (income), net, to cover the settlement and
other expenses incurred in connection therewith.
16. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
For the fiscal years ended
----------------------------------
Dec. 30, Dec. 28, Dec. 27,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) used in net
income (loss) per common
share - basic $ (1,614) $ (4,365) $ 1,807
Net income (loss) used in net
income (loss) per common
share - diluted $ (1,614) $ (4,365) $ 1,807
</TABLE>
F-23
<PAGE> 95
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Weighted average number of
shares outstanding - basic 11,621 11,705 11,766
Effect of dilutive securities:
Employee stock options - - 42
Stock warrants 106
-------- -------- -------
Weighted average number of
shares outstanding - diluted 11,621 11,705 11,914
Net income (loss) per common
share - basic $ (0.14) $ (0.37) $ 0.15
Net income (loss) per common
share - diluted $ (0.14) $ (0.37) $ 0.15
</TABLE>
During 1995, 1996 and 1997, 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 (see Note 9). These
shares were not included in the computation of diluted earnings per share for
the fiscal years ended December 30, 1995, December 28, 1996 or December 27, 1997
because the addition of interest expense, after the effect of income taxes, of
$855,000 to net income (loss) would have been antidilutive.
During 1995 and 1996, options to purchase 422,080 and 248,450 shares
of common stock at an average price of $6.69 and $5.77 per share, respectively,
and warrants to purchase 0 and 96,000 shares of common stock at $5.62 per share
were outstanding but were not included in the computation of diluted earnings
per share for the fiscal years ended December 30, 1995 or December 28, 1996
because the effect would have been antidilutive.
17. Subsequent Event
On March 23, 1998 the Company sold the Mexico, MO production facility
and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash. In conjunction with the sale, the Au Bon Pain
Division and the Saint Louis Bread Co. Division entered into five year supply
agreements with Bunge for the supply of substantially all their frozen dough
needs, excluding bagels, in their domestic bakery cafes. The Company expects the
supply agreements will result in an improved operating margin of approximately
.5% of total revenues, along with reduced interest expense. The net proceeds of
the sale were used to reduce the $7.9 million outstanding for the Industrial
Revenue Bond and $4.9 million for a permanent reduction to the revolving credit
line. This reduction of the revolving credit line reduced the total commitment
of the Banks in the Credit Agreement so that the amount available under the
revolving credit line decreased to $23.1 million from $28 million (see Note 8).
In addition, approximately $2 million of related receivables at December 27,
1997 will be used to further reduce debt. The Company expects to recognize a
pre-tax loss on the sale of the facility of approximately $700,000 in the
Company's results of operations for the first quarter of 1998. There were no
gains or losses associated with the early retirement of the Industrial Revenue
Bond or the partial repayment of the revolving credit line.
F-24
<PAGE> 96
AU BON PAIN CO., INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, December 27,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
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 ................ 0 42,526,752
Convertible Subordinated Notes ......................... 0 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.
F-25
<PAGE> 97
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............ 0 - 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.
F-26
<PAGE> 98
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.
F-27
<PAGE> 99
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 .................... -- 229,013 -- 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>
F-28
<PAGE> 100
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 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, 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
F-29
<PAGE> 101
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 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.
F-30
<PAGE> 102
ANNEX A
EXECUTION COPY
================================================================================
STOCK PURCHASE AGREEMENT
DATED AUGUST 12, 1998
BY AND AMONG
AU BON PAIN CO., INC.
ABP HOLDINGS, INC.
AND
ABP CORPORATION
================================================================================
A-1
<PAGE> 103
TABLE OF CONTENTS
ARTICLE I......................................................................4
DEFINITIONS................................................................4
Section 1.01 DEFINITIONS............................................4
ARTICLE II.....................................................................8
TRANSACTIONS AND CLOSING...................................................8
Section 2.01 CLOSING TRANSACTIONS...................................8
Section 2.02 FORM AND PAYMENT OF PURCHASE PRICE.....................8
Section 2.03 PURCHASE PRICE ADJUSTMENTS.............................8
Section 2.04 CLOSING...............................................10
Section 2.05 UNASSIGNED STORE LEASES...............................10
Section 2.06 SPECIAL PROVISIONS FOR CERTAIN LEASES.................11
ARTICLE III...................................................................12
REPRESENTATIONS AND WARRANTIES OF THE SELLER..............................12
Section 3.01 ORGANIZATION AND GOOD STANDING........................12
Section 3.02 CAPITAL STOCK/SUBSIDIARIES AND AFFILIATES.............12
Section 3.03 EXECUTION AND EFFECT OF AGREEMENT.....................13
Section 3.04 CONSENTS..............................................13
Section 3.05 ABP DIVISION FINANCIAL STATEMENTS.....................13
Section 3.06 LAWSUITS AND PROCEEDINGS..............................14
Section 3.07 COMPLIANCE WITH LAWS..................................14
Section 3.08 LICENSES AND PERMITS..................................14
Section 3.09 INSURANCE.............................................14
Section 3.10 AGREEMENTS............................................14
Section 3.11 TAXES.................................................15
Section 3.12 BANKS.................................................16
Section 3.13 CLAIMS OF EMPLOYEES, DIRECTORS, AND OFFICERS..........16
Section 3.14 AFFILIATE TRANSACTIONS................................16
Section 3.15 INTELLECTUAL PROPERTY.................................16
Section 3.16 EXTRAORDINARY TRANSACTIONS............................17
Section 3.17 ACCOUNTS RECEIVABLE...................................17
Section 3.18 BROKER AND FINDER FEES................................17
Section 3.19 EMPLOYEES.............................................17
Section 3.20 EMPLOYMENT MATTERS....................................17
Section 3.21 EMPLOYEE BENEFIT MATTERS..............................18
Section 3.22 ENVIRONMENTAL MATTERS.................................19
Section 3.23 REAL PROPERTY.........................................19
Section 3.24 TITLE TO ASSETS.......................................20
ARTICLE IV....................................................................20
REPRESENTATIONS AND WARRANTIES OF BUYER...................................20
Section 4.01 ORGANIZATION AND GOOD STANDING........................20
Section 4.02 EXECUTION AND EFFECT OF AGREEMENT.....................20
Section 4.03 RESTRICTIONS..........................................21
Section 4.04 CONSENTS..............................................21
Section 4.05 LAWSUITS AND PROCEEDINGS..............................21
Section 4.06 BROKER AND FINDER FEES................................21
Section 4.07 FINANCING AND NET WORTH...............................21
Section 4.08 ACKNOWLEDGEMENT OF CERTAIN SAINT LOUIS
BREAD PROPRIETARY RIGHTS..............................21
ARTICLE V.....................................................................22
A-2
<PAGE> 104
COVENANTS OF THE SELLER...................................................22
Section 5.01 CONDUCT OF BUSINESS OF SELLER.........................22
Section 5.02 ACCESS TO INFORMATION.................................24
Section 5.03 RESOLUTION OF AFFILIATED TRANSACTIONS.................24
Section 5.04 TRANSFER OR ENCUMBRANCE OF THE ABPH COMMON STOCK......24
Section 5.05 NON-SOLICITATION OF EMPLOYEES.........................25
Section 5.06 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES......25
Section 5.07 CHANGE OF CORPORATE NAME..............................25
ARTICLE VI....................................................................25
COVENANTS OF BUYER AND SELLER.............................................25
Section 6.01 SELLER CONSENTS.......................................25
Section 6.02 BUYER CONSENTS........................................26
Section 6.03 STOCKHOLDERS'MEETING..................................26
Section 6.04 BUYER'S FINANCING.....................................26
ARTICLE VII...................................................................27
OTHER COVENANTS OF THE PARTIES...........................................27
Section 7.01 FURTHER ASSURANCES....................................27
Section 7.02 CERTAIN FILINGS; CONSENTS.............................27
Section 7.03 PUBLIC ANNOUNCEMENTS..................................27
Section 7.04 H-S-R ACT.............................................28
Section 7.05 POST-CLOSING RESTRICTIVE COVENANTS....................28
Section 7.06 BUYER EMPLOYEE COVENANTS..............................28
Section 7.07 SELLER EMPLOYEE COVENANT..............................29
Section 7.08 TRANSITION SERVICES AGREEMENT.........................29
ARTICLE VIII..................................................................29
CONDITIONS TO CLOSING.....................................................29
Section 8.01 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY...........29
Section 8.02 CONDITIONS TO OBLIGATIONS OF THE SELLER...............30
Section 8.03 CONDITIONS TO OBLIGATION OF BUYER.....................30
ARTICLE IX....................................................................32
SURVIVAL; INDEMNIFICATION.................................................32
Section 9.01 SURVIVAL..............................................32
Section 9.02 INDEMNIFICATION.......................................32
Section 9.03 PROCEDURES............................................32
Section 9.04 DEDUCTIBLE AMOUNT.....................................34
ARTICLE X.....................................................................36
TERMINATION...............................................................36
Section 10.01 TERMINATION...........................................36
Section 10.02 EFFECT OF TERMINATION.................................37
ARTICLE XI....................................................................38
MISCELLANEOUS.............................................................38
Section 11.01 NOTICES...............................................38
Section 11.02 AMENDMENTS; WAIVERS...................................39
Section 11.03 EXPENSES..............................................39
Section 11.04 SUCCESSORS AND ASSIGNS................................39
Section 11.05 CONSTRUCTION..........................................39
Section 11.07 GOVERNING LAW.........................................40
Section 11.08 COUNTERPARTS; EFFECTIVENESS...........................40
Section 11.09 JURISDICTION..........................................40
Section 11.10 SPECIFIC PERFORMANCE..................................40
Section 11.11 CAPTIONS..............................................40
A-3
<PAGE> 105
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (together with the Schedules and
Attachments hereto, this "AGREEMENT") is made as of the 12th day of August,
1998, by and among AU BON PAIN CO., INC., a Delaware corporation ("SELLER"); ABP
HOLDINGS, INC., a Delaware corporation ("ABPH") and ABP CORPORATION, a Delaware
corporation ("BUYER").
W I T N E S S E T H:
WHEREAS, Seller is the owner, operator and franchisor of a certain
bakery/cafe food service business concept generally known as Au Bon Pain (the
"AU BON PAIN DIVISION"); and
WHEREAS, in connection with and in contemplation of the stock
transfer described below, Seller shall be transferring to ABPH, pursuant to a
contribution agreement in form mutually satisfactory to Buyer and Seller and
consistent with the Restructuring described herein, substantially all of the
operating assets, store leases, contracts and liabilities associated with its Au
Bon Pain Division to ABPH; and
WHEREAS, Seller owns 100% of the issued and outstanding capital stock
of ABPH, free and clear of any and all "Encumbrances" (as that term is defined
in Section 1.01); and
WHEREAS, Seller desires to transfer, sell and convey to Buyer all of
Seller's capital stock of ABPH, and Buyer desires to purchase, buy and acquire
all of the issued and outstanding capital stock of ABPH, upon the terms and
subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 DEFINITIONS.
(a) The following terms have the following meanings:
"AFFILIATE" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person. For purposes of determining whether a Person is an Affiliate, the term
"control" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of securities, by virtue of the office held by such
Person, by contract or otherwise.
"AFFILIATED GROUP" means any affiliated group within the meaning of
Tax Code Section 1504(a) or any similar group defined under a similar provision
of state, local or foreign law.
"APPLICABLE LAW" means, with respect to any Person, any domestic or
foreign, federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, writ, injunction, directive, judgment, decree
or other requirement of any Governmental Authority (including any Environmental
Law and building and zoning laws, ordinances, rules and regulations) applicable
to such Person or any of their respective properties, assets, officers,
directors, employees, consultants or agents (in connection with such officer's,
director's, employee's, consultant's or agent's activities on behalf of such
Person).
"ABPH" means ABP Holdings, Inc. a Delaware corporation.
A-4
<PAGE> 106
"ABPH COMMON STOCK" shall mean all of the issued and outstanding
Common Stock, par value $.0001 per share, of ABPH as of the Closing, which
Common Stock shall constitute 100% of the issued and outstanding capital stock
of ABPH.
"BENEFIT PLAN" means any qualified or non-qualified Employee Pension
Benefit Plan (including a Multiemployer Plan), Employee Welfare Benefit Plan or
fringe benefit plan, program, policy or arrangement, regardless of whether
funded or subject to ERISA.
"BUSINESS" means the particular business conducted by each of the Au
Bon Pain Division of the Seller and/or ABPH, respectively, as of the date of
this Agreement.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day
on which commercial banks in Boston, Massachusetts are authorized or required by
law to close.
"BUYER" shall mean ABP Corporation, a Delaware corporation.
"CONTROLLED GROUP OF COMPANIES" shall have the meaning set forth in
Section 414 of the Tax Code.
"DAMAGES" means all demands, claims, actions or causes of action,
assessments, losses, damages, costs, expenses, liabilities, judgments, awards,
fines, sanctions, penalties, charges and amounts paid in settlement, including,
without limitation, reasonable costs, fees and expenses of attorneys, experts,
accountants, appraisers, consultants, witnesses, investigators and any other
agents or representatives of such Person (with such amounts to be determined net
of any resulting tax benefit and net of any refund or reimbursement by way of
insurance or third party indemnification). Any provision hereof to the contrary
notwithstanding, Damages shall not include any demands, claims, actions or
causes of action, assessments, losses, damages, costs, expenses, liabilities,
judgments, awards, fines, sanctions, penalties, or charges that are not
reasonably foreseeable or that represent lost profits, opportunities or
expectancies.
"EMPLOYEE PENSION BENEFIT PLAN" shall have the meaning set forth in
Section 3(2) of ERISA.
"EMPLOYEE WELFARE BENEFIT PLAN" shall have the meaning set forth in
Section 3(1) of ERISA.
"ENCUMBRANCES" means all liens (including, but not limited to, tax
liens), security interests, charges, pledges, encumbrances, mortgages, claims or
rights, restrictions on transfer or other alienation of rights of any kind,
nature or description whatsoever.
"ENVIRONMENTAL LAWS" means any and all past, present or future
federal, state, local and foreign statutes, laws, regulations, ordinances,
judgments, orders, codes, or injunctions, which impose liability for or
standards of conduct concerning the manufacture, processing, generation,
distribution, use, treatment, storage, disposal, cleanup, transport or handling
of Hazardous Substances including, the Resource Conservation and Recovery Act of
1976, as amended, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, the Superfund Amendment and Reauthorization
Act of 1984, as amended, the Toxic Substances Control Act, as amended, and any
other so-called "Superfund" or "Superlien" law.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and any regulations thereunder.
"FUNDED DEBT" means the sum of, as of the date of determination, the
total amount of all obligations due under indebtedness for borrowed money and
capitalized leases (as determined in accordance with GAAP) of the Au Bon Pain
Division, including, without limitation, all principal, interest, premiums,
penalties, breakage costs, indemnities, expense reimbursements and overdrafts
due thereunder.
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"GAAP" means Generally Accepted Accounting Principles as in effect on
the date of the Agreement, consistently applied.
"GOVERNMENTAL AUTHORITY" means any foreign, domestic, federal,
territorial, state or local governmental authority, quasi-governmental
authority, instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.
"HAZARDOUS SUBSTANCES" means substances defined as "hazardous
substances," "hazardous materials" or "hazardous waste" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
the Resource Conservation and Recovery Act of 1976, as amended, those substances
defined as "hazardous wastes" in the regulations adopted and publications
promulgated pursuant to said laws, those substances defined as "pollutants"
pursuant to the Federal Water Pollution and Control Act, as amended, those
substances defined as "toxic substances" in the Toxic Substances Control Act, as
amended, and petroleum, its derivatives and petroleum products.
"H-S-R ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and all regulations promulgated thereunder.
"INTELLECTUAL PROPERTY" means patents, copyrights, trademarks, trade
names, service marks, service names, logos, technology, know-how, processes,
trade secrets, inventions, proprietary data, formulae, research and development
data, computer software programs and other intellectual property and licenses,
registrations and applications for the same.
"1933 ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"MULTIEMPLOYER PLAN" shall have the meaning set forth in Section
3(37) of ERISA.
"PERSON" means an individual, a corporation, a general partnership, a
limited partnership, a limited liability company, an association, a trust or any
other entity or organization, including a government or political subdivision or
an agency or instrumentality thereof.
"PURCHASE PRICE" means Seventy-Eight Million Dollars ($78,000,000),
as adjusted pursuant to Article II.
"SEC" means the Securities and Exchange Commission.
"RETURN" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"SELLER" shall mean Au Bon Pain Co., Inc., a Delaware corporation.
"TAX CODE" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"TRANSACTION DOCUMENTS" means this Agreement and any exhibits,
schedules or attachments thereto, as the same may be amended from time to time,
and all other agreements, instruments and documents that may be executed and
delivered in connection with the transactions contemplated by this Agreement.
(b) "TO THE KNOWLEDGE," "KNOWN BY" or "KNOWN" (and any similar
phrase) means (i) with respect to Buyer, the actual knowledge of any of its
directors, executive officers, including its Chairman, President, Chief
Executive Officer and Chief Financial Officer, and shall be deemed to include a
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representation that a reasonable investigation or inquiry of such subject matter
thereof has been conducted by one of the specified Persons; and (ii) with
respect to Seller, the actual knowledge of any of the directors, either of its
Co-Chairmen, the President of the Au Bon Pain Division, its Chief Executive
Officer and Chief Financial Officer and the following executive officers of
Seller: Thomas R. Howley (Vice President and General Counsel), and shall be
deemed to include a representation that a reasonable investigation or inquiry of
the subject matter thereof has been conducted by one of the specified Persons.
