Filed On 4/7/00 · SEC File 0-19253 · Accession Number 912057-0-16976
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/10/00 Panera Bread Co 10-K 12/25/99 8:72 Merrill Corp/FA
Document/Exhibit Description Pages Size
1: 10-K Annual Report 50 203K
2: EX-4.1-8 Instrument Defining the Rights of Security Holders 11 34K
3: EX-10.6-5 Material Contract 2 12K
4: EX-10.6-6 Material Contract 3 13K
5: EX-10.6-7 Material Contract 2± 10K
6: EX-21 Subsidiaries of the Registrant 1 6K
7: EX-23.1 Consent of Experts or Counsel 1 6K
8: EX-27 Financial Data Schedule 2 7K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 25, 1999, OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19253
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PANERA BREAD COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 04-2723701
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7930 BIG BEND BOULEVARD, ST. LOUIS, MO 63119
(Address of principal executive offices) (Zip code)
(314) 918-7779
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.0001 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-k or any
amendment to this Form. /X/
Aggregate market value of the registrant's voting stock held by
non-affiliates as of March 17, 2000: Class A Common Stock, $.0001 par value:
$82,150,888
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 17, 2000: Class A Common Stock, $.0001 par value: 10,639,978
shares, Class B Common Stock, $.0001 par value: 1,530,524 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its Annual Meeting of
Stockholders, to be filed in connection with the Annual Meeting of Stockholders
is incorporated by reference in response to Part III, Items 10, 11, 12, and 13.
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PART I
ITEM 1. BUSINESS
GENERAL
Panera Bread Company ("the Company") is the new name for what previously was
Au Bon Pain Co., Inc. Such name change occurred as a result of the sale of the
Au Bon Pain Division to private investors effective May 16, 1999. The Company
now consists of the Panera Bread/Saint Louis Bread Co. concept, with the Company
doing business as Saint Louis Bread Co. in the Saint Louis and Atlanta areas,
and as Panera Bread outside those areas. As of December 25, 1999, the Company
had 81 Company-operated bakery-cafes (including 2 specialty bakery-cafes), and
100 franchise-operated bakery-cafes. The concept specializes 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, and targets suburban dwellers and workers by offering a
premium specialty bakery and cafe experience with a neighborhood emphasis.
The Company's bakery-cafes are principally located in suburban, strip mall
and regional mall locations. The concept is currently operating in Florida,
Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, North
Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, and Wisconsin (see "Properties"). System wide sales for Panera Bread
were approximately $202.1 million for the fiscal year ended December 25, 1999.
The Company sold the Au Bon Pain Division to ABP Corporation for
$73 million in cash before contractual purchase price adjustments of
$1 million. The sale was effective May 16, 1999. Results of operations for the
fifty-two week period ending December 25, 1999, includes the results of the
divested Au Bon Pain Division for the period December 27, 1998 through May 16,
1999. The Au Bon Pain Division had $51.5 million of revenue and $3.2 million of
operating earnings through May 16, 1999. For the fifty-two week period ended
December 25, 1999, the Company recorded a pre-tax loss of $5.5 million related
to the transaction, and a $0.6 million pre-tax ($0.4 million after tax)
extraordinary loss related to the early extinguishment of debt from the proceeds
of the sale.
CONCEPT AND STRATEGY
The Company's concept focuses on the emerging "Specialty Bread/Bakery-Cafe"
category. Its artisan sourdough breads, which are breads made with a craftsman's
attention to quality and detail, and overall award-winning bakery expertise are
at the heart of the concept's menu. The concept is designed to deliver against
the key consumer trends of today, specifically the need for an efficient but
more esthetically pleasing 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: breakfast, lunch, day-time
"chill out" (the time between breakfast and lunch and between lunch and dinner
when customers visit our bakery-cafes to take a break from their daily
activities), and take home specialty retailing. Average revenue per
Company-operated bakery-cafe open for the full fiscal year ended December 25,
1999, was approximately $1,296,000 (excluding the two specialty cafes) for the
Panera Bread/Saint Louis Bread Co. concept compared to average revenue per cafe
of approximately $1,249,000 for those cafes open for the full year ended
December 26, 1998.