(c) Each of the following terms is defined in the Section set
forth opposite such term:
TERM LOCATION
---- --------
"Agreement" Preamble
"Alternative Transaction" Section 10.01(d)
"BRS" Section 4.07
"Benefit Plans" Section 3.21
"Closing" Section 2.04
"Closing Date" Section 2.04
"Deductible Amount" Section 9.04(a)
"Employees" Section 3.19
"ABP Division Financial Statements" Section 3.05(a)
"Indemnified Claim" Section 9.03(a)
"Indemnified Party" Section 9.03(a)
"Indemnifying Party" Section 9.03(a)
"Lease Fee Adjustment" Section 2.03(a)
"Lease Loss Adjustment" Section 2.03(b)
"Permits" Section 3.08
"Purchase Price Adjustments" Section 2.03(d)
"Referee" Section 9.03(c)
"Restructuring" Section 5.06
"Returns" Section 3.11(a)
"Taxes" Section 3.11(a)
"Third Party Claim" Section 9.03(a)
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"WARN Act" Section 3.20
"Net Worth Adjustment" Section 2.03(f)
ARTICLE II
TRANSACTIONS AND CLOSING
Section 2.01 CLOSING TRANSACTIONS.
Upon the terms and subject to the conditions set forth in this
Agreement, the parties agree that on the Closing Date:
(a) Seller shall sell, assign, transfer and deliver to Buyer the
ABPH Common Stock (each share certificate representing the ABPH Common Stock so
delivered shall be duly endorsed by Seller assigning the shares to Buyer), free
and clear of any and all Encumbrances;
(b) In consideration of Seller's sale, assignment, transfer and
delivery of the ABPH Common Stock to Buyer, Buyer shall pay, in accordance with
the provisions of Section 2.02, the Purchase Price.
Section 2.02 FORM AND PAYMENT OF PURCHASE PRICE.
Subject to adjustment as herein provided, the Purchase Price shall be
SEVENTY-EIGHT MILLION DOLLARS ($78,000,000). At the Closing, Buyer shall pay to
Seller the Purchase Price, as adjusted by the estimated amounts provided
pursuant to Section 2.03(c) plus any amounts due pursuant to Section 2.05(a), by
wire transfer of immediately available funds, to the account or accounts which
are designated in writing by the Seller and delivered to Buyer at least two (2)
Business Days prior to Closing.
Section 2.03 PURCHASE PRICE ADJUSTMENTS.
(a) In the event that, prior to the Closing, Seller and/or ABPH
enters into an amendment to any lease of any store listed on SCHEDULE 2.03(a)
increasing or decreasing the occupancy costs for any of such leases following
the Closing Date from the rent terms that would otherwise be payable by Seller
and/or ABPH under any such lease, then the Purchase Price shall be decreased (in
the event of a net increase in occupancy costs) or increased (in the event of a
net decrease in occupancy costs), as the case may be, by an amount (the "LEASE
FEE ADJUSTMENT") equal to five (5) multiplied by the difference between: (1) the
total base and percentage rent plus all other occupancy expenses for the year
commencing on the Closing Date under such leases calculated as if no such
amendments had been entered into; and (2) the total base and percentage rent
plus all other occupancy expenses for the year commencing on the Closing Date
under such amended leases. For the purposes of calculating percentage rent in
each of the above-mentioned cases the sales of the relevant store shall be
assumed to be the sales of that store for the four consecutive full fiscal
quarters of Seller immediately preceding the Closing.
(b) Subject to Section 2.06, In the event that, at or prior to the
Closing, any lease of any store listed on SCHEDULE 2.03(a) is neither
transferred by Seller to ABPH with all consents from landlords necessary to
permit such transfers in connection with the Restructuring contemplated by
Section 5.06 and the sale, assignment, transfer and delivery of the ABPH Common
Stock to Buyer nor franchised to a designee of Buyer pursuant to the terms of
Section 6.01(b), the Purchase Price shall be adjusted downward by an amount (the
"LEASE LOSS ADJUSTMENT") equal to five (5) multiplied by the total net EBITDA of
all such stores during Seller's 1997 fiscal year as listed on SCHEDULE 2.03(a)
opposite the relevant store. The foregoing notwithstanding, Seller and/or ABPH,
as the case may be, may close those bakery/cafe stores identified on
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Schedule 5.01(a)(ii) prior to the Closing, and no Lease Loss Adjustment
calculation shall be made based upon the EBITDA of such stores.
(c) At least three (3) Business Days' prior to the Closing, Seller
shall deliver to Buyer a statement estimating each of the Lease Fee Adjustment,
Lease Loss Adjustment and the Net Worth Adjustment pursuant to this Section
2.03, setting forth the amount of adjustments determined by Seller and the
computation of such adjustments in detail reasonably satisfactory to Buyer. The
Purchase Price paid to Seller at the Closing pursuant to Section 2.02 shall be
adjusted by the net amount of these adjustments.
(d) Within sixty (60) calendar days after the Closing Date, Seller
shall prepare and deliver to Buyer a consolidated balance sheet of the Au Bon
Pain Division as of the Closing Date (the "CLOSING DATE BALANCE SHEET"),
together with a computation of the "Lease Fee Adjustment" and the "Lease Loss
Adjustment" and the "Net Worth Adjustment" (as those terms hereinafter are
defined; such adjustments are referred to collectively herein as the "PURCHASE
PRICE ADJUSTMENTS"). The Closing Date Balance Sheet shall be prepared in
accordance with GAAP applied consistently with the ABP Division Financial
Statements.
(e) Buyer and its representatives shall have fifteen (15) calendar
days to review the computations of the Purchase Price adjustments pursuant to
this Section 2.03. If Buyer disputes any of the Purchase Price Adjustments, it
shall, within such fifteen (15) day period, provide Seller with a written notice
specifying in reasonable detail such item(s) of dispute. Any items not
specifically disputed shall be deemed conclusively determined. Buyer and Seller
shall attempt to resolve by mutual agreement the item(s) in dispute in good
faith within thirty (30) calendar days (the "RESOLUTION PERIOD") following the
delivery of such written notice. If any of the item(s) in dispute are not
resolved within the Resolution Period, the parties shall promptly submit the
dispute(s) for resolution to a so-called "Big Five" accounting firm (the
"ARBITRATOR") mutually agreed upon by Buyer and Seller (but which shall not be
PricewaterhouseCoopers LLP), who shall determine the disputed Purchase Price
Adjustments items on a basis consistent with the provisions hereof and whose
decision shall be final and binding on the parties, and when made, shall be
deemed to be an agreement between the parties on the issues so determined. The
expense of the Arbitrator shall be borne equally by the parties. The Arbitrator
shall determine the Purchase Price Adjustments items specifically in dispute as
soon as practicable, and, in any event, within fifteen (15) days, all in
accordance with the standards and definitions set forth herein. The Arbitrator
shall determine the Purchase Price Adjustments items specifically in dispute
within the ranges of values established for each such item as determined by
reference to the value assigned to each such item by Buyer's objection notice
and the Seller in the Closing Financial Statements, respectively, and without
regard to their materiality, individually or in the aggregate. Each accounting
term used herein shall have the meaning that is applied thereto in accordance
with GAAP and each account included in the Closing Financial Statements shall be
calculated in accordance with GAAP, as applied to the Au Bon Pain Division
balance sheet, and shall be consistent with the books and records of the Au Bon
Pain Division. With respect to the calculation of the levels of the accounts set
forth above, no change in accounting principles shall be made from those
utilized in preparing the ABP Financial Statements (without regard to their
materiality) including, without limitation, with respect to the nature or
classification of accounts, closing proceedings, level of reserves or levels of
accruals. For purposes of the preceding sentence, "change in accounting
principles" includes all changes in accounting principles, policies, practices,
procedures or methodologies with respect to financial statements, their
classification or their display, as well as all changes in practices, methods,
conventions, or assumptions (unless required by objective changes in underlying
events as reasonably agreed upon by Buyer and Seller) utilized in making
accounting estimates. The Net Worth Adjustment, as finally determined by Section
2.03(d)-(e), shall be referred to as the Final Net Worth Adjustment.
(f) The term "NET WORTH ADJUSTMENT" shall mean the amount, if any,
by which the difference between: (1) the "Consolidated Assets" (as hereinafter
defined) minus net plant, property and equipment, and (2) "Consolidated
Liabilities" (as hereinafter defined) of ABPH, on a consolidated basis as of the
Closing Date, minus the difference between the Consolidated Assets and
Consolidated Liabilities of the Au Bon Pain Division, on a consolidated basis as
of April 18, 1998. If the Net Worth Adjustment is positive (up to Three
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Million Dollars ($3,000,000)), it shall be added to the Purchase Price to be
paid by Buyer to Seller at the Closing pursuant to Section 2.02. If the Net
Worth Adjustment is negative, it shall be deducted from the Purchase Price to be
paid by Buyer to Seller at the Closing pursuant to Section 2.02. As used herein
the terms: (1) "CONSOLIDATED ASSETS" shall mean the sum of cash, accounts
receivable, inventories, prepaid expenses and plant, property and equipment and
"Other Assets"; and (2) "CONSOLIDATED LIABILITIES" shall mean the sum of
accounts payable, accrued expenses and minority interests, in each case
calculated in accordance with GAAP applied consistently with the ABP Division
Financial Statements.
(g) If the amount of the Final Net Worth Adjustment is a positive
number, then the difference between such amount and the estimate made pursuant
to Section 2.03(c) shall be paid by Buyer to Seller, together with interest at a
per annum rate of eight percent (8%) from the Closing Date until the date of
payment, within three (3) Business Days after the final determination of the Net
Worth Adjustment, such payment to be made by wire transfer of immediately
available funds to the account or accounts designated by Seller. If the amount
of the Final Net Worth Adjustment is a negative number, then the difference
between such amount and the estimate made pursuant to Section 2.03(c) shall be
paid by Seller to Buyer, together with interest at a per annum rate of eight
percent (8%) from the Closing Date until the date of payment, within three (3)
Business Days after the final determination of the Final Net Worth Adjustment,
such payment to be made by wire transfer of immediately available funds to the
account or accounts designated by Buyer.
Section 2.04 CLOSING.
Subject to the provisions of Article X, the closing (the "CLOSING")
of the transactions contemplated by this Agreement shall take place at the
offices of Kirkland & Ellis in New York, New York on the day which is at least
one (1) Business Day after the day on which the last of the conditions set forth
in Article VIII (other than those that can be fulfilled only on the date of
Closing) is fulfilled or waived, or on such other day as the parties to this
Agreement may agree (such date being referred to herein as the "CLOSING DATE").
Section 2.05 UNASSIGNED STORE LEASES.
(a) With respect to any of the store leases listed on SCHEDULE
2.03(a) that cannot be transferred to ABPH with all consents from landlords
necessary to permit such transfers in connection with the Restructuring
contemplated by Section 5.06 and the sale, assignment, transfer and delivery of
the ABPH Common Stock to Buyer, if Seller and Buyer mutually agree at the
Closing that ABPH should undertake to manage any of each of such stores (such
stores being referred to herein as the "MANAGEMENT STORES"), then Seller and
ABPH shall enter into a Management Agreement at the Closing and ABPH shall
undertake the management of each such store from and after the Closing as
provided in such Management Agreement until the first to occur of: (1) the
expiration of the relevant lease for each such store (plus all option periods);
or (2) Seller is able to obtain the consent of the landlord to the transfer of
such lease to ABPH. At the Closing, Buyer shall pay to the Seller, in respect of
the Management Stores, an amount equal to three and one-half (3 1/2) multiplied
by the total net EBITDA of all Management Stores during Seller's 1997 fiscal
year as listed on SCHEDULE 2.03(a) opposite the relevant store. At such time, if
ever, Seller shall thereafter obtain from any of the landlords of the Management
Stores the consent necessary to transfer any of the Management Store leases to
ABPH, Seller shall transfer such leases to ABPH and Buyer or ABPH shall pay to
Seller, in exchange therefor, an amount equal to one and one-half (1 1/2)
multiplied by the total net EBITDA of all Management Stores during Seller's 1997
fiscal year as listed on SCHEDULE 2.03(a) opposite the relevant store.
(b) With respect to any of the store leases listed on SCHEDULE 2.03(a)
that cannot be transferred to ABPH with all consents from landlords necessary to
permit such transfers in connection with the Restructuring contemplated by
Section 5.06 and the sale, assignment, transfer and delivery of the ABPH Common
Stock to Buyer, and Seller and Buyer do not mutually agree at the Closing that
ABPH should undertake to manage any of such stores in accordance with Section
2.05(a), at the Closing Seller and ABPH shall enter into a franchise agreement
pursuant to which Seller shall become a franchisee of ABPH from and after the
Closing with respect to such stores (the "SELLER FRANCHISE STORES") until the
first to occur of: (1) the
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expiration of the relevant lease for each such store; or (2) Seller is able to
obtain the consent of the landlord to the transfer of such lease to ABPH. The
form of franchise agreement to be used for each store franchised to Seller
pursuant to this Section 2.05(b) shall be the standard form of franchise
agreement used for Au Bon Pain franchisees as of the Closing, with the following
exceptions: (1) the term of each franchise agreement shall expire upon the
expiration of the lease applicable to such franchise agreement; (2) bakery
products manufactured by Bunge Foods Corporation ("BUNGE") pursuant to that
certain Bakery Product Supply Agreement (the "BUNGE SUPPLY AGREEMENT") dated
March 23, 1998 by and between Seller and Bunge shall be sold to Seller at
Buyer's cost under the Bunge Supply Agreement (i.e., at the "Invoice Price per
Case of Product" as set forth in Section 3.2 of the Bunge Supply Agreement); (3)
there shall be no royalty or franchise fees; and (4) there shall be no
noncompetition provisions applicable to Seller. At such time after the Closing
as Seller shall, if ever, obtain from any of the landlords of the Seller
Franchise Stores the consent necessary to transfer any of the Seller Franchise
Store leases to ABPH, Seller shall transfer such leases to ABPH and Buyer or
ABPH shall pay to Seller, in exchange therefor, an amount equal to five (5)
multiplied by the total net EBITDA of all such Seller Franchise Stores: (x)
during Seller's 1997 fiscal year as listed on SCHEDULE 2.03(a) opposite the
relevant store, in the event that such transfer is made during the first six (6)
months following the Closing; and (y) for any transfer thereafter, during the
applicable fifty-two (52) week period ending immediately prior to delivery of
each such consent, multiplied by a fraction the numerator of which is the number
of months then remaining on the relevant lease from the date of transfer
(including option periods) and the denominator of which is the number of months
remaining on the relevant lease (including option periods) as of the Closing
Date. The computation of EBITDA shall be consistent with the methodology used to
compute the EBITDA for the stores as reflected on SCHEDULE 2.03(a), and shall
reflect prices for products purchased from Bunge Foods Corporation at the
"Invoice Price" from Bunge to the distributor pursuant to that certain Bakery
Product Supply Agreement dated March 23, 1998 by and between Bunge Foods
Corporation and Au Bon Pain Co., Inc.
(c) Except for stores managed by ABPH by the mutual agreement
of Buyer and Seller pursuant to Section 2.05(a), nothing contained herein shall
preclude Seller from at any time discontinuing any store operations prior to or
after the Closing for any lease for which Seller fails or is unable in a
commercially reasonable manner to obtain the consents necessary to transfer such
lease to ABPH in connection with the Restructuring contemplated by Section 5.06
and the sale, assignment, transfer and delivery of the ABPH Common Stock to
Buyer; provided, however, Seller shall not operate, and shall not permit its
wholly-owned subsidiary, Saint Louis Bread Company, Inc. or any of its
franchisees, to operate a Saint Louis Bread or Panera Bread bakery/cafe at the
location of any such discontinued store, in each such case within one (1) year
after the termination of the lease for such store. If ABPH or any of its
Affiliates enters into a lease or license for the operation of an Au Bon Pain
bakery/cafe at the location of any discontinued store within one (1) year of the
termination of any such discontinued store, Buyer or ABPH shall pay to Seller
upon its entering into such lease or license an amount equal to five (5)
multiplied by the total net EBITDA of such discontinued store during the most
recent fifty-two (52) week period during which such store was operated by Seller
(adjusted for differences in the occupancy costs of Seller during such fifty-two
(52) week period and the standard occupancy costs in such lease or license with
ABPH or such Affiliate).
Section 2.06 SPECIAL PROVISIONS FOR CERTAIN LEASES.
Any provision hereof to the contrary notwithstanding, in the event
that a landlord for any one or more of those stores identified on SCHEDULE 2.06
conditions any consent necessary for the transfer of such lease to ABPH and/or
the subsequent transfer of the ABPH Common Stock to the Buyer following the
transfer of such lease to ABPH on the renewal of such lease, the Buyer shall
have the right to conduct the negotiations regarding the renewal terms for such
lease and to approve any such renewal terms entered into in connection
therewith. In the event that the consent necessary for the transfer to ABPH of
any such lease or the ABPH Common Stock following such transfer to ABPH
thereafter is not obtained, the Lease Loss Adjustment pursuant to Section
2.03(b) shall not apply with regard to that particular lease and the Purchase
Price shall be reduced with respect to such lease by an amount equal to the
estimated EBITDA for such store over the remaining term of the lease, based upon
the 1997 EBITDA for such store.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
In order to induce Buyer to enter into this Agreement and to
consummate the transactions contemplated hereunder, Seller, and to the extent
applicable, ABPH hereby makes the following representations and warranties which
are subject to the disclosure items set forth on the Schedules hereto,
regardless of whether any such Schedule refers to the Section in which such
representation or warranty is made:
Section 3.01 ORGANIZATION AND GOOD STANDING.
SCHEDULE 3.01 sets forth a list of the states of incorporation of
Seller and ABPH and each foreign jurisdiction in which each of Seller (solely by
virtue of its ownership and operation of the Au Bon Pain Division) and ABPH is
qualified to do business. Each of Seller and ABPH is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation, and has full corporate power and authority to own, operate
and lease its properties, to carry on its business as it is now being conducted,
and to enter into this Agreement and perform its obligations hereunder. Each of
Seller and ABPH is qualified as a foreign corporation and is in good standing
under the laws of each jurisdiction in which the conduct of its business or the
ownership of its properties requires such qualification, except where such
qualification would not have a material adverse effect on the Business. The
organizational documents, bylaws and minutes of proceedings of ABPH is complete
and correct, has not been amended or repealed since delivery to Buyer, and are
in full force and effect.
Section 3.02 CAPITAL STOCK/SUBSIDIARIES AND AFFILIATES.
(a) Seller owns all right, title and interest in and to one
hundred percent (100%) of the issued and outstanding capital stock of ABPH free
and clear of all Encumbrances, voting agreements, proxies and restrictions on
transfer, except as imposed under Applicable Law. The capital stock and
ownership of ABPH is set forth on SCHEDULE 3.02(a) hereto. Seller owns an
interest in fourteen (14) separate joint ventures with ABP/LI Associates (the
"ABP/LI JOINT VENTURES"). The ABP/LI Joint Ventures and the percentage of equity
interests owned by Seller in each such venture, are set forth on SCHEDULE
3.02(a) hereto. At the Closing, except as described in this Section 3.02, there
shall be no issued or outstanding equity securities or instruments convertible
into equity securities of ABPH. Except as provided in the Contribution Agreement
to be entered into pursuant to Section 5.06, ABPH is not subject to any
commitment or obligation which would require the issuance or sale or repurchase
of additional shares of its capital stock or debt securities at any time under
options, subscriptions, warrants, rights, calls, preemptive rights, convertible
obligations or any other fixed or contingent obligations (including, without
limitation, under any phantom stock or stock appreciation rights agreements).
(b) Except for the ownership interests of Seller in the ABP/LI
Joint Venture interests to be transferred to ABPH on or prior to the Closing
Date in connection with the Restructuring contemplated by Section 5.06, ABPH
does not own or control, directly or indirectly, shares of capital stock or
other securities of or has any ownership interests in any other corporation or
other entity.
(c) The delivery at the Closing of the certificates
representing the ABPH Common Stock owned by the Seller, duly endorsed, shall
transfer to Buyer good and valid title to such shares, which title shall be free
and clear of all Encumbrances.
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Section 3.03 EXECUTION AND EFFECT OF AGREEMENT.
(a) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby (including the
Restructuring), including, without limitation, the sale, conveyance, transfer
and assignment of the ABPH Common Stock to Buyer, have been duly and effectively
authorized by all necessary corporate action on the part of Seller, except for
the approval of the shareholders of Seller authorizing the transaction
contemplated hereby. This Agreement has been duly executed and delivered by
Seller and, subject to shareholder approval, constitutes the legal, valid and
binding obligation of Seller, enforceable in accordance with its terms, except
as limited by bankruptcy, insolvency, reorganization, fraudulent conveyance and
transfer, moratorium, or other similar laws relating to creditors' rights.
(b) Except as set forth on SCHEDULE 3.03(b), neither the
execution, delivery and performance of this Agreement nor the consummation of
the transactions contemplated hereby (including the Restructuring) by Seller and
ABPH will, with or without the passage of time, or the giving of notice, or
both, (i) violate any of the provisions of the certificate of incorporation or
bylaws of Seller or ABPH, (ii) violate in any material respect the provisions of
any Applicable Law to which Seller or ABPH is subject, (iii) result in the
creation of any Encumbrance upon any of the ABPH Common Stock or any of the
assets of the Au Bon Pain Division or of ABPH, or (iv) conflict with or result
in a breach of or give rise to the right of termination of, or constitute a
default of, or accelerate the performance required by, the terms of any
Applicable Law or any other restriction of any kind or character, or any
material agreement, indenture, mortgage, deed of trust, lease, contract, note,
bond, license, permit, authorization or other instrument to or by which Seller,
or ABPH is a party or bound.
Section 3.04 CONSENTS.
Except as set forth on SCHEDULE 3.04, no consent or approval of any
Governmental Authority, or of any other Person is required as a condition to the
validity or enforceability of this Agreement or any other Transaction Documents
to be executed by Seller, or for the completion or validity of any of the
transactions contemplated by this Agreement, including the Restructuring
contemplated by Section 5.06.
Section 3.05 ABP DIVISION FINANCIAL STATEMENTS.
(a) Attached as SCHEDULE 3.05 are true and complete copies of
the pro-forma consolidated balance sheet of the Au Bon Pain Division as of
December 27, 1997 and at April 18, 1998, and pro-forma consolidated statements
of revenue, EBIT and EBITDA for each of such fiscal years in the three (3) year
period ended December 27, 1997, for the sixteen (16) week period ended April 18,
1998, and for the twelve (12) week period ended July 11, 1998 (collectively, the
"ABP DIVISION FINANCIAL STATEMENTS"). Except as disclosed in the footnotes to
the ABP Division Financial Statements, the ABP Division Financial Statements
have been prepared from the books and records of the Au Bon Pain Division in
accordance with GAAP, and fairly present the financial condition and pro forma
results of operations of each of the Au Bon Pain Division on a consolidated
basis at and for the dates and periods indicated.
(b) The ABP Division Financial Statements fairly and accurately
reflect all transactions since December 25, 1994 on a pro forma basis and
include all adjustments that the Seller considers necessary for a fair
presentation of the financial condition and results of operations of the Au Bon
Pain Division as of the date thereof and for the period covered thereby.
(c) As of the date of this Agreement, ABPH has no liabilities
or obligations, whether known or unknown, accrued, absolute, contingent or
otherwise, except and to the extent as incurred in connection with the usual and
ordinary course of ABPH's business since April 18, 1998 and that are reflected
in the books of account of ABPH subject to period end adjustments which are not,
in the aggregate, material to ABPH. At Closing, ABPH will have no liabilities or
obligations, whether known or unknown, accrued, absolute, contingent or
otherwise except and to the extent (i) disclosed in any of the Transaction
Documents, (ii)
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reflected or reserved against in the ABP Division Financial Statements or (iii)
of current liabilities incurred in connection with the usual and ordinary course
of the Business of ABPH consistent with its past practices since April 18, 1998,
and that are reflected in the books of account of ABPH subject to period end
adjustments which are not, in the aggregate, material to ABPH. No dividends or
other distributions to their shareholder are currently due or unpaid by ABPH.
Section 3.06 LAWSUITS AND PROCEEDINGS.
Except as set forth on SCHEDULE 3.06, there is no suit, claim,
action, audit, investigation or proceeding pending or, to Seller's knowledge,
threatened against Seller or ABPH before or involving any Governmental
Authority. Neither the Seller nor ABPH is in default with respect to any decree,
injunction or other order of any Governmental Authority. Neither the Seller nor
ABPH is a party to any consent decree or settlement with any Governmental
Authority, nor is there such a consent decree or settlement affecting the Au Bon
Pain Division.
Section 3.07 COMPLIANCE WITH LAWS.
Except as set forth on SCHEDULE 3.07, each of Seller and ABPH has
conducted and conducts its business, and has maintained and maintains its
assets, in material compliance with all (and has not received notice of a
claimed material violation of any) Applicable Laws applicable to, binding upon
or affecting the Au Bon Pain Division and ABPH or any of their respective
assets.
Section 3.08 LICENSES AND PERMITS.
Each of the Seller and ABPH possess all material licenses, permits,
and other governmental consents, certificates, approvals, or other
authorizations necessary for operation of the Business at the locations and in
the manner presently operated (the "PERMITS"). Except as set forth on SCHEDULE
3.08, (a) each of the Seller and ABPH and the Au Bon Pain Division has complied
with the terms and conditions of all such Permits and all such Permits are in
full force and effect (and no notice of a claimed material violation of any such
Permits has been received), and (b) there has occurred no event nor is any
event, action, investigation or proceeding pending or threatened which would
cause or permit revocation or suspension of or otherwise adversely affect the
maintenance of any such Permits. The transactions contemplated by this Agreement
will not lead to the revocation, cancellation, termination or suspension of any
such Permits.
Section 3.09 INSURANCE.
SCHEDULE 3.09 sets forth a list and description of all policies of
fire, casualty, liability, worker's compensation, life and other forms of
insurance currently carried by the Seller for the Au Bon Pain Division and ABPH,
including with respect to each policy a description of the types and limits of
the coverage, the amount of premiums, the name of the carrier, the policy
number, the expiration date of the current premium period. Neither Seller nor
ABPH is in default with respect to any material provision contained in any
insurance policy or has failed to give any notice or present any claim
thereunder in due and timely fashion, and no cancellation or non-renewal has
been threatened or occurred with respect to any policy. There are no pending
claims against any insurance policy which have been denied.
Section 3.10 AGREEMENTS.
(a) SCHEDULE 3.10 sets forth a correct and complete list of all
material written contracts, agreements and other instruments to which each of
Seller (only with respect to those material contracts, agreements and other
instruments to be assigned to ABPH in connection with the Restructuring) and/or
ABPH is a party (the "MATERIAL CONTRACTS"). Each of the Material Contracts is
the valid and binding obligation of Seller and/or ABPH, as applicable,
enforceable against it or them in accordance with its terms, except to the
extent limited by: (1) bankruptcy, insolvency, reorganization, fraudulent
conveyance and
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transfer, moratorium, or other similar laws relating to creditors' rights, and
(2) the discretionary nature of any remedies relating to specific performance,
injunctive and other equitable relief. Except as set forth on SCHEDULE 3.10,
neither Seller nor ABPH, nor to the best of Seller's knowledge, any other party,
is in material default with respect to, and to Seller's knowledge, there exists
no event, condition or occurrence which with notice, lapse of time or both,
would constitute such a default by Seller or ABPH under, any of the Material
Contracts. As of the Closing Date, Seller or ABPH will have paid all sums and
performed all obligations under the Material Contracts which are required to be
paid or performed prior to the Closing Date.
(b) Except as set forth on SCHEDULE 3.10, there are no contractual
agreements which prohibit or limit the right of Seller to establish and operate,
or to allow others to establish and operate, Au Bon Pain bakery/cafes.
Section 3.11 TAXES.
(a) Each of Seller and ABPH has duly and timely filed all
applicable Returns with respect to all income, property, sales, use, gross
receipts, value-added, profits, occupancy, employment, excise, withholding,
customs, duties or other taxes of any nature whatsoever, whether of the United
States, a state or otherwise, including, without limitation, penalties and
interest thereon, ("TAXES") required to be filed prior to the date hereof and,
as of the Closing Date, to the Closing Date. All Taxes, regardless of whether
shown on the Returns or pursuant to any declarations or assessments received by
ABPH (including estimated taxes, penalties and interest) have been duly and
timely paid, or, if not yet due, properly accrued and reserved for and reflected
in the books of account of ABPH. All such Returns are true, correct and
complete, and Seller knows of no currently pending or threatened claims or
assessments that have not been accrued for in the ABP Financial Statements.
There exists no tax deficiency or unpaid tax assessed by any authority against
ABPH.
(b) ABPH has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, in either case, for any Tax period that remains open.
(c) ABPH has not filed a consent under Tax Code Section 341(f)
concerning collapsible corporations. ABPH has not made any payments, is not
obligated to make any payments, and is not a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Tax Code Section 280G. ABPH has not been and is not party to
any Tax allocation or sharing agreement. ABPH has not been a member of an
Affiliated Group filing a consolidated federal income Return, other than groups
the common parent of which is Seller.
(d) Except with respect to income Taxes, all tax accruals and
deferrals are properly and accurately reflected on the ABP Division Financial
Statements. Except with respect to income Taxes, the unpaid Taxes of ABPH (A)
did not exceed the reserve for Tax Liability set forth on the face of the ABP
Division Financial Statements (rather than in any notes thereto) and (B) do not
exceed that reserve as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of ABPH and Seller in filing
their Returns.
(e) Schedule 3.11(e) contains a list of all states and other
jurisdictions where Seller (solely with respect to its ownership and operation
of the Au Bon Pain Division) and ABPH has filed Returns during the past three
years or expects to file Returns during the Seller's current fiscal year.
SCHEDULE 3.11(e) also indicates those Returns, including consolidated Returns,
that have been audited to which ABPH was a party, and those Returns, including
consolidated Returns, that currently are the subject of audit to which ABPH was
a party. Seller has delivered or made available to Buyer correct and complete
copies of all federal income Returns, including consolidated Returns, to which
ABPH was a party, examination reports, and statements of deficiencies assessed
against or agreed to by ABPH, either directly or indirectly as the result of
being a
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member of a consolidated group, for all tax years that the statute of
limitations for assessments has not ended.
(f) Each Affiliated Group has filed all income Returns that it
was required to file for each taxable period during which ABPH was a member of
the group. All such Returns were correct and complete (A) in all respects in so
far as they relate to ABPH and (B) in all material respects in so far as they do
not relate to ABPH. All income Taxes owed by any Affiliated Group (regardless of
whether shown on any Return) have been paid for each taxable period during which
ABPH was a member of the group.
(g) None of Seller or any director or officer (or employee
responsible for Tax matters) of any of Seller and its subsidiaries expects any
authority to assess any additional income Taxes against any Affiliated Group for
any taxable period during which ABPH was a member of the group. Except as set
forth on SCHEDULE 3.11(g), no Affiliated Group has waived any statute of
limitations in respect of any income Taxes or agreed to any extension of time
with respect to an income Tax assessment or deficiency for any taxable period
during which ABPH was a member of the group.
(h) ABPH has properly withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party.
Section 3.12 BANKS.
SCHEDULE 3.12 sets forth the name of each bank or other depository in
which Seller (solely with respect to the Au Bon Pain Division) and ABPH has an
account and the number assigned to each account, and the names of all authorized
signatories thereto.
Section 3.13 CLAIMS OF EMPLOYEES, DIRECTORS, AND OFFICERS.
No Employee, director or officer of ABPH, either individually or in
any other capacity, has asserted a claim against Seller or any of ABPH which has
not been resolved, except in respect of their right to current salary or wages,
any accrued vacation pay, and reasonable reimbursable expenses, all arising in
the ordinary course of business.
Section 3.14 AFFILIATE TRANSACTIONS.
SCHEDULE 3.14 sets forth a true and complete list of all amounts that
are due and payable (including amounts that have arisen in respect of
intercompany transactions) by any Affiliate (including Seller) of ABPH to ABPH.
Section 3.15 INTELLECTUAL PROPERTY.
SCHEDULE 3.15 contains a true, correct and complete list and
description of all Intellectual Property of the Seller and ABPH, in each case
relating to the Business, consisting of registered patents, copyrights,
trademarks, trade names, service marks, service names and any applications for
registrations of any of the foregoing, and further consisting of (i) computer
software (other than mass-marketed software purchased or licensed for less than
a total of $10,000), and (ii) licenses or similar agreements for Intellectual
Property to which Seller (to the extent relating to the Business) or ABPH is a
party. To Seller's knowledge, except as set forth on SCHEDULE 3.15, the conduct
of the Business does not infringe upon, conflict with, or violate the rights of
others in respect of any Intellectual Property and none of the Seller or ABPH
has received notice that any claim or proceeding is pending or threatened in
respect of any Intellectual Property or that Seller or ABPH
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has infringed upon, conflicted with, or violated any Intellectual Property of
any third party. Except as set forth on SCHEDULE 3.15, all of the Intellectual
Property necessary for the conduct of the Business will be owned by or licensed
to ABPH as of the Closing, including, without limitation, the unregistered
trademarks, service marks, copyrights and trade names described on SCHEDULE
3.15. With respect to the compatibility of the Au Bon Pain Division's computer
systems upon the advent of the year 2000 (the so-called "Year 2000" or "Y2k"
issue), Seller's computer systems are in the process of being tested for Year
2000 compliance, which testing is expected to continue into 1999. Seller expects
that the Au Bon Pain Division's Point-Of-Sale system and store managers' work
stations will require modification or replacement. Other secondary systems
associated with the Au Bon Pain Division's retail operations are in the process
of being tested and may require modification or replacement.
Section 3.16 EXTRAORDINARY TRANSACTIONS.
Except as set forth on SCHEDULE 3.16, since April 18, 1998, neither
Seller nor ABPH has, nor as of the Closing will have (i) mortgaged, pledged or
subjected to any Encumbrance any of its assets; (ii) canceled or compromised any
material claim of or material debts owed to it in respect of the Business; (iii)
except in the ordinary course of business, sold, leased or transferred any of
the assets of the Business; (iv) sold, assigned or transferred any of the
Intellectual Property of the Business; (v) suffered any material destruction,
loss or damage to any of the assets of the Business; (v) paid any dividends in
respect of its capital stock; (vi) increased any salaries or bonuses of
employees of the Au Bon Division for any employee with an annual salary of
$50,000 or higher; (vii) made any material change in its accounting or cash
management policies and practices; (viii) committed ABPH to make any capital
expenditures except in the ordinary course of its business or as permitted
pursuant to Section 6.01 in connection with Seller's ABP2000 program; or (ix)
entered into any transactions with any of its Affiliates except in the ordinary
course of business or as may otherwise be disclosed in this Agreement and the
Schedules hereto.
Section 3.17 ACCOUNTS RECEIVABLE.
To the best of Seller's knowledge, the accounts receivable of the
Business are good and collectible in amounts equal to the aggregate face amounts
thereof, after giving effect to any reserves for bad debts and contractual
allowances reflected on the books of the Seller. The foregoing notwithstanding,
the note receivable of Northern Bakers and the long-term receivables reflected
on Seller's "Other Asset" account shall be assigned to ABPH at the Closing
without representation or warranty by Seller as to their collectability.
Section 3.18 BROKER AND FINDER FEES.
Other than Peter J. Solomon Company Limited (whose fee shall be paid
by Seller), neither Seller nor ABPH has engaged any broker or finder in
connection with this transaction, and no action by any of the foregoing will
cause or support any claim to be asserted against ABPH or Buyer by any broker,
finder or intermediary in connection with this transaction.
Section 3.19 EMPLOYEES.
SCHEDULE 3.19 sets forth a true, correct and complete list of all
current employees of ABPH and of Seller who shall be offered employment with
ABPH upon the completion of the Restructuring contemplated by Section 5.06
immediately prior to the Closing and whose current annual salary exceeds $80,000
(the "EMPLOYEES").