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's concept has tremendous growth potential in the suburban markets which
will be realized through both Company and franchise efforts. Franchising is a
key component of the Company's success. At
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year end, there were 100 franchised bakery-cafes opened and signed commitments
to open an additional 543 bakery-cafes. The average unit volume per franchised
bakery-cafe open for the full fiscal year ended December 25, 1999, was
approximately $1,426,000 compared to approximately $1,281,000 for those cafes
open for the full year ended December 26, 1998.
MENU
The menu seeks 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; made-to-order sandwiches; hearty, unique soups;
custom roasted coffees and cafe beverages such as espresso and cappuccino. The
Company's concept emphasizes the sophisticated specialty and sourdough breads
which supports a 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
then introduced in the Company's bakery-cafes.
MARKETING
The Company believes it competes on the basis of providing an entire
experience rather than price. Pricing is structured so customers perceive good
value, with high quality food at reasonable prices to encourage frequent visits.
The average customer purchase is approximately $5.44 at the Company's bakery-
cafes. Breakfast and lunch checks average $3.76 and $6.41, respectively.
Historically, the Company has not relied on external media to promote its
bakery-cafes. The Company attempts to increase its per location sales through
menu development, promotions, and by sponsorship of local community charitable
events.
SITE SELECTION
During 1999, the Company increased the number of Company-operated
bakery-cafes by 12 to 81 locations by expanding in both new and existing
markets. The franchise-operated locations increased by 56 to 100 locations.
The bakery-cafe concept relies 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 and lunch competitors. Management evaluates the
Company's ability to establish a dominant presence within that area in order to
create entry barriers to other 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 its concept. The design visually reinforces the distinctive
difference between the Company's bakery-cafes and other quick services
restaurants serving breakfast and lunch. Many of the Company's cafes also
feature outdoor cafe seating. The average construction and equipment cost for
the 12 bakery-cafes opened in 1999 was approximately $656,000 after landlord
allowance.
The average bakery-cafe size ranges between 3,000 and 4,000 square feet.
Currently all company-owned bakery-cafes are in leased premises. Lease terms are
typically ten years with one or two five-year
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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.
FRESH DOUGH PRODUCTION
The Company's bakery-cafes use fresh dough for their sourdough breads and
bagels. Fresh dough is supplied daily by the Company's commissary system for
both Company-owned and franchise-operated bakery-cafes. The Company operated 10
regional commissaries as of December 25, 1999.
The remaining baked goods are prepared with frozen dough. During 1996, the
Company completed construction of a state of the art frozen dough production
facility in Mexico, Missouri to supply frozen dough. On March 23, 1998, the
Company sold the Mexico production facility and its wholesale frozen dough
business to Bunge Food Corporation ("Bunge") for approximately $13 million in
cash. Concurrent with the sale, the Company entered into a five-year supply
agreement with Bunge for the supply of substantially all of its frozen dough
needs, excluding bagels. The agreement automatically renews on an annual basis
unless either party provides written cancellation notice to the other. Pricing
is based on Bunge's cost plus a specified mark-up calculated on each individual
product that is purchased. The agreement contains minimum volume commitments,
and provides for financial penalties if either party cancels the agreement
before the initial term is complete.
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
agreement and allow the Company to take advantage of Bunge's significant
purchasing power. The five-year supply agreement allows the bakery-cafes to
continue to offer the same high quality fresh baked goods, as the frozen dough
products purchased from Bunge are made on the same equipment, by the same
management team, using the same proprietary processes and specifications as
prior to the sale.
The net proceeds from the sale were used to reduce the Company's debt. The
Company recognized a pre-tax loss on the sale of the facility of approximately
$735,000 in the Company's 1998 results of operations.
COMPETITION
The Company experiences competition from numerous sources in its trade
areas. The Company's 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. The competitive factors are price, service, and quality of products. The
Company competes for leased space in desirable locations. 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 is 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 St. Louis 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.
The commissaries have
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computerized systems which allow the commissaries to accept electronic orders
from the bakery-cafes and deliver the ordered product back to the bakery-cafe.
The Company has network/integration systems which 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. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for information
pertaining to the "Year 2000" issue.
DISTRIBUTION
The Company currently utilizes independent distributors to distribute frozen
dough products and other materials to Company-operated bakery-cafes. By
contracting with independent distributors, the Company has been able to
eliminate investment in distribution 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 to the 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 a 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 is not currently operating under any joint venture agreements.