Section 3.20 EMPLOYMENT MATTERS.
No employees are members of any collective bargaining unit or a party
to any union agreement. Except as set forth on SCHEDULE 3.20, neither Seller nor
ABPH has any written employment agreements with
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any Employees. SCHEDULE 3.20 also identifies certain other employees of Seller
with written employment agreements who may be offered employment with ABPH.
Except as set forth on SCHEDULE 3.20, there are no controversies pending or in
progress between Seller or ABPH and its employees and, to Seller's knowledge, no
such controversies are threatened nor is there any basis for such a controversy.
Each of Seller (with respect to the Business) and ABPH is in substantial
compliance with all material laws respecting occupational health and safety,
employment, employment practices, and terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor practice and there is not now
pending or threatened any charge or complaint against ABPH by any Governmental
Authority. Prior to the date hereof, neither Seller nor ABPH has taken any acts
that would subject it to liability under the U.S. Worker Adjustment and
Retraining Notification Act (the "WARN ACT").
Section 3.21 EMPLOYEE BENEFIT MATTERS.
(a) SCHEDULE 3.21 lists all Benefit Plans that Seller or ABPH
maintains, to which they contribute, or to which they have an obligation to
contribute with respect to any current or former employee of Seller or ABPH, or
with respect to which Seller or ABPH otherwise reasonably expects to have any
liability or potential liability (regardless of whether any such plan has
terminated or regardless of whether any such plan is or was maintained for
current or former employees of Seller or ABPH or current or former employees of
any other member of the Controlled Group of Companies).
(b) Neither Seller nor ABPH maintains or has any obligation to
contribute to (or any other liability with respect to) any Benefit Plan which is
a "defined benefit plan" (as defined in Section 3(35) of ERISA), whether or not
terminated.
(c) Neither Seller nor ABPH has any obligation to contribute to (or
any other liability, including current or potential withdrawal liability, with
respect to) any Multiemployer Plan.
(d) Neither Seller nor ABPH maintains or has any obligation to
contribute to (or any other liability with respect to) any plan or arrangement,
regardless of whether terminated, which provides medical, health, life insurance
or other welfare-type benefits for current or future retired or terminated
employees (except for limited continued medical benefit coverage required to be
provided under Section 4980B of the Tax Code or as required by applicable state
law).
(e) Neither Seller nor ABPH maintains or has any obligation to
contribute to (or any other liability with respect to) any Benefit Plan which is
a "defined contribution plan" (as defined in Section 3(34) of ERISA), regardless
of whether terminated, other than the Au Bon Pain Co., Inc. 401(k) Plan.
(f) With respect to each Benefit Plan, all required or
recommended (in accordance with historical practices) payments, premiums,
contributions, reimbursements or accruals for all periods (or partial periods)
ending prior to or as of the Closing Date shall have been made or properly
accrued on the appropriate balance sheet. The Benefit Plans have no unfunded
liabilities.
(g) Each Benefit Plan and all related trusts, insurance
contracts and funds have been maintained, funded and administered in all
material respects with the applicable provisions of ERISA, the Tax Code and all
other applicable laws. Neither Seller nor ABPH nor any trustee or administrator
of the Benefit Plans has engaged in any transaction with respect to any Benefit
Plan which could subject Seller or ABPH or any trustee or administrator of the
Benefit Plans or any party dealing with the Benefit Plans to any tax or penalty
imposed under applicable law. No actions, suits, claims, complaints, charges,
proceedings, hearings, investigations, or demands with respect to the Benefit
Plans (other than routine claims for benefits) are pending or threatened, and
neither Seller nor ABPH has any knowledge of any facts which could give rise to
or be expected to give rise to any actions, suits, claims, complaints, charges,
proceedings, hearings, investigations, or demands.
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(h) None of the Benefit Plans obligates Seller or ABPH to pay
separation, severance, termination or similar-type benefits solely as a result
of the transactions contemplated by this Agreement or solely as a result of a
"change in control", as such term is defined in Section 280G of the Tax Code.
(i) Each Benefit Plan that is intended to be qualified under
Section 401(a) of the Tax Code, and each trust (if any) forming a part thereof,
has received a favorable determination letter from the Internal Revenue Service
as to the qualification under the Tax Code of such Benefit Plan, and the
tax-exempt status of such related trust, and nothing has occurred since the date
of such determination letter that could adversely affect the qualification of
such Benefit Plan or the tax-exempt status of such related trust.
(j) With respect to each Benefit Plan, Seller has provided or
has made available to Buyer true, complete and correct copies, to the extent
applicable, of (i) all documents pursuant to which the Benefit Plans are
maintained, funded and administered, (ii) the three (3) most recent annual
reports (Form 5500 series) filed with the Internal Revenue Service (with
attachments), (iii) the three (3) most recent actuarial reports, (iv) the three
(3) most recent financial statements, and (v) all governmental rulings,
determinations, and opinions (and pending requests for governmental rulings,
determinations, and opinions).
Section 3.22 ENVIRONMENTAL MATTERS.
(a) The facilities occupied or used by the Au Bon Pain Division
and ABPH and any other real property leased to Seller for use by the Au Bon Pain
Division or ABPH (collectively, the "PROPERTY") comply in all material respects
with all Environmental Laws, and each of Seller and ABPH is in compliance in all
material respects with all Environmental Laws in connection with the ownership,
use, maintenance or operation of such Property and the Business.
(b) Each of Seller (solely with respect to the Au Bon Pain
Division) and ABPH has all material permits, registrations, approvals and
licenses required by any Environmental Law.
(c) There are no claims, notices of violations, notice letters,
investigations, inquiries or other proceedings now pending or, to Seller's
knowledge, threatened by any Governmental Authority or third Person with respect
to the Business or any Property in connection with any actual or alleged failure
to comply with any requirement of any Environmental Law or any liabilities or
potential liabilities arising under Environmental Law.
(d) Neither the Au Bon Pain Division nor ABPH has treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled or released any Hazardous Substances or owned or operated any Property
or other facility so as to give rise to material liabilities of Seller, the Au
Bon Pain Division or ABPH pursuant to Environmental Laws.
Section 3.23 REAL PROPERTY.
(a) Neither Seller nor ABPH owns any real property. Set forth
on SCHEDULE 3.23 is a true, correct and complete list of all leases, subleases
and other occupancy agreements, including all amendments and other modifications
(the "LEASES") to which Seller (with respect to the Au Bon Pain Division) is the
"tenant", "subtenant" or other lessee party or is otherwise bound as a
guarantor, excluding a lease for property located at Two Penn Plaza, New York.
The full street addresses of all real property at which Seller currently
operates company-owned Au Bon Pain bakery/cafe stores pursuant to any of the
Leases or maintains office or commissary facilities necessary for the operation
of the Business (the "LEASED PROPERTY") is also set forth on SCHEDULE 3.23. As
of the date hereof, ABPH is not a "tenant", "subtenant" or other lessee party
under any lease of real property. Seller has good and valid leasehold interests
in and to all of the Leased Property, subject to no liens, encroachments,
Encumbrances or other defects in title (collectively, "Liens") except as
described in SCHEDULE 3.23. Seller also has good and valid leasehold interests
as "tenant" and as "sublessor" in and to the leases and subleases, respectively,
for those store locations identified on
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SCHEDULE 3.23 as "Franchise Locations for which Seller Subleases or Guarantees
the Leases" (excluding Dallas/Fort Worth International Airport) (the "SUBLEASED
FRANCHISE LOCATIONS"), subject to no Liens except as described in SCHEDULE 3.23.
Each Lease is in full force and effect and is enforceable in accordance with its
terms. Except as disclosed on SCHEDULE 3.23, there exists no default or
condition which, with the giving of notice, the passage of time or both, could
become a default by Seller or, to Seller's knowledge, by the landlord under any
Lease or by landlord or subtenant under any lease or sublease for any of the
Subleased Franchise Locations. Seller has previously delivered or made available
to Buyer true and complete copies of all the Leases.
(b) The Leased Property and the Subleased Franchise Locations
constitute all of the real property leased, occupied or otherwise utilized by
Seller in connection with the Business, and there is no real property leased by
Seller that will be transferred to ABPH which is not being used by Seller in the
administration or operation of the Business. Other than Seller and ABPH, there
are no parties in possession or parties having any current or future right to
occupy any of the Leased Property during the term of any of the respective
Leases for such Leased Property. Except for maintenance and repairs necessary in
the ordinary course of business, the Leased Property is in good condition and
repair and is sufficient for the conduct of the Business. Except as disclosed in
this Agreement, there exists no material violation of any covenant, condition,
restriction, easement, agreement or order to which Seller is a party or
otherwise has knowledge affecting any portion of the Leased Property. Except as
disclosed on SCHEDULE 3.23, there is no pending or, to the knowledge of Seller
or ABPH, any threatened condemnation proceeding affecting any portion of the
Leased Property.
Section 3.24 TITLE TO ASSETS.
Seller and ABPH has good title to all of the assets reflected in the
ABP Division Financial Statements, free and clear of all Encumbrances, except
for the Encumbrances reflected on SCHEDULE 3.24 and such assets, together with
any assets leased by Seller for use by the Au Bon Pain Division (which leases
shall be transferred to ABPH in connection with the Restructuring, except as
otherwise provided in this Agreement), constitute all of the assets necessary to
conduct the Business of the Au Bon Pain Division. At or prior to the Closing,
all such owned and leased assets, except as otherwise provided in this
Agreement, shall be transferred to ABPH in connection with the Restructuring
contemplated by Section 5.06 free and clear of all Encumbrances, except to the
extent otherwise disclosed on SCHEDULE 3.24.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
In order to induce Seller to enter into this Agreement and to
consummate the transactions contemplated hereunder, Buyer hereby makes the
following representations and warranties:
Section 4.01 ORGANIZATION AND GOOD STANDING.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has full corporate power
and authority to carry on its business as it is now being conducted.
Section 4.02 EXECUTION AND EFFECT OF AGREEMENT.
Buyer has full corporate power and authority to enter into this
Agreement and to perform the obligations to be performed by Buyer hereunder, and
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action. This Agreement has been duly executed and delivered by Buyer
and constitutes a legal, valid and
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binding obligation of Buyer, enforceable against Buyer in accordance with its
terms, except as limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance and transfer, moratorium, or other similar laws relating to
creditors' rights.
Section 4.03 RESTRICTIONS.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will, with or without the
passage of time, or the giving of notice, or both, (i) violate any of the
provisions of the certificate of incorporation or bylaws of Buyer, (ii) violate
in any material respect the provisions of any Applicable Law to which Buyer is
subject, (iii) conflict with or result in a breach of or give rise to the right
of termination of, or constitute a default of, or accelerate the performance
required by, the terms of any Applicable Law or any other restriction of any
kind or character, or any material agreement, indenture, mortgage, deed of
trust, lease, contract, note, bond, license, permit, authorization or other
instrument to or by which Buyer is a party or bound.
Section 4.04 CONSENTS.
No consent or approval of any Governmental Authority, or of any other
Person, is required by Buyer as a condition to (a) the validity or
enforceability of this Agreement or any other Transaction Documents to be
executed by Buyer, or (b) the completion or validity of any of the transactions
contemplated by this Agreement, except for compliance with and approval under
the H-S-R Act, and other consents or approvals specified in this Agreement.
Section 4.05 LAWSUITS AND PROCEEDINGS.
There is no suit, claim, action, audit, investigation or proceeding
pending or, to Buyer's knowledge, threatened against Buyer before or involving
any Governmental Authority. The Buyer is not in default with respect to any
decree, injunction or other order of any Governmental Authority.
Section 4.06 BROKER AND FINDER FEES.
Buyer has not engaged any broker or finder in connection with this
transaction, and no action by Buyer will cause or support any claim to be
asserted against the Seller by any broker, finder or intermediary in connection
with this transaction.
Section 4.07 FINANCING AND NET WORTH.
Buyer has obtained in good faith a bona fide commitment letter: (a)
from Societe Generale dated July 9, 1998, a true and complete copy of which is
attached hereto as SCHEDULE 4.07(a), and (b) from Bruckmann, Rosser, Sherrill &
Co., L.P. ("BRS"), a true and complete copy of which is attached hereto as
SCHEDULE 4.07(b) providing for debt and equity financing sufficient to pay the
Purchase Price. To the best of Buyer's knowledge, no facts or circumstances
exist as of the date of this Agreement that would be reasonably likely to result
in the failure to complete such financing with Societe Generale or BRS upon the
terms set forth in such commitment letters. After giving effect to the
transactions contemplated by this Agreement, ABPH will have a net worth,
computed in accordance with GAAP, of not less than $15,000,000.
Section 4.08 ACKNOWLEDGEMENT OF CERTAIN SAINT LOUIS BREAD
PROPRIETARY RIGHTS.
In addition to the various assets, properties and proprietary rights
of Saint Louis Bread, Inc. or of Seller related to the operation of its Saint
Louis Bread/Panera Bread unit (the "SLB RIGHTS"), Buyer expressly acknowledges
that certain of the SLB Rights which are described on SCHEDULE 4.08, are the
sole and exclusive
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property of Saint Louis Bread, Inc. and/or Seller, and shall not be transferred
to ABPH in connection with the Restructuring or the transactions contemplated by
this Agreement.
ARTICLE V
COVENANTS OF THE SELLER
Section 5.01 CONDUCT OF BUSINESS OF SELLER.
From the date of this Agreement until the Closing Date,
(a) the Seller shall:
(i) maintain itself as a corporation duly incorporated and
in good standing under the laws of the State of Delaware and conduct the
Business in substantially the same manner as it historically has been conducted
in the usual and ordinary course; and
(ii) use reasonable commercial efforts to maintain and/or
preserve the Business and employees, customers, suppliers and operations as an
ongoing business in accordance with past practices and customs, except that
Seller shall be permitted to close certain of its restaurant operations as
described in SCHEDULE 5.01(a);
(b) without the prior written consent of Buyer, Seller shall not:
(i) enter into any transaction (including commitments for
capital expenditures except in accordance with Section 6.01) relating to the
Business other than in the ordinary course of business;
(ii) materially change the extent or character of the
Business;
(iii) sell, assign, transfer, lease or remove any material
assets (tangible and intangible) from any facilities or premises of the Au Bon
Pain Division, unless such assets are replaced before the Closing Date with
similar items of equal quality and utility;
(iv) pay to any current or former employee of the Business
any compensation or other benefit that is not (A) required by a plan, trust,
agreement or other arrangement in effect on or before the date hereof and
disclosed in a schedule to this Agreement, or (B) salaries and bonuses in the
ordinary course of business;
(v) adopt, amend, or increase any benefits payable under,
any employee benefit, welfare, compensation, or other "fringe benefit" plan,
trust, agreement or arrangement, including any thrift, pension, savings,
retirement, stock bonus, stock option, stock purchase, profit sharing, group
insurance, medical reimbursement, deferred compensation, or other similar plan,
including any Benefit Plan as defined in Section 3.21, in each such case such
that any such action will not be binding upon or create any liability or
obligation of ABPH prior to or after the Closing, except that the Seller may
increase annual compensation to employees of the Au Bon Pain Division with an
annual salary of less than $50,000 in the ordinary course of business on a basis
consistent with past practices;
(vi) discontinue or materially diminish any insurance
coverage applicable to the Business;
(vii) cancel or compromise any material legal right or claim
of or debts owed to Seller in respect of the Business;
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(viii) enter into any non-competition, non-solicitation or
indemnification agreements with any Person, the terms of which shall be binding
upon ABPH after the Closing;
(ix) incur or suffer to exist any indebtedness of or
Encumbrance upon any assets of Seller which shall constitute a liability of ABPH
after the Closing, except: (1) to the extent incurred pursuant to contracts
entered into on or prior to the date hereof; or (2) which otherwise is incurred
in the ordinary and usual course of business; or (3) which shall be discharged
on or prior to the Closing Date; or (4) which is contemplated by any of the
Transaction Documents to be incurred prior to the Closing Date;
(x) (i) mortgage, pledge or subject to any Encumbrance any
of its assets; (ii) cancel or compromise any material claim of or material debts
owed to it in respect of the Business; (iii) except in the ordinary course of
business, sell, lease or transfer any of the assets of the Business; (iv) sell,
assign or transfer any of the Intellectual Property of the Business; (v) pay any
dividends in respect of its capital stock; (vi) increase any salaries or bonuses
of its employees for any employee with an annual salary of $50,000 or higher;
(vii) materially change its accounting or cash management policies and
practices; (viii) enter into any transactions with any of its Affiliates except
in the ordinary course of business or as may otherwise be contemplated by this
Agreement and the Schedules hereto or (ix) unless otherwise agreed upon by both
Buyer and Seller upon mutually acceptable terms and conditions, commence the
conversion or remodeling of any of its bakery/cafes in accordance with its
ABP2000 program;
(xi) enter into any amendments for any of its store leases to
be transferred to ABPH in connection with the Restructuring which would have the
effect of shifting the economic impact of such amendments from the first year of
such lease immediately following the Closing into subsequent years so as to
avoid any Lease Fee Adjustment that would otherwise result from such amendment;
or
(xii) agree to do, or acquiesce in, any of the foregoing acts.
(c) the Seller shall cause ABPH to, and ABPH shall:
(i) maintain itself as a corporation duly incorporated and
in good standing under its state of incorporation and conduct its Business in
the same manner as it historically has been conducted in the usual and ordinary
course; and
(ii) use reasonable commercial efforts to maintain and/or
preserve its assets in accordance with past practices and customs; and
(iii) not make any change or amendment to its certificate of
incorporation or bylaws.
(d) without the prior written consent of Buyer, the Seller shall
not permit ABPH to:
(i) enter into any transaction other than in the ordinary
course of business;
(ii) enter into any transaction with any Affiliate, except as
otherwise provided for herein, or any transaction which is not at arms-length
with any unaffiliated Person;
(iii) wind-up, dissolve, liquidate (completely or partially),
acquire any capital assets, other than in the ordinary course of business, merge
or consolidate into or with any other person, or sell, lease, exchange,
transfer, or otherwise dispose of, or grant to any person a right or option to
lease, acquire, or purchase any material amount of the assets of ABPH or the Au
Bon Pain Division (including any part of them or any interest therein), except
as expressly contemplated by this Agreement;
(iv) sell, assign, transfer, lease or remove or suffer any
material uninsured casualty loss of any material assets (tangible and
intangible) from ABPH or the Au Bon Pain Division facilities or premises,
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unless such assets are replaced before the Closing Date with similar items of
equal quality and utility and without incurring any indebtedness or Encumbrance;
(v) issue any shares of capital stock of ABPH or any
securities convertible into or exercisable or exchangeable for capital stock or
options to purchase capital stock or other rights in respect of any of the
foregoing; provided, however, ABPH may issue to Seller shares of its' capital
stock in consideration of the Seller assigning its interest in certain leases,
contracts and assets to ABPH pursuant to the Restructuring contemplated by
Section 5.06;
(vi) declare, set aside, pay or make any dividend or other
distribution or payment with respect to, or redeem, purchase, or otherwise
acquire, split, combine, or reclassify, any shares of their capital stock or
otherwise change their capital structure;
(vii) discontinue or materially diminish any insurance
coverage applicable to them;
(viii) cancel or compromise any material contract of, or legal
right or claim of or debts owed to, ABPH or the Au Bon Pain Division;
(ix) enter into any non-competition, non-solicitation or
indemnification agreements with any third Person, the terms of which shall
survive the Closing Date;
(x) incur or suffer to exist any indebtedness of or
Encumbrance upon any assets of any of ABPH or the Au Bon Pain Division, except:
(1) to the extent incurred pursuant to contracts entered into by Seller or ABPH
on or prior to the date hereof; or (2) which otherwise is incurred in the
ordinary and usual course of business; or (3) which shall be discharged on or
prior to the Closing Date; or (4) which is contemplated by any of the
Transaction Documents to be incurred prior to the Closing Date.
(xi) agree to do, or acquiesce in, any of the foregoing acts.
Section 5.02 ACCESS TO INFORMATION.
Except as may be deemed appropriate by Seller to ensure compliance
with any Applicable Laws, from the date of this Agreement until the Closing
Date, the Seller shall, and shall cause the Au Bon Pain Division and ABPH to,
give Buyer and its representatives (including financing sources) reasonable
access to all information (financial or otherwise) relating to the Business
reasonably requested by or on behalf of Buyer, its financing sources, and their
respective representatives, including, without limitation, at all reasonable
times and upon reasonable notice, access to books, records, Returns, facilities,
properties, officers, accountants and representatives. Buyer shall use best
efforts to minimize any disruption to the Business, and shall not otherwise
interfere with the operation of the Business of the Au Bon Pain Division by
Seller so long as such operation is in the ordinary course of business
consistent with past custom and practice.
Section 5.03 RESOLUTION OF AFFILIATED TRANSACTIONS.
On or prior to the Closing, Seller shall pay, satisfy, discharge and
release any and all claims of Seller against ABPH, all of which are reflected on
SCHEDULE 3.14, unless otherwise specifically noted thereon.
Section 5.04 TRANSFER OR ENCUMBRANCE OF THE ABPH COMMON STOCK.
From the date hereof until the Closing, the Seller shall not (a)
sell, transfer, issue or otherwise convey any interest in or to any of the ABPH
Common Stock or any options, warrants or other rights to acquire shares of the
ABPH Common Stock or (b) incur or allow to exist any Encumbrances upon any
shares of the ABPH Common Stock which shall survive the Closing.
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Section 5.05 NON-SOLICITATION OF EMPLOYEES.
(a) From and after the Closing Date until the second
anniversary of the Closing Date, neither Seller nor any of its Affiliates shall,
on its own behalf or on behalf of any other Person, without prior written
approval of Buyer, directly or indirectly solicit any person who is an employee
(with a salary in excess of $40,000) of ABPH at any time on or after the date of
this Agreement to terminate his or her relationship with ABPH.
(b) From and after the Closing Date until the second
anniversary of the Closing Date, neither the Buyer nor any of its Affiliates
shall, on its own behalf or on behalf of any other Person, without prior written
approval of Seller, directly or indirectly solicit any person who is an employee
(with a salary in excess of $40,000) of the Seller or any of its subsidiaries on
or after the date of this Agreement to terminate his or her relationship with
the Seller or any of its subsidiaries.
Section 5.06 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES.
Immediately prior to the Closing and only for the purpose of
consummating the transactions contemplated by this Agreement, Seller shall
transfer and assign or sublease to ABPH (for no additional consideration from
Buyer) all of Seller's right, title and interest in and to the assets (including
Intellectual Property), contracts, leases and agreements including, without
limitation, all development agreements and individual franchise agreements
(foreign and domestic) and ABPH shall assume certain liabilities, in each case
relating to the Au Bon Pain Division, pursuant to a Contribution Agreement to be
entered into in the form attached hereto as EXHIBIT 5.06 (the "RESTRUCTURING")
on terms which include all authorizations and consents which are necessary to
permit the sale of the ABPH Common Stock to Buyer; provided, however, that
Seller shall not assign or sublease to ABPH any store lease or other contract
for which it fails or is unable to obtain a consent required under or in
connection with such lease as a condition to such assignment or sublease or to
the sale of the ABPH Common Stock to Buyer as contemplated herein.
Section 5.07 CHANGE OF CORPORATE NAME.
At the Closing, Seller shall change its corporate name to any name
which does not include the name "Au Bon Pain". From and after the Closing,
Seller and its Affiliates shall cease using the trade name "Au Bon Pain" in
connection with any of its business activities, except for any stores franchised
by Buyer to Seller pursuant to Section 2.05(b).
ARTICLE VI
COVENANTS OF BUYER AND SELLER
Section 6.01 SELLER CONSENTS.
(a) As soon as reasonably practical after the execution and
delivery of this Agreement, and in any event on or before the Closing Date,
Seller shall use its commercially reasonable best efforts to obtain the written
consent of the Persons whose approval is required in order for Seller to effect
the transactions contemplated (including those transactions contemplated by the
Contribution Agreement entered into pursuant to Section 5.06)) and shall furnish
to Buyer executed copies of such consents. In addition, Seller shall use its
commercially reasonable best efforts to obtain the written consent of all
Persons necessary to permit the transfer to ABPH, and thereupon to consummate
the transactions contemplated by this Agreement, of those leases designated on
Attachment "A" to SCHEDULE 3.23 and designated as "Franchise Locations for which
Seller Subleases or Guarantees the Leases"; provided, however, that the failure
of Seller to secure any such consents shall not be a condition to the
consummation of the transactions contemplated hereby. The requested form of all
consents referred to above in this Section 6.01 that will be sent by Seller
shall be provided to Buyer prior to their transmittal and shall be reasonably
acceptable to Buyer. Seller shall
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use best efforts to obtain all governmental approvals and consents necessary or
required for the consummation of the transactions contemplated hereby in form
and substance reasonably satisfactory to Buyer. Seller shall pay and assume all
fees and expenses incurred and paid or to be paid to all landlords of all Au Bon
Pain bakery/cafes in connection with obtaining all such approvals and consents.
Seller may, as an inducement to any landlord to provide such approval or
consent, commit on behalf of ABPH (but not as a liability of Seller) to remodel
the premises which is the subject of such approval or consent in accordance with
Seller's ABP2000 remodeling program; PROVIDED, that: (i) the remaining lease
term for any such store (including all option terms available under such lease)
continues until at least December 31, 2001; and (ii) such commitments shall not
require the remodeling of more than twenty (20) stores in the aggregate.
(b) With respect to those leases identified on SCHEDULE 6.01,
if, after a request made by Seller for consent to transfer such lease to ABPH in
connection with the consummation of the transactions pursuant to this Agreement,
the landlord for such lease does not provide such consent on or immediately
prior to the Closing Date (or Seller reasonably determines that a request for
such consent cannot be made without unduly risking a termination of such lease
pursuant to any so-called "recapture" provision contained in such lease), Seller
shall assign such lease to a designee of Buyer immediately prior to the Closing
who shall become an Au Bon Pain franchisee pursuant to a franchise agreement in
form and substance mutually satisfactory to Buyer and Seller, and no Lease Loss
Adjustment shall be made with respect any such Leases.
Section 6.02 BUYER CONSENTS.
As soon as reasonably practical after the execution and delivery of
this Agreement, and in any event on or before the Closing Date, Buyer shall use
its best efforts to obtain the written consent of the persons and entities
(other than with respect to landlords of the stores) whose approval is required
in order for Buyer to effect the transactions contemplated hereby and shall
furnish to Seller executed copies of such consents. Buyer shall use best efforts
to obtain all governmental approvals and consents necessary or required for the
consummation of the transactions contemplated hereby.
Section 6.03 STOCKHOLDERS' MEETING.
Subject to Seller's right to terminate this Agreement pursuant to
Section 10.01(d), Seller shall take all action necessary to convene a special
meeting of Sellers stockholders in accordance with Applicable Law and its
Certificate of Incorporation and bylaws as promptly as practicable for the
purpose of considering and taking action on this Agreement. The board of
directors of Seller shall recommend, subject to its right to consider and
recommend to stockholders an Alternative Transaction pursuant to Section
10.01(d), that Sellers' stockholders vote in favor of and approve this Agreement
and the transactions contemplated hereby. In connection therewith, Seller shall
prepare and file with the SEC proxy materials, and use its best efforts to
respond promptly to any SEC comments with respect to such proxy materials, and
thereafter to cause its final proxy statement and form of proxy to be mailed to
Seller's stockholders, all in compliance with Applicable Law. Seller shall
provide Buyer with a reasonable opportunity to review and comment upon Seller's
proxy statement prior to its filing with the SEC, and shall keep Buyer informed
of any comments and/or requests for amendments to such proxy statement from the
SEC or its staff, and shall provide Buyer with a reasonable opportunity to
review and comment upon any amendments or supplements to such proxy statement.
Section 6.04 BUYER'S FINANCING.
From and after the date hereof, Buyer shall diligently undertake in
good faith to cause all conditions necessary from the completion of the
financing transactions contemplated by the commitment letters attached hereto as
SCHEDULE 4.07, and shall use best efforts to complete such financing upon the
terms contained in such commitment letters in a timely manner so as not to delay
or prevent the consummation of the transactions contemplated by this Agreement.
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ARTICLE VII
OTHER COVENANTS OF THE PARTIES
Section 7.01 FURTHER ASSURANCES.
Subject to the terms and conditions of this Agreement, each party
hereto shall use all reasonable commercial efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
desirable under this Agreement and Applicable Laws to consummate the
transactions contemplated by this Agreement. Buyer and Seller shall execute and
deliver such other documents, certificates, agreements and other writings and
take such other actions as may be necessary or desirable in order to consummate
or implement expeditiously the transactions contemplated by this Agreement.
Except as otherwise expressly set forth in the Transaction Documents (including,
without limitation, as set forth in Section 6.01), nothing in this Section 7.01
shall require Buyer or Seller or ABPH or any of their Affiliates to make any
payments in order to obtain any consents or approvals necessary or desirable in
connection with the consummation of the transactions contemplated by this
Agreement. Buyer and Seller acknowledge and agree that, except for the express
covenants contained herein and in the Transaction Documents, nothing contained
herein is intended to, nor shall operate as, any restriction or limitation on
the general operating procedures, practices and policies or the marketing and
business strategies (including the trade dress) of Seller's affiliate, Saint
Louis Bread Company, Inc., or of the Business of the Au Bon Pain Division upon
its transfer to ABPH as contemplated by this Agreement.
Section 7.02 CERTAIN FILINGS; CONSENTS.
Buyer and Seller shall cooperate with one another (i) in determining
whether any action by or in respect of, or filing with, any Governmental
Authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and
(ii) subject to the terms and conditions of this Agreement, in taking such
actions or making any such filings (and paying any required filing fees as
provided by Applicable Law), furnishing information required in connection
therewith and seeking timely to perform any such actions, or obtain any such
consents, approvals or waivers.
Section 7.03 PUBLIC ANNOUNCEMENTS.
Neither Buyer nor Seller shall make any public announcement relating
to the transactions contemplated by this Agreement without the prior consent of
the other parties, except as may be required by Applicable Law based on an
opinion of counsel. Upon execution of this Agreement, Seller shall issue a press
release in form and content reasonably satisfactory to Buyer, and Seller may
file a Current Report on Form 8-K, announcing the signing of this Agreement.
Seller shall provide Buyer with a draft copy of such Form 8-K prior to its
filing with the SEC. The parties agree that prior to Closing and except as may
be required by Applicable Law based on an opinion of counsel, the timing and
content of all other press releases and other public announcements, and all
communications with Seller's and ABPH's customers, suppliers and employees
relating to the transactions contemplated by this Agreement shall be mutually
agreed upon and the content of which will be determined jointly by Buyer and
Seller. The foregoing provision notwithstanding, in the event that Seller
determines that a press release or other public announcement is necessary to
comply with any Applicable Law, Seller may issue any such press release or other
public announcement Seller deems necessary to comply with any such Applicable
Law without Buyer's consent; provided that Seller shall use its reasonable best
efforts to give Buyer an opportunity to review such press release or other
public announcement prior to the issuance of such press release or other public
announcement. Buyer acknowledges that Seller and ABPH will communicate with its
customers, suppliers, employees and franchisees contemporaneously with the
initial public announcement of the transactions contemplated by this Agreement
and Buyer hereby consents to such communications.
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Section 7.04 H-S-R ACT.
The Seller and Buyer shall use their best efforts to file as soon as
practicable any notifications required under the H-S-R Act (and not heretofore
obtained) in connection with the transactions contemplated hereby, and to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "ANTITRUST DIVISION") for additional information or documentation
and to respond as promptly as practicable to all inquiries and requests received
from any state Attorney General or other governmental authority in connection
with antitrust matters.
Section 7.05 POST-CLOSING RESTRICTIVE COVENANTS.
(a) During the twenty-four (24) month period following the
Closing Date, neither ABPH nor any of its Affiliates shall open, and shall not
permit any of its franchisees to open, within the continental United States,
more than sixty (60) bakery/cafes. Such sixty (60) store limit shall be
exclusive of: (1) stores opened anywhere outside of the continental United
States; (2) stores opened in "Trade Channel Locations" (as that term hereinafter
is defined); and (3) stores located within the corporate limits of each of the
following cities and counties: City of Boston; City of Cambridge, Massachusetts;
New York City; the District of Columbia; City of Chicago; City of Pittsburgh;
City of Philadelphia; and Dade County, Florida. As used herein, the term "TRADE
CHANNEL LOCATIONS" shall mean hospitals; hotels; on-campus universities;
airport, bus and railroad terminals; gasoline stations; and sports arenas.
(b) During the eighteen (18) month period following the Closing
Date, ABPH shall not engage in or be the subject of any transaction or series of
transactions resulting in a "Change of Control" (including, but not limited to,
a Change of Control resulting from one or more sales of assets and/or capital
stock, the franchising and/or licensing of the business concept and ancillary
intellectual property rights, or otherwise). As used herein the term "CHANGE OF
CONTROL" shall mean any transaction or series of transactions in which as a
result (a) ABPH or a substantial portion of its business, directly or
indirectly, through one or more intermediaries, is controlled by (whether by a
sale of assets or capital stock, franchise agreement, joint venture or
otherwise), any Person in the food service and/or bakery/cafe business with at
least 300 owned and/or franchised units, or its Affiliate, other than BRS; or
(b) ABPH or a substantial portion of its business, together with any Person in
the retail food service and/or bakery/cafe business with at least 300 owned
and/or franchised units, or its Affiliate, is under common control (whether by a
sale of assets or capital stock, franchise agreement, joint venture or
otherwise) by BRS; or (c) ABPH ceases to own substantially all of the assets
used or useful in the ownership and operation of the principal business concept
utilized by ABPH. The foregoing notwithstanding, nothing contained herein shall
restrict in any way Buyer or any of its Affiliates from purchasing or acquiring
any interest in any business: (1) which does not own or operate or franchise any
bakery/cafe, restaurant or food service business in which the retail sale of
baked goods (meaning breads, muffins, bagels, cookies and other baked sweet
goods, but excluding pizza dough) and coffee constitutes less than twenty-five
percent (25%) of the sales of such business, without regard to the number of
units owned and/or franchised by such business; or (2) in which more than fifty
percent (50%) of its sales consist of bagels, without regard to the number of
units owned and/or franchised by such business.
(c) Without limiting the provisions of Sections 9.01 and 11.04, the
restrictions set forth in this Section 7.05 shall survive the Closing and shall
be binding upon any and all successors and assigns of Buyer.
Section 7.06 BUYER EMPLOYEE COVENANTS.
(a) Buyer shall offer employment to a sufficient number of Seller's
employees so that Seller shall have no duties or obligations under the WARN Act
or any comparable statute under Applicable Law.
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(b) If ABPH does not employ all of Seller's Employees listed on
SCHEDULE 3.19 immediately upon consummation of the Closing and Seller thereafter
terminates such Employees who are not so employed by ABPH within six (6) months
following the Closing and makes a severance payment to such Employee pursuant to
the terms of an employment or severance agreement in effect as of the date
hereof and disclosed herein, then Buyer shall reimburse Seller the full amount
of any such severance payment in the event that ABPH or any of its Affiliates
subsequently employs such Employee in connection with the Business within one
(1) year after the Closing; provided, however, that nothing contained herein
shall impose upon Buyer any obligation in respect of any so-called "stay
bonuses" (that is, any bonuses guaranteed for any employee based solely on their
continued employment with Seller through a date certain) granted by Seller to
any of its employees, and; provided, further, that Seller shall pay such "stay
bonuses" to any of its employees who may earn them.