The divested Au Bon Pain Division operated 14 bakery-cafes in New York City
under a joint venture agreement with a private investor group. This joint
venture was part of the sale of the Au Bon Pain Division which was effective
May 16, 1999. For the period December 27, 1998, through May 16, 1999, the joint
venture had sales of $7.8 million and a pre-tax loss of approximately $(81,000).
FRANCHISE OPERATIONS
The Company began a broad-based franchising program in 1996. The Company is
actively seeking to extend its franchise relationships beyond its current
franchisees. The franchise agreement typically requires 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 Company. The Company's commissary
system supplies fresh dough products to substantially all franchise-operated
bakery-cafes.
The Company has entered into 34 separate franchise area development
agreements for a total of 643 bakery-cafes of which 100 have been opened as of
December 25, 1999. 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. At the present time, the Company does not have any international
franchise development agreements in force having decided to focus on domestic
opportunities for expansion. All former international franchise operations were
part of the Au Bon Pain Division, which has been divested.
EMPLOYEES
The Company has 599 full-time employees, of whom 134 are employed in general
or administrative functions principally at or from the Company's executive
offices in St. Louis, Missouri, or Waltham,
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Massachusetts; 242 are employed in the Company's commissary operations; and 223
are employed in the Company's bakery-cafe operations. The Company also has
2,337 hourly employees at the bakery-cafes, including bakers and associates.
There are no collective bargaining agreements. The Company considers its
employee relations to be excellent.
TRADEMARKS
The "Panera Bread" and "Saint Louis Bread Company" names are of material
importance to the Company and are trademarks registered with the United States
Patent and Trademark Office. In addition, 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 federal agencies as well as
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 the
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 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 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
the 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.
ITEM 2. 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 a
contingent percentage rent based on sales above a stipulated sales level.
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Information with respect to our leased commissaries as of December 25, 1999
is set forth below:
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FACILITY SQUARE FOOTAGE
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St. Louis, MO Commissary.................................... 12,100
Dallas, TX Commissary....................................... 1,000
Washington, DC Commissary................................... 8,900
Atlanta, GA Commissary...................................... 4,100
Detroit, MI Commissary...................................... 5,200
Minneapolis, MN Commissary.................................. 4,800
Cincinnati, OH Commissary................................... 8,500
Warren, OH Commissary....................................... 11,300
Chicago, IL Commissary...................................... 12,100
Orlando, FL Commissary...................................... 5,900
In 1998, the Company leased short-term office space in Waltham, MA, to house
its Legal and Development functions. The annual rent is approximately $42,000
and the lease expires in October, 2000.
In 1997, the Company leased new office space in Webster Groves, MO, for its
corporate offices. The space occupies approximately 10,300 square feet. The
annual rent is approximately $150,000. The lease expires, assuming exercise of
renewal options, in 2007.
The Company leases additional space in St. Louis, MO, to house its
information systems staff and training functions. The annual rent is
approximately $46,000. The lease expires in November, 2001.
The Company considers its physical properties to be in good operating
condition and suitable for the purpose for which they are used.