(c) At the Closing, ABPH and Louis I. Kane shall enter into a
Severance and Benefits Letter Agreement in the form attached hereto as
EXHIBIT 7.06.
Section 7.07 SELLER EMPLOYEE COVENANT.
Seller will be responsible for managing the administration of
continuation coverage ("COBRA" coverage) of eligible employees who leave the
employ of the Seller prior to or on the Closing Date.
Section 7.08 TRANSITION SERVICES AGREEMENT.
At the Closing, Seller, ABPH and Saint Louis Bread Company, Inc.
shall enter into a Transition Services Agreement in the form attached hereto as
EXHIBIT 7.08.
ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.01 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY.
The obligations of Buyer and Seller to consummate the Closing are
subject to the satisfaction (or waiver) of the following conditions:
(a) Any applicable waiting period (or extensions thereof) under
the H-S-R Act relating to the transactions contemplated by this Agreement shall
have expired without any adverse action having been taken by the Federal Trade
Commission or the U.S. Department of Justice (or Buyer and Seller shall have
received notice of early termination);
(b) No temporary restraining order, preliminary or permanent
injunction, or other order by any federal or state court of competent
jurisdiction in the United States restraining or prohibiting the consummation of
the transactions contemplated hereby shall be in effect (each party agreeing to
use its reasonable commercial efforts to have any such restraining order,
injunction or other order lifted);
(c) All consents or actions by or in respect of or filings with
any Governmental Authority required to permit the consummation of the
transactions contemplated hereby shall have been taken or obtained other than
those which would not cause or have a material adverse effect on the Seller or
Buyer;
(d) The Restructuring transactions contemplated by Section 5.06
(including the execution and delivery of the Contribution Agreement) shall have
been completed; and
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(e) The total amount of the Lease Fee Adjustments and the Lease
Loss Adjustments shall not exceed Twelve Million Five Hundred Thousand Dollars
($12,500,000) in the aggregate.
Section 8.02 CONDITIONS TO OBLIGATIONS OF THE SELLER.
In addition to the conditions set forth in Section 8.01, the
obligations of the Seller to consummate the Closing are subject to the
satisfaction (or waiver) by Seller of the following further conditions:
(a) Buyer and BRS shall each have performed in all material
respects all of its obligations under the Transaction Documents required to be
performed by it on or prior to the Closing Date;
(b) The representations and warranties of Buyer and BRS
contained in the Transaction Documents (except for representations and
warranties that by their terms speak expressly as of a specific date) shall be
true and accurate at and as of the Closing Date, as if made at and as of such
date and the Seller shall have received a certificate signed by an executive
officer of each of Buyer and BRS to the foregoing effect;
(c) Seller shall have received from Buyer's and BRS's counsel, an
opinion dated the Closing Date in form and substance reasonably acceptable to
Seller;
(d) A majority-in-voting-interest of the Shareholders of Seller
shall have duly approved all transactions contemplated hereby;
(e) The Board of Directors of Seller shall have received a
fairness opinion to the effect that the transactions contemplated by this
Agreement are fair, from a financial perspective, to the Shareholders of Seller,
from a Person and in form and content reasonably satisfactory to the Board of
Directors of Seller;
(f) Seller or ABPH, as the case may be, shall have obtained all
consents or approvals of third parties (except for the consents or approvals of
landlords for the bakery/cafe stores of the Au Bon Pain Division) or
Governmental Authorities required for the consummation of the transactions
contemplated by this Agreement, including those described in SCHEDULE 5.06;
(g) Buyer shall have executed and delivered to Seller an ABP
Restriction Agreement substantially in the form attached hereto as SCHEDULE
8.02(g);
(h) Seller shall have received a certificate of a duly authorized
officer of Buyer to the effect set forth on SCHEDULE 8.02(h);
(i) Seller shall have received a certificate of the Secretary or an
Assistant Secretary of Buyer to the effect set forth on SCHEDULE 8.02(i);
(j) Seller shall have received a corporate good standing
certificate concerning Buyer from the Secretary of State of Delaware; and
(k) Buyer shall have executed and delivered to Seller all other
agreements, instruments and documents contemplated in connection with the
transactions described herein or in any other agreement, instrument or document
executed and/or delivered in connection herewith.
Section 8.03 CONDITIONS TO OBLIGATION OF BUYER.
In addition to the conditions set forth in Section 8.01, the
obligation of Buyer to consummate the Closing is subject to the satisfaction (or
waiver by Buyer) of the following further conditions:
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(a) Seller and ABPH shall have performed in all material respects
all of their respective obligations under the Transaction Documents required to
be performed by them at or prior to the Closing Date;
(b) The representations and warranties of the Seller contained
in the Transaction Documents (except for representations and warranties that by
their terms speak expressly as of a specific date) shall be true and accurate at
and as of the Closing Date, as if made at and as of such date and Buyer shall
have received certificates signed by an executive officer of Seller to the
foregoing effect;
(c) There shall have been no material adverse change since July
11, 1998 in the Business, assets, condition (financial or otherwise), operating
results, customers, supplier and employer relations, or business prospects of
the Au Bon Pain Division or ABPH taken as a whole;
(e) Buyer shall have received the cash proceeds of the financings
described in the commitment letters attached hereto as SCHEDULE 4.07;
(f) ABPH shall have no obligations with respect to Funded Debt;
(g) Seller or ABPH, as the case may be, shall have obtained all
consents or approvals of third parties (except for the consents or approvals of
landlords for the bakery/cafe stores of the Au Bon Pain Division) or
Governmental Authorities required for the consummation of the transactions
contemplated by this Agreement, including the transactions contemplated by the
Contribution Agreement to be entered into pursuant to Section 5.06;
(h) Buyer shall have received an opinion of Gadsby & Hannah LLP,
Seller's counsel, dated the Closing Date in form and substance reasonably
acceptable to Buyer;
(i) Buyer shall have received a certificate of a Co-Chairman of
Seller to the effect set forth on SCHEDULE 8.03(i);
(j) Buyer shall have received a certificate of the Secretary or an
Assistant Secretary of each of Seller and ABPH to the effect set forth on
SCHEDULE 8.03(j);
(k) Buyer shall have received a corporate good standing certificate
concerning Seller and ABPH from the Secretary of State of Delaware;
(l) Seller shall have caused all officers and directors of ABPH to
tender their resignations from their elected offices (but not as employees),
effective as of the Closing Date;
(m) Seller shall have delivered to Buyer one or more stock
certificates representing one hundred percent of the issued and outstanding
capital stock of each of ABPH, together with: (1) stock powers duly executed in
blank; and (2) all corporate records of ABPH, including without limitation, all
minute books, stock ledgers and corporate seals;
(n) Seller shall have executed and delivered to Buyer all other
agreements, instruments and documents contemplated in connection with the
transactions described herein or in any other agreement, instrument or document
executed and/or delivered in connection herewith; and
(o) Seller shall have, as of the Closing Date, waived all
rights and claims held by it against ABPH, except for any such rights and claims
arising under or in connection with any of the Transaction Documents and the
transactions contemplated thereby.
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ARTICLE IX
SURVIVAL; INDEMNIFICATION
Section 9.01 SURVIVAL.
Except as otherwise specifically provided in this Agreement, each of
the covenants, agreements, representations and warranties of the parties
contained herein or in any certificate or other writing delivered pursuant to
this Agreement shall survive the Closing for a period of three (3) months
following the completion of the first full audit cycle of the Buyer following
the Closing Date; provided, however, that the representations and warranties set
forth in: (a) Sections 3.01, 3.02, 3.03 and 3.18 shall survive forever; (b)
Section 3.11 shall survive until thirty (30) days after the expiration of the
statute of limitations provided by Applicable Law (or extensions or waivers
thereof); and (c) Section 3.22 shall survive for thirty-six (36) months
following the Closing Date.
Section 9.02 INDEMNIFICATION.
Subject to Section 9.01:
(a) Indemnification of Buyer by the Seller. Seller hereby
indemnifies Buyer and, with respect to any representation, warranty, covenant or
agreement made or to be performed prior to or at the Closing, ABPH against and
agrees to defend and hold Buyer and ABPH harmless from any and all Damages
incurred or suffered by Buyer or ABPH or their respective Affiliates, directors,
officers or shareholders arising out of any breach of any representation,
warranty, covenant or agreement made or to be performed by the Seller pursuant
to any of the Transaction Documents.
(b) Indemnification of the Seller by Buyer. Buyer and, with
respect to any representation, warranty, covenant or agreement made or to be
performed after the Closing, ABPH hereby indemnifies Seller and its Affiliates
against and agrees to defend and hold Seller and its Affiliates harmless from
any and all Damages incurred or suffered by Seller and/or any of its Affiliates
arising out of any breach of any representation, warranty, covenant or agreement
made or to be performed by Buyer pursuant to any of the Transaction Documents.
In addition, Buyer and ABPH shall indemnify, defend and hold harmless Seller as
provided for in the Contribution Agreement, the ABP Restriction Agreement, or in
any other agreement or instrument executed and delivered by Buyer to Seller
and/or any Affiliate in connection with the transactions contemplated herein.
(c) In the absence of fraud, the indemnification rights set
forth in this Section 9 shall be the exclusive remedy available to any party
hereto for breach, by any other party to this Agreement, of any representation,
warranty, covenant or agreement herein contained.
Section 9.03 PROCEDURES.
Except as otherwise provided in Section 9.05:
(a) Notice. If Buyer or ABPH shall seek indemnification
pursuant to Section 9.02(a) or if Seller or its Affiliates shall seek
indemnification pursuant to Section 9.02(b), such Person seeking indemnification
(the "INDEMNIFIED PARTY") shall give written notice to the party from whom such
indemnification is sought (the "INDEMNIFYING PARTY") promptly (but in any event
within ten (10) days) after the Indemnified Party becomes aware of the facts
giving rise to such claim for indemnification (an "INDEMNIFIED CLAIM") stating
the amount of the Damages, if known, and the method of computation thereof. The
failure of an Indemnified Party to provide notice pursuant to this Section 9.03
shall not constitute a waiver of that party's claims to indemnification pursuant
to Section 9.02 except to the extent of material prejudice to the Indemnifying
Party. If the Indemnified Claim arises from the assertion of any claim, or the
commencement of any suit, action or
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proceeding brought by a Person that is not a party hereto (a "THIRD PARTY
CLAIM") any such notice to the Indemnifying Party shall be accompanied by a copy
of any and all papers theretofore served on the Indemnified Party in connection
with such Third Party Claim. With respect to any Third Party Claim asserted or
brought prior to the Closing Date, notice of such Third Party Claim shall be
deemed to have been delivered on the Closing Date.
(b) Defense and Settlement of Third Party Claims.
(i) Assumption of Defense by Indemnifying Party. Upon
receipt of notice of a Third Party Claim from an Indemnified Party pursuant to
Section 9.03(a), the Indemnifying Party shall, subject to the provisions of
Section 9.03(b)(ii), (iii) and (iv), assume the defense and control of such
Third Party Claim by written notice to the Indemnified Party within twenty (20)
days of receipt of notice from the Indemnified Party, but shall allow the
Indemnified Party a reasonable opportunity to participate in the defense thereof
with its own counsel and at its own expense; provided that such participation
shall not constitute a shared defense as described in Section 9.03(b)(iv). The
Indemnifying Party shall select counsel, independent contractors and consultants
of recognized standing and competence after consultation with the Indemnified
Party; shall take all steps necessary in the defense or settlement thereof; and
shall at all times diligently and promptly pursue the resolution thereof. In
conducting the defense thereof, the Indemnifying Party shall at all times act as
if all Damages relating to such Third Party Claim were for its own account and
shall act in good faith and with reasonable prudence to minimize Damages
therefrom. The Indemnified Party shall, and shall cause each of its Affiliates,
directors, officers, employees, and agents to, cooperate fully with the
Indemnifying Party in the defense of any Third Party Claim defended by the
Indemnifying Party.
(ii) Continuing Notice of Certain Claims. The Indemnifying
Party shall give prompt and continuing notice to the Indemnified Party of any
Third Party Claims that may: (1) result in the assertion of criminal liability
on the part of the Indemnified Party or any of its Affiliates, directors,
officers, employees or agents; (2) adversely affect the ability of the
Indemnified Party to do business in any jurisdiction or in any manner or with
any customer; (3) materially affect the reputation of the Indemnified Party or
any of its Affiliates, directors, officers, employees or agents; or (4) involves
a request for equitable or injunctive relief.
(iii) Settlement of Claims. Subject to the provisions of
Section 9.03(b)(iv), the Indemnifying Party shall be authorized to consent to a
settlement of, or the entry of any judgment arising from, any Third Party
Claims, in each case without the consent of any Indemnified Party; provided,
that the settlement involves monetary damages only and the Indemnifying Party
(1) shall pay or cause to be paid all amounts arising out of such settlement or
judgment concurrently with the effectiveness thereof; (2) shall not encumber any
of the assets of any Indemnified Party or agree to any restriction or condition
that would apply to such Indemnified Party or to the conduct of that party's
business; and (3) shall obtain, as a condition of any settlement or other
resolution, a complete release of each Indemnified Party.
(iv) Shared Defense. Each party may elect to share the
defense of a Third Party Claim the defense of which has been assumed by the
other party pursuant to Section 9.03(b)(ii). In that event, the Indemnified
Party shall so notify the Indemnifying Party in writing. Thereafter, the
Indemnifying Party and the Indemnified Party shall participate on an equal basis
in the defense, management and control of any such claim. The Indemnifying Party
and the Indemnified Party shall select mutually satisfactory counsel,
independent contractors and consultants to conduct the defense or settlement
thereof (the costs and expenses of which shall be shared equally by the
Indemnifying Party and the Indemnified Party), and shall at all times diligently
and promptly pursue the resolution thereof.
(c) Dispute Resolution. If the Indemnifying Party and the
Indemnified Party are unable to agree with respect to a procedural matter
arising under Section 9.03(b)(iv), the Indemnifying Party and the Indemnified
Party shall, within twenty (20) days after notice of disagreement given by
either party, agree upon a third-party arbitrator or referee ("REFEREE"), who
shall be an attorney and who shall have the authority to review and resolve the
disputed matter. The parties shall present their differences in writing (each
party
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simultaneously providing to the other a copy of all documents submitted) to the
Referee and shall cause the Referee promptly to review any facts, law or
arguments either the Indemnifying Party or the Indemnified Party may present.
The Referee shall be retained to resolve specific differences between the
parties within the range of such differences. Either party may request that all
oral arguments presented to the Referee by either party be in each other's
presence. The decision of the Referee shall be final and binding unless both the
Indemnifying Party and the Indemnified Party agree otherwise in writing. The
parties shall share equally all costs and fees of the Referee.
(d) In the event that the Indemnifying Party fails to assume or
continue the defense and control of any Third Party Claim:
(i) the Indemnified Party may, in replacement of the
Indemnifying Party, assume the defense and control of such Third Party Claim,
select counsel, independent contractors and consultants of recognized standing
and competence, and take any other steps necessary in the defense or settlement
thereof, and, for so long as the Indemnified Party is in control of such Third
Party Claim, the provisions of Section 9.03(b)(i) otherwise applicable to the
Indemnified Party shall apply to the Indemnifying Party and the provisions of
Section 9.03(b)(i) otherwise applicable to the Indemnifying Party shall apply to
the Indemnified Party; and
(ii) the Indemnifying Party will remain responsible for any
Damages the Indemnified Party may suffer as provided in Section 9.02.
(e) All amounts paid under this Section 9 shall be treated as
an adjustment to the Purchase Price.
Section 9.04 DEDUCTIBLE AMOUNT.
(a) The Buyer Indemnified Parties shall not be entitled to seek
indemnification for any breach of any representation or warranty pursuant to
Section 9.02(a) until the aggregate amount of the Damages actually paid by the
Buyer Indemnified Parties exceeds One Million Dollars ($1,000,000) (the
"DEDUCTIBLE AMOUNT"). In the event that the Deductible Amount is exceeded, the
Buyer Indemnified Parties shall be entitled to seek indemnification only to the
extent of Damages incurred in excess of the Deductible Amount. Notwithstanding
the foregoing, any Buyer Indemnified Party shall be entitled to indemnification
without regard to the Deductible Amount if the claim for such indemnification
arises from a breach of the representations and warranties set forth in Sections
3.01, 3.02, 3.03, 3.11, 3.14 or 3.18.
(b) The Seller and its Affiliates shall not be entitled to seek
indemnification until the aggregate amount of Damages actually paid by the
Seller and/or its Affiliates exceeds the Deductible Amount. In the event that
the Deductible Amount is exceeded, the Seller and its Affiliates shall be
entitled to seek indemnification only to the extent of Damages incurred in
excess of the Deductible Amount. Notwithstanding the foregoing, any Seller
Indemnified Party shall be entitled to indemnification without regard to the
Deductible Amount if the claim for such indemnification arises under Section
4.06 or pursuant to any agreement or instrument described in the second sentence
of Section 9.02(b).
Section 9.05 TAX MATTERS.
(a) TAX SHARING AGREEMENTS. Any agreement regarding the sharing
of Tax or similar agreement between Seller and ABPH shall be terminated as of
the Closing Date and will have no further effect for any taxable year (whether
the current year, a future year, or a past year). All other Tax sharing
agreements or similar agreements with respect to or involving ABPH shall be
terminated as of the Closing Date. After the Closing Date, ABPH shall not be
bound or have any Liability under any Tax sharing agreements or similar
agreements.
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(b) INCOME TAX TREATMENT OF CAPITAL CONTRIBUTION TO ABPH AND
THE SALE OF ITS CAPITAL STOCK. Buyer and Seller agree that the Restructuring and
subsequent sale of the capital stock of ABPH to Buyer shall not be treated as a
transaction described in Section 351 of the Tax Code, and shall for federal and
state income Tax purposes be treated as a sale of the assets transferred by
Seller to ABPH in the Restructuring from Seller to Buyer.
(c) SECTION 338(h)(10) ELECTION. Seller will join with the
Buyer in making a timely election under Section 338(h)(10) of the Tax Code (and
any corresponding elections under state, local, or foreign tax law)
(collectively a "SECTION 338(h)(10) ELECTION") with respect to the purchase and
sale of the ABPH Common Stock hereunder. Seller will pay any Tax attributable to
the making of the Section 338(h)(10) Election. Seller will also pay any state,
local, or foreign Tax (and indemnify Buyer, ABPH, and Buyer's Subsidiaries
against any Adverse Consequences arising out of any failure to pay such Tax)
attributable to an election under state, local, or foreign law similar to the
election available under Section 338(g) of the Code (or which results from the
making of an election under Section 338(g) of the Code) with respect to the
purchase and sale of the ABPH Common Stock hereunder.
(d) ALLOCATION OF PURCHASE PRICE. Buyer and Seller will
allocate the Purchase Price and the liabilities of ABPH (plus other relevant
items) to the assets of ABPH for all purposes (including Tax and financial
accounting purposes) in a reasonable manner mutually agreed upon between them
which is consistent with the fair market values of such assets. Buyer, ABPH and
Seller will file all Returns (including amended Returns and claims for refund)
and information reports in a manner consistent with such values. Neither Buyer
nor Seller nor ABPH shall file any Return or take any position with any taxing
agency or authority which is inconsistent with such mutually agreed upon
allocation, except to the extent required by a Governmental Authority in a
determination binding upon either such party unless such party provides
reasonable written notice and opportunity to the other party at such party's
sole expense to contest and appeal such determination on behalf of both parties
and such determination nevertheless becomes final.
(e) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. Seller
shall prepare or cause to be prepared and file or cause to be filed all Returns
for ABPH for all periods ending on or prior to the Closing Date which are filed
after the Closing Date. Seller shall pay any Tax shown as owing on such Return
to the extent such Taxes are not reflected in the reserve for Tax Liability
shown on the face of the Closing Date Balance Sheet.
(f) FEDERAL RETURNS FOR PERIODS THROUGH THE CLOSING DATE.
Seller will include the income of ABPH (including any deferred income triggered
into income by U.S. Treasury Regulation Section 1.1502-13 and Reg. ss. 1.1502-14
and any excess loss accounts taken into income under U.S. Treasury Regulation
Section 1.1502-19) on the Seller's consolidated federal income Returns for all
periods through the Closing Date and pay any federal income Taxes attributable
to such income. ABPH will furnish Tax information to Seller for inclusion in
Seller's federal consolidated income Return for the period which includes the
Closing Date in accordance with ABPH's past custom and practice. Seller will
allow the Buyer an opportunity to review and comment after the Closing upon such
Returns (including any amended Returns) to the extent that they relate to ABPH.
Seller will take no position on such Returns that relate to ABPH that would
adversely affect ABPH after the Closing Date unless such position would be
reasonable in the case of a Person that owned ABPH both before and after the
Closing Date. The income of ABPH will be apportioned to the period up to and
including the Closing Date and the period after the Closing Date by closing the
books of ABPH as of the end of the Closing Date.
(g) TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING
DATE. Buyer shall prepare or cause to be prepared and file or cause to be filed
any Returns of ABPH for Tax periods which begin before and end after the Closing
Date. Seller shall pay to Buyer within fifteen (15) days after the date on which
Taxes are paid with respect to such periods an amount equal to the portion of
such Taxes which relates to the portion of such Taxable period ending on the
Closing Date to the extent such Taxes are not reflected in the reserve for Tax
Liability shown on the face of the Closing Date Balance Sheet. For purposes of
this Section
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9.05, in the case of any Taxes that are imposed on a periodic basis and are
payable for a Taxable period that includes (but does not end on) the Closing
Date, the portion of such Tax which relates to the portion of such Taxable
period ending on the Closing Date shall (A) in the case of any Taxes other than
Taxes based upon or related to income or receipts, be deemed to be the amount of
such Tax for the entire Taxable period multiplied by a fraction the numerator of
which is the number of days in the Taxable period ending on the Closing Date and
the denominator of which is the number of days in the entire Taxable period, and
(B) in the case of any Tax based upon or related to income or receipts, be
deemed equal to the amount which would be payable if the relevant Taxable period
ended on the Closing Date. Any credits relating to a Taxable period that begins
before and ends after the Closing Date shall be taken into account as though the
relevant Taxable period ended on the Closing Date. All determinations necessary
to give effect to the foregoing allocations shall be made in a manner consistent
with prior practice of ABPH.
(h) COOPERATION ON TAX MATTERS.
(i) Buyer, ABPH and Seller shall cooperate fully, as and to
the extent reasonably requested by the other party, in connection with the
filing of Returns pursuant to this Section 9.05 and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. ABPH and Seller agree (A) to retain all books and records with
respect to Tax matters pertinent to ABPH relating to any taxable period
beginning before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by Buyer or Seller, any extensions
thereof) of the respective taxable periods, and to abide by all record retention
agreements entered into with any Tax Authority, and (B) to use reasonable
efforts to give the other party reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the other party so
requests, ABPH or Seller, or the case may be, shall allow the other party to
take possession of such books and records.
(ii) Buyer and Seller further agree, upon request, to use
their best efforts to obtain any certificate or other document from any
governmental authority or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not limited
to, with respect to the transactions contemplated hereby).
(iii) Buyer and Seller further agree, upon request, to provide
the other party with all information that either party may be required to report
pursuant to Section 6043 of the Code and all Treasury Department Regulations
promulgated thereunder.
ARTICLE X
TERMINATION
Section 10.01 TERMINATION.
The Transaction Documents may be terminated at any time prior to the
Closing:
(a) by mutual written agreement of Buyer and Seller;
(b) by either Buyer or Seller if there shall be any law or
regulation that makes consummation of the transactions contemplated by this
Agreement illegal or otherwise prohibited or if consummation of the transactions
contemplated by this Agreement would violate any nonappealable final order,
decree or judgment of any court or Governmental Authority having jurisdiction;
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(c) by Buyer or Seller if the Closing shall not have been
consummated on or before the one hundred eightieth (180th) day following the
date of this Agreement; provided, however, that neither Buyer nor Seller may
terminate the Transaction Documents pursuant to this clause (c) if the Closing
shall not have been consummated by such date by reason of any inaccuracy of any
representation and warranty on the part of such party or the failure of such
party or any of its Affiliates to perform in all material respects any of its or
their respective covenants or agreements contained in the Transaction Documents;
and
(d) by Seller if, after receipt of a proposal for an
"Alternative Transaction" (as hereinafter defined), the Board of Directors of
Seller shall have withdrawn or modified its recommendation of consummating the
transactions contemplated by this Agreement. Any provision of the Agreement to
the contrary notwithstanding, nothing contained in this Agreement shall prevent
the Seller or its Board of Directors, from (i) furnishing non-public information
to, or entering into discussions or negotiations with, any Person in connection
with an unsolicited proposal or offer by such Person for a merger, consoli-
dation, business combination, sale or transfer of substantial assets or shares
of capital stock (whether by tender offer or otherwise) involving Seller or ABPH
(each, an "ALTERNATIVE TRANSACTION") or recommending an Alternative Transaction
to its stockholders, if and only to the extent that the Board of Directors of
the Seller determines in good faith after consultation with outside legal
counsel that such action is necessary for such Board of Directors to comply with
its fiduciary duties to stockholders under applicable law; or (ii) complying
with Rule 14e-2 promulgated under the Securities Exchange Act of 1934 with
regard to a proposal by any Person to acquire the Seller.
Any party desiring to terminate this Agreement pursuant to this Section 10.01
shall give written notice of such termination to the other parties to this
Agreement. Any provision of this Agreement to the contrary notwithstanding, in
the event of a second request by a Governmental Authority under the H-S-R Act,
the term of this Agreement shall extend through the fifth (5th) Business Day
after final determination under the H-S-R Act and no party shall be entitled to
terminate this Agreement as a result of not having received clearance under the
H-S-R Act prior to the final determination under the H-S-R Act.
Section 10.02 EFFECT OF TERMINATION.
(a) Except as provided in Section 10.02(b)-(c), if this
Agreement is terminated as permitted by Section 10.01, such termination shall be
without liability of any party (or any Affiliate, shareholder, director,
officer, employee, attorney, agent, consultant or representative of such party)
to any other party to this Agreement; provided, however, that if the
transactions contemplated by this Agreement fail to close as a result of a
breach of any Transaction Document by Buyer or Seller, such party shall be fully
liable for any and all Damages incurred or suffered by the other party as a
result of all such breaches.
(b) If Seller terminates this Agreement pursuant to Section
10.01(d), Seller shall thereupon pay to Buyer a termination fee of Two Million
Five Hundred Thousand Dollars ($2,500,000). The payment of such termination fee
shall be the sole and exclusive remedy of Buyer and its Affiliates against
Seller and any of its Affiliates with respect to the circumstances giving rise
to such payment.
(c) If this Agreement is terminated either: (i) by Buyer or
Seller as a result of the inability to satisfy the condition to Closing set
forth in Section 8.01(e) (relating to the total amount of the Lease Fee
Adjustments and the Lease Loss Adjustments); or (ii) by Buyer if there occurs a
material breach by Seller in any term, condition, covenant, representation or
warranty contained in any of the Transaction Documents, then Seller shall
reimburse Buyer for its out-of-pocket expenses actually incurred and paid in
connection with the transactions contemplated by this Agreement up to $500,000.
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ARTICLE XI
MISCELLANEOUS
Section 11.01 NOTICES.
All notices, requests and other communications to any party hereunder
shall be in writing (including telecopy or similar writing) and shall be given,
by telecopy, registered or certified mail or overnight delivery service:
if to ABPH after the Closing or, to Buyer :
c/o Bruckmann, Rosser, Sherrill & Co., Inc.
156 E. 56th Street
New York, New York 10022
Attention: Stephen Edwards
Telecopy: (212) 521-3799
with a copy to:
Kirkland & Ellis
Citicorp Center
153 E. 53rd Street
New York, New York 10022-4675
Attention: Adrian J. van Schie, Esq.
Telephone: (212) 446-4882
Telecopy: (212) 446-4900
if to ABPH prior to the Closing or, to the Seller
Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, Massachusetts
Attention: Mr. Ronald M. Shaich
Telephone: (617) 423-2100
Telecopy: (617) 451-8780
with a copy to:
Gadsby & Hannah LLP
225 Franklin Street
Boston, Massachusetts 02110-2811
Attention: Walter D. Wekstein, Esq.
Lawrence R. Katz, Esq.
Telephone: (617) 345-7000
Telecopy: (617) 345-7050
or to such other address or telecopy number and with such other copies, as such
party may hereafter specify for the purpose by notice to the other parties. Each
such notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified in
this Section 11.01 and evidence of receipt is received or (ii) if given by any
other means, upon delivery or refusal of delivery at the address specified in
this Section 11.01.
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Section 11.02 AMENDMENTS; WAIVERS.
(a) Any provision of the Transaction Documents may be amended
or waived prior to the Closing Date if, and only if, such amendment or waiver is
in writing and signed, in the case of an amendment, by Buyer and Seller, or in
the case of a waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right,
power or privilege under any Transaction Document shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law, unless otherwise expressly provided
herein.
Section 11.03 EXPENSES.
Except as otherwise provided in the Transaction Documents (including
Section 10.02(b) and Section 6.01), all costs and expenses incurred in
connection with the Transaction Documents shall be paid by the party incurring
such cost or expense. Seller shall not allocate any of its fees or expenses for
the transactions contemplated by this Agreement, including without limitation,
fees and expenses of counsel and brokers, to ABPH.
Section 11.04 SUCCESSORS AND ASSIGNS.
The provisions of the Transaction Documents shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns;
provided that no party may assign, delegate or otherwise transfer any of its
right or obligations under this Agreement without the consent of Buyer (in the
case of Seller and, prior to the Closing, ABPH) and Seller (in the case of Buyer
and, after the Closing, ABPH); provided, however, that each of Seller and Buyer
shall be permitted to collaterally assign its respective rights hereunder and
under the Transaction Documents to any institutional lender to whom Seller or
Buyer (as the case may be) is indebted for borrowed money.
Section 11.05 CONSTRUCTION.
As used in the Transaction Documents, any reference to the masculine,
feminine or neuter gender shall include all genders, the plural shall include
the singular, and the singular shall include the plural. With regard to each and
every term and condition of the Transaction Documents, the parties understand
and agree that the same have or has been mutually negotiated, prepared and
drafted, and that if at any time the parties desire or are required to interpret
or construe any such term or condition or any agreement or instrument subject
hereto, no consideration shall be given to the issue of which party actually
prepared, drafted or requested any term or condition of the Transaction
Documents.
Section 11.06 ENTIRE AGREEMENT.
(a) The Transaction Documents and any other agreements
contemplated thereby constitute the entire agreement among the parties with
respect to the subject matter of such documents and supersede all prior
agreements, understandings and negotiations, both written and oral, between the
parties with respect to the subject matter thereof.
(b) Except as expressly provided herein or in any other Transaction
Document, no Transaction Document or any provision thereof is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
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Section 11.07 GOVERNING LAW.
This Agreement shall be construed in accordance with and governed by
the law of The Commonwealth of Massachusetts (without regard to the choice of
law provisions thereof).
Section 11.08 COUNTERPARTS; EFFECTIVENESS.
This Agreement may be signed in any number of counterparts (by
facsimile or otherwise), each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other parties hereto.
Section 11.09 JURISDICTION.
Any suit, action or proceeding seeking to enforce any provision of,
or based on any matter arising out of or in connection with, any of the
Transaction Documents or the transactions contemplated by this Agreement shall
be brought in either the state or federal courts of The Commonwealth of
Massachusetts, and each of the parties hereby consents to the exclusive
jurisdiction of such courts (and of the appropriate appellate courts) in any
such suit, action or proceeding and waives any objection to venue laid therein.
Process in any such suit, action or proceeding may be served on any party
anywhere in the world, whether within or without The Commonwealth of
Massachusetts. Without limiting the foregoing, each of the parties agree that
service of process upon such party at the address referred to in Section 11.01,
together with written notice of such service to such party, shall be deemed
effective service of process upon such party. EACH OF SELLER, ABPH AND BUYER, TO
THE EXTENT ENTITLED UNDER APPLICABLE LAW, IRREVOCABLY WAIVES ANY PRESENT OR
FUTURE RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY CASE OR CONTROVERSY IN
WHICH IT IS OR BECOMES A PARTY (WHETHER INITIATED BY OR AGAINST IT OR WHETHER IT
IS JOINED AS PARTY THERETO), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN
RESPECT OF, THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
Section 11.10 SPECIFIC PERFORMANCE.
The parties hereto agree that if for any reason any party shall have
failed to perform its obligations under this Agreement, then any other party
hereto seeking to enforce this Agreement against such non-performing party shall
be entitled to specific performance and injunctive and other equitable relief,
and the parties hereto further agree to waive any requirement for the securing
or posting of any bond in connection with the obtaining of any such injunctive
or other equitable relief.
Section 11.11 CAPTIONS.
The captions herein are included for convenience of reference only
and shall be ignored in the construction or interpretation hereof.
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
A-40
<PAGE> 142
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
duly executed, individually or by their respective authorized officers, on the
day and year first above written.
WITNESS: BUYER:
ABP CORPORATION
/s/ Adrian J. van Schie By /s/ Stephen F. Edwards
- -------------------------- -------------------------------
Adrian J. van Schie Name: Stephen F. Edwards
Title: President
SELLER:
AU BON PAIN CO., INC.
/s/ Anthony J. Carroll By /s/ Ronald M. Shaich
- -------------------------- -------------------------------
Anthony J. Carroll Name: Ronald M. Shaich
Title: Co-Chairman and
Chief Executive Officer
ABPH:
ABP HOLDINGS, INC.
/s/ Anthony J. Carroll By /s/ Ronald M. Shaich
- -------------------------- -------------------------------
Anthony J. Carroll Name: Ronald M. Shaich
Title: President
A-41
<PAGE> 143
EXECUTION COPY
AMENDMENT TO
STOCK PURCHASE AGREEMENT
This AMENDMENT TO STOCK PURCHASE AGREEMENT (together with the
Schedules and Attachments hereto, this "AMENDMENT") is made as of the 28th day
of October, 1998, by and among AU BON PAIN CO., INC., a Delaware corporation
("SELLER"); ABP HOLDINGS, INC., a Delaware corporation ("ABPH") and ABP
CORPORATION, a Delaware corporation ("BUYER").
W I T N E S S E T H:
WHEREAS, Seller, ABPH and Buyer entered into a Stock Purchase
Agreement dated August 12, 1998 (together with the Schedules and Attachments
thereto, and as amended hereby, the "AGREEMENT"), pursuant to which, among other
things, Seller agreed: (1) to transfer to its wholly-owned subsidiary ABPH
substantially all of the operating assets, store leases, contracts and
liabilities associated with its Au Bon Pain Division pursuant to a Contribution
Agreement to be entered into in the form attached to the Agreement as EXHIBIT
5.06; and (2) to sell and convey to Buyer all of Seller's capital stock of APBH,
all upon and subject to the terms and conditions of the Agreement; and
WHEREAS, Seller, ABPH and Buyer desire to amend the Agreement in
certain respects as provided in this Amendment; and
WHEREAS, unless otherwise expressly defined herein, capitalized terms
used herein shall have the respective meanings ascribed to them in the
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements of the parties contained herein, the parties agree as follows:
1. PURCHASE PRICE.
Section 2.01 of the Agreement is amended by deleting the text
therefrom in its entirety and substituting therefor the following:
"Section 2.02 FORM AND PAYMENT OF PURCHASE PRICE.
Subject to adjustment as herein provided, the Purchase Price
shall be SEVENTY-THREE MILLION DOLLARS ($73,000,000). At the Closing,
Buyer shall pay to Seller the Purchase Price, as adjusted by the
estimated amounts provided pursuant to Section 2.03(c) plus any
amounts due pursuant to Section 2.05(a), by wire transfer of
immediately available funds, to the account or accounts which are
designated in writing by the Seller and delivered to Buyer at least
two (2) Business Days prior to Closing."
2. CONTRIBUTION AGREEMENT.
(a) Section 5.06 of the Agreement is amended by deleting the text
therefrom in its entirety and substituting therefor the following:
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<PAGE> 144
"SECTION 5.06 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES.
(a) Immediately prior to the Closing, the following
transactions shall take place in the order set forth below:
(1) Seller shall transfer and assign or sublease to ABPH (for
no additional consideration from Buyer) all of Seller's right,
title and interest in and to the assets (including Intellectual
Property), contracts, leases and agreements including, without
limitation, all development agreements and individual franchise
agreements (foreign and domestic) and ABPH shall assume certain
liabilities, in each case relating to the Au Bon Pain Division,
(but specifically excluding all leasehold improvements,
machinery and equipment, signs, furniture and fixtures,
transportation equipment and other fixed tangible equipment)
pursuant to a Non-Fixed Asset Contribution Agreement to be
entered into in the form attached hereto as RESTATED EXHIBIT
5.06A on terms which include all authorizations and consents
which are necessary to permit the sale of the ABPH Common Stock
to Buyer; provided, however, that Seller shall not assign or
sublease to ABPH any store lease or other contract for which it
fails or is unable to obtain a consent required under or in
connection with such lease as a condition to such assignment or
sublease or to the sale of the ABPH Common Stock to Buyer as
contemplated herein.
(2) Seller shall transfer and assign (for no additional
consideration from Buyer) to a Delaware corporation to be
formed by Seller ("ABP NEWCO") all of Seller's right, title and
interest in and to all leasehold improvements, machinery and
equipment, signs, furniture and fixtures, transportation
equipment and other fixed tangible equipment relating to the Au
Bon Pain Division pursuant to a Fixed Asset Contribution
Agreement to be entered into in the form attached hereto as
RESTATED EXHIBIT 5.06B.
(3) ABP Newco shall merge with and into ABPH, with ABPH being
the surviving corporation, in accordance with the Delaware
General Corporation Law and the terms of an Agreement and Plan
of Merger to be executed by ABP Newco and ABPH prior to the
Closing in form and substance reasonably acceptable to each of
Buyer and Seller, such merger to become effective prior to the
Closing upon the filing of a Certificate of Merger with the
Secretary of State of Delaware.
(4) The Non-Fixed Asset Contribution Agreement and the Fixed
Asset Contribution Agreement shall be referred to herein
collectively as the "Contribution Agreement". The transactions
contemplated by the Non-Fixed Asset Contribution Agreement and
the Fixed Asset Contribution Agreement shall be referred to
herein as the "RESTRUCTURING".
(b) From the date of its formation through the Closing Date,
ABP Newco will engage in no business activity other than the
Restructuring."
(b) Section 1.01 of the Agreement is amended by inserting a new
subsection (d) at the end of such section as follows:
A-43
<PAGE> 145
"(d) Any reference in the Agreement to the Contribution
Agreement shall be deemed to be a reference to both the
Non-Fixed Asset Contribution Agreement and the Fixed Asset
Property Contribution Agreement. Any reference in this
Agreement to "this Agreement" shall mean the Agreement as
amended by the Amendment dated October 28, 1998."
(c) Section 3.24 of the Agreement is amended by deleting the last
sentence therefrom and substituting therefor the following:
"At or prior to the Closing, all such owned and leased assets,
except as otherwise expressly provided in this Agreement, shall
be transferred to ABP Newco and ABPH in connection with the
Restructuring contemplated by Section 5.06 free and clear of
all Encumbrances, except to the extent otherwise disclosed on
SCHEDULE 3.24. From the date of its formation through the
Closing Date, ABP Newco will engage in no business activity
other than the Restructuring contemplated by Section 5.06."
3. NET WORTH ADJUSTMENT.
(a) Section 2.03(f) of the Agreement is amended by deleting the
text therefrom in its entirety and substituting therefor the following:
"(f) The term "NET WORTH ADJUSTMENT" shall mean the amount,
if any, by which the difference between: (1) the "Consolidated
Assets" (as hereinafter defined) minus net plant, property and
equipment, minus (2) "Consolidated Liabilities" (as hereinafter
defined) of ABPH, on a consolidated basis as of the Closing Date
(after giving effect to the Restructuring), exceeds or is less than
the difference between: (1) the Consolidated Assets minus net plant,
property and equipment, minus (2) Consolidated Liabilities of the Au
Bon Pain Division, on a consolidated basis as of April 18, 1998. If
the Net Worth Adjustment is positive (up to Three Million Dollars
($3,000,000)), it shall be added to the Purchase Price to be paid by
Buyer to Seller at the Closing pursuant to Section 2.02. If the Net
Worth Adjustment is negative, it shall be deducted from the Purchase
Price to be paid by Buyer to Seller at the Closing pursuant to
Section 2.02. As used herein the terms: (1) "CONSOLIDATED ASSETS"
shall mean the sum of cash, accounts receivable, inventories, prepaid
expenses and plant, property and equipment and "Other Assets", but
such term shall exclude the $431,000 note receivable from Northern
Bakers, Inc. created in connection with the transfer of the
bakery/cafe known as "Big D" from Seller to Northern Bakers, Inc.;
and (2) "CONSOLIDATED LIABILITIES" shall mean the sum of accounts
payable, accrued expenses and minority interests, in each case
calculated in accordance with GAAP applied consistently with the ABP
Division Financial Statements."."
4. TRANSITION SERVICES AGREEMENT.
The form of Transition Services Agreement to be entered into at the
Closing in the form attached to the Agreement as EXHIBIT 7.06 is amended by
deleting such exhibit in its entirety and substituting therefor the form of
agreement attached hereto as RESTATED EXHIBIT 7.06.
A-44
<PAGE> 146
5. REPRESENTATIONS AND WARRANTIES.
(a) SCHEDULE 3.10 of the Agreement is amended by adding to such
schedule SUPPLEMENTAL SCHEDULE 3.10 attached hereto.
(b) SCHEDULE 3.21 of the Agreement is amended by adding to such
schedule SUPPLEMENTAL SCHEDULE 3.21 attached hereto.
6. CONDITIONS TO OBLIGATIONS OF BUYER.
Section 8.03(c) of the Agreement is amended by deleting therefrom the
phrase "July 11, 1998" and substituting therefor the phrase "October 3, 1998".
7. REAFFIRMATION AND CONFIRMATION OF AGREEMENT.
Except as otherwise set forth in this Amendment, the Agreement is
ratified and confirmed in all respects.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
duly executed, individually or by their respective authorized officers, on the
day and year first above written.
WITNESS: BUYER:
ABP CORPORATION
/s/ Adrian J. van Schie By /s/ Stephen F. Edwards
- -------------------------- -------------------------------
Adrian J. van Schie Name: Stephen F. Edwards
Title: President
SELLER:
AU BON PAIN CO., INC.
/s/ Anthony J. Carroll By /s/ Ronald M. Shaich
- -------------------------- -------------------------------
Anthony J. Carroll Name: Ronald M. Shaich
Title: Co-Chairman and
Chief Executive Officer
ABPH:
ABP HOLDINGS, INC.
/s/ Anthony J. Carroll By /s/ Louis I. Kane
- -------------------------- -------------------------------
Anthony J. Carroll Name: Louis I. Kane
Title: President
A-45
<PAGE> 147
ANNEX B
------------------------------------
NATIONSBANC MONTGOMERY SECURITIES
------------------------------------
October 28, 1998
Board of Directors
Au Bon Pain Co., Inc.
19 Fid Kennedy Avenue
Boston, Massachusetts 02210
Gentlemen and Ladies:
We understand that ABP Corporation, a Delaware corporation ("Buyer"),
Au Bon Pain Co., Inc., a Delaware corporation ("Seller"), and ABP Holdings,
Inc., a Delaware corporation ("ABPH"), have entered into a Stock Purchase
Agreement dated August 12, 1998, as amended on October 28, 1998 (the "Purchase
Agreement"), pursuant to which Buyer will pay to Seller $73,000,000 in cash,
subject to certain adjustments set forth in Section 2.03 of the Purchase
Agreement (the "Consideration"), for all the issued and outstanding capital
stock of ABPH (the "Transaction"). We understand that prior to the completion of
the Transaction, ABPH will own all the assets and will have assumed all the
liabilities of Seller's Au Bon Pain division, and our analyses referred to
herein were performed on a pro forma basis assuming the assets, liabilities,
businesses, financial condition, results of operations and prospects of ABPH
were the same as those of Seller's Au Bon Pain division. The terms and
conditions of the Transaction as we understand them are set forth in more detail
in the Purchase Agreement.
We previously delivered to you an opinion dated August 12, 1998 (the
"Prior Letter") which stated, subject to the limitations and conditions
contained therein, our opinion as investment bankers that the consideration to
be received by Seller pursuant to the Transaction (as it was then contemplated,
prior to the amendment (the "Amendment") dated October 28, 1998) was fair to
Seller from a financial point of view, as of the date thereof. You have asked us
to reconfirm the opinion expressed in the Prior Letter, and further asked for
our opinion as investment bankers as to whether the Consideration to be received
by Seller pursuant to the Transaction (as amended) is fair to Seller from a
financial point of view, as of the date hereof. As you are aware, we were
engaged solely for the purposes of examining the fairness of the Transaction
from a financial point of view, as set forth above, and we were not requested to
(nor did we) solicit or assist Seller in soliciting indications of interest from
third parties for ABPH or all or any other part of Seller. Additionally, we were
not retained to consider (nor did we advise Seller with respect to) alternatives
to the Transaction or Seller's underlying decision to proceed with or effect the
Transaction.
B-1
NationsBanc Montgomery Securities LLC
600 Montgomery Street San Francisco, California 94111 (415) 627-2000
------------------------------------------------------------------------
NATIONSBANK
<PAGE> 148
Board of Directors
Au Bon Pain Co., Inc.
October 28, 1998
Page 2
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Seller, including the consolidated financial statements of Seller and the pro
forma financial statements of ABPH for recent years and interim periods through
October 3, 1998, and certain other relevant financial and operating data
relating to Seller and ABPH made available to us from published sources and from
the internal records of Seller; (ii) reviewed the financial terms and conditions
of the Purchase Agreement; (iii) compared ABPH from a financial point of view
with certain other companies in the restaurant industry which we deemed to be
relevant; (iv) considered the financial terms, to the extent publicly available,
of selected recent business combinations involving companies in the restaurant
industry which we deemed to be comparable, in whole or in part, to the
Transaction; (v) reviewed and discussed with representatives of the management
of Seller certain information of a business and financial nature regarding ABPH,
including financial forecasts and related assumptions of Seller pertaining to
ABPH furnished to us by management of Seller; (vi) made inquiries regarding and
discussed the Transaction, the Purchase Agreement and other matters related
thereto with Seller's counsel; and (vii) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for ABPH provided to us by management of Seller, upon your advice and
with your consent we have assumed for purposes of our opinion that the forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management of Seller as to the future financial
performance of ABPH and that they provide a reasonable basis upon which we can
form our opinion. We have also assumed that there have been no material changes
in Seller's or ABPH's assets, financial condition, results of operations,
business or prospects since the respective dates of the most recent consolidated
and pro forma financial statements made available to us (except that Seller's
management has provided us with a revised cash flow forecast for the fiscal year
ending December 28, 1998, that is lower than the cash flow forecast earlier
provided to us in connection with our review of the financial condition of ABPH
for the Prior Letter). We have relied on advice of the independent accountants
to Seller as to all tax and financial reporting matters with respect to Seller,
ABPH, the Transaction and the Purchase Agreement. We have assumed that the
Transaction will be consummated in a manner that complies in all respects with
the Securities Exchange Act of 1934, as amended, and all other applicable
federal and state statutes, rules and regulations. In addition, we have not
assumed responsibility for making an independent evaluation, appraisal or
physical inspection of any of the assets or liabilities (contingent or
otherwise) of ABPH, nor have we been furnished with any such appraisals.
Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligations to update, revise or reaffirm this
opinion.
B-2
<PAGE> 149
Board of Directors
Au Bon Pain Co., Inc.
October 28, 1998
Page 2
We have further assumed with your consent that the Transaction will
be consummated in accordance with the terms described in the Purchase
Agreement, without any further amendments thereto, and without waiver by Seller
of any of the conditions to its obligations thereunder.
Based upon the foregoing and in reliance thereon, it is our opinion
as investment bankers that the consideration to be received by Seller pursuant
to the Transaction (prior to giving effect to the Amendment) was fair to Seller
from a financial point of view, as of the date of the Prior Letter, and the
Consideration to be received by Seller pursuant to the Transaction (after giving
effect to the Amendment) is fair to Seller from a financial point of view, as of
the date hereof.
In the ordinary course of our business, we trade the equity
securities of Seller for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
We have also acted as an underwriter in connection with offers of securities of
Seller.
This opinion is directed solely to the Board of Directors of Seller
in connection with its consideration of the Transaction, and is not a
recommendation to any shareholder as to how shareholders should vote with
respect to the Transaction. Shareholders of Seller are neither addressees nor
intended beneficiaries of our opinion or our underlying financial analysis
(which was prepared solely for the members of the Board of Directors of Seller
for their personal use as directors in connection with their review and
evaluation of the Transaction), and no shareholder of Seller may rely or allege
any reliance on our opinion or analysis in connection with such shareholder's
consideration of the merits of the Transaction or otherwise. Further, this
opinion addresses only the financial fairness of the Consideration to the
Seller, as of the date hereof, and does not address any other aspect of the
Transaction including, without limitation, the relative merits of the
Transaction, any alternatives to the Transaction or Seller's underlying decision
to proceed with or effect the Transaction. This opinion may not be used or
referred to by Seller, or quoted or disclosed to any person in any manner,
without our prior written consent, which consent is hereby given to the
inclusion of this opinion in its entirety in any proxy statement filed by Seller
with the Securities and Exchange Commission in connection with the Transaction
that requires a description of the factors considered by the Board of the
Directors of Seller in connection with its approval of the Transaction.
Very truly yours,
/s/ NationsBanc Montgomery
Securities LLC
B-3
<PAGE> 150
AU BON PAIN CO., INC.
19 FID KENNEDY AVENUE
BOSTON, MA 02210
SPECIAL MEETING OF STOCKHOLDERS -FEBRUARY 22, 1999
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints Louis I. Kane and
Ronald M. Shaich as Proxies, with full power of substitution for and on behalf
of the undersigned at the Special Meeting of Stockholders of AU BON PAIN CO.,
INC. to be held at BankBoston, 100 Federal Street, Boston, Massachusetts, on
February 22, 1999, at 2:00 p.m., and at any adjournment or adjournments thereof.
The undersigned hereby directs the said Proxies to vote in accordance with their
judgment on any business that may properly come before the Special Meeting or
any adjournment(s) thereof, all as indicated in the Notice of Special Meeting,
receipt of which is hereby acknowledged, and to act on the following matters set
forth in such notice as specified herein by the undersigned.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
"FOR" PROPOSAL 1 AND IN THE DISCRETION OF THE PROXIES AS TO ANY OTHER BUSINESS
THAT MAY PROPERLY COME BEFORE THE MEETING OR AT ANY ADJOURNMENT(S) THEREOF,
INCLUDING MATTERS WHICH THE COMPANY DID NOT KNOW WOULD BE PROPERLY PRESENTED AT
THE MEETING.
________________________________________________________________________________
PLEASE VOTE, DATE, AND SIGN ON REVERSE AND RETURN PROMPTLY USING THE ENCLOSED
ENVELOPE.
________________________________________________________________________________
Please sign exactly as your name(s) appear(s) on the books of the company.
Joint owners should each sign personally. Trustees, custodians, and other
fiduciaries should indicate the capacity in which they sign, and where
more than one name appears, a majority must sign. If the shareholder is a
corporation, the signature should be that of an authorized officer who should
indicate his or her title.
________________________________________________________________________________
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
Form of Proxy - Page 1
<PAGE> 151
<TABLE>
<CAPTION>
<S> <C>
| |
| X | PLEASE MARK VOTES
| | AS IN THIS EXAMPLE
______________________ For Against Abstain
AU BON PAIN CO.,
INC.
______________________
1. Approval of: (1) the terms and
conditions of the Stock Purchase
Agreement, as amended and supplemented,
by and among Au Bon Pain Co., Inc. (the
"Company"), ABP Holdings, Inc., a
Delaware corporation and wholly owned
subsidiary of the Company, and ABP
Corporation, a Delaware corporation and
affiliate of Bruckmann, Rosser,
Sherrill and Co., L.P. and (2) the
amendment to the Company's Certificate
of Incorporation to change the name of
the Company to Panera Bread Company.
RECORD DATE SHARES: _________
[Name and Address
of Shareholder]
2. In their discretion, the Proxies are
authorized to vote upon any other
business that may properly come before
the Special Meeting or at any
adjournment(s) thereof.
_______________
| Date |
Please be sure to sign and date this | |
Proxy Card | |
_______________________________________|_______________|
| Mark box at right if an address change or
| comment has Been noted on the reverse
| side of this card.
Stockholder sign here Co-owner sign here |
_______________________________________________________|
- ---------------------------------------------------------------------------------------------------
DETACH CARD DETACH CARD
AU BON PAIN CO., INC.
Dear Shareholder,
Please take note of the important information enclosed with this proxy card. There are a number of
issues related to the management and operation of the Company that require your immediate attention
and approval. These are discussed in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote your shares.
Please mark the boxes on this proxy card to indicate how your shares will be voted. Then sign the
card, detach it and return your proxy vote in the enclosed postage paid envelope.
Your vote must be received prior to the Special Meeting of Stockholders, to be held February 22,
1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Au Bon Pain Co., Inc.
[Name and Address of Shareholder]
Form of Proxy - Page 2
</TABLE>