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PANERA BREAD/SAINT LOUIS BREAD CO. BAKERY-CAFES
COMPANY-OPERATED: 81 TOTAL (INCLUDING SPECIALTY CAFES) AS OF DECEMBER 25, 1999
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GREATER ST. LOUIS MARKET AREA: 35
Ballas, Creve Coeur, MO Kirkwood, MO
Belleville, IL Main, St. Charles, MO
Baxter, Ballwin, MO Market, St. Louis, MO
Bogey Hills, St. Charles, MO Northwest Plaza, St. Ann, MO
Brentwood, St. Louis, MO Pine, St. Louis, MO
Cape Girardeau, MO Soulard, St. Louis, MO
Carondelet, Clayton, MO South 9(th) Street, Columbia, MO
Central West End, St. Louis, MO South Central, Clayton, MO
Chesterfield Mall, Chesterfield, MO St. Clair Square, Fairview Heights, IL
Columbia Mall, Columbia, MO Sunset Hills, Sunset Hills, MO
Crestwood Plaza, St. Louis, MO Surrey Plaza, Florissant, MO
Delmar, University City, MO Telegraph Road, St. Louis, MO
Esquire, Clayton, MO Tesson Ferry, St. Louis, MO
Four Seasons, Chesterfield, MO West County, Des Peres, MO
Galleria, Richmond Heights, MO Westport Plaza, Maryland Heights, MO
Gateway One, St. Louis, MO Wildwood Crossing, Wildwood, MO
Grand, St. Louis, MO Winchester, MO
Highway K, O'Fallon, MO
ATLANTA MARKET AREA: 9
Briarcliff, Atlanta, GA Lenox Square, Atlanta, GA
Dunwoody, GA Peachtree, Atlanta, GA
Emory Village, Atlanta, GA Sandy Springs, Atlanta, GA
Gwinnett Place, Duluth, GA Town Center, Kennesaw, GA
Haywood Mall, Greenville, SC
CHICAGO MARKET AREA: 20
Diversey, Chicago, IL Orland Square Mall, Orland Park, IL
Downer's Grove, IL Park Ridge, IL
Elmwood Park, Elmwood, IL Plaza del Grato, Arlington Heights, IL
Evanston, IL Scharrington Square, Schaumburg, IL
Four Flaggs, Niles, IL Stratford Square Mall, IL
Fox Valley, Aurora, IL Two Rivers Plaza, Bolingbrook, IL
Glen Ellyn Marketplace, Glen Ellyn, IL Vernon Hills, IL
Golf & Meacham, Schaumburg, IL Wheaton, IL
LaGrange Park, IL Wilmette, IL
Niles Amlings, Niles, IL Winnetka, IL
MASSACHUSETTS MARKET AREA: 2
Arlington Heights, Arlington, MA Vinnin Square, Swampscott, MA
MICHIGAN MARKET AREA: 12
Campus Corners, Rochester Hills, MI Newburgh Plaza, Livonia, MI
City Center, Novi, MI Orchard Mall, West Bloomfield, MI
Clocktower Place, Southfield, MI Oakland Plaza, Troy, MI
KT Plaza, Farmington, MI Troy Commons, Troy, MI
Lakeside Mall, Sterlington Heights, MI Twelve Mile & Halsted, Farmington Hills, MI
Lathrup Village, Bloomfield, MI Twelve Oaks Mall, Novi, MI
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WASHINGTON DC MARKET AREA: 1
Hechinger Commons, Alexandria, VA
SPECIALTY STORES: 2 (INCLUDED IN TOTAL STORE COUNT)
City Museum, St. Louis, MO Rendezvous Cafe, Richmond Heights, MO
FRANCHISE-OPERATED: 100 TOTAL AS OF DECEMBER 25, 1999
THE BREADBOX, L.L.C.: 1
Baymeadows, Jacksonville, FL
BREADS OF THE WORLD, L.L.C.: 8
Blacklick Crossing, Columbus, OH Five Points, Columbus, OH
Crosswoods Commons, Columbus, OH Founder's Plaza, Gahanna, OH
Easton Town Center, Columbus, OH Olengtangy Plaza, Columbus, OH
Festival at Sawmill, Dublin, OH Tuttle Crossing Mall, Columbus, OH
BREADS OF THE WORLD, L.L.C.: 2
Festival Market, Cincinnati, OH Kenwood Pavilion, Cincinnati, OH
BREADWINNERS OF THE TRIANGLE, L.L.C.: 1
Crabtree Mall, Raleigh, NC
CADLE, L.L.C.: 4
East State Street, Hermitage, PA Keystone Drive, Erie, PA
Freeport Road, Pittsburgh, PA Murray Avenue, Pittsburgh, PA
CANDALL, INC.: 11
Beldon Village Road, Canton, OH Golden Gate Plaza, Mayfield Heights, OH
Boardman Poland Rd., Boardman, OH Hudson Plaza, Hudson, OH
Center Ridge Road, Rocky River, OH Medina Road, Akron, OH
Detroit Road, Westlake, OH 44145 Tower City, Cleveland, OH
Edgerton Road, Broadview Heights, OH Van Aken Blvd., Shaker Heights, OH
Elm Road, Warren, OH
CARLON CORPORATION, L.L.C.: 3
N. Calhoun Road, Brookfield, WI West Layton Avenue, Greenfield, WI
Westfield Way, Pewaukee, WI
CHICAGO BREAD, L.L.C.: 5
Northwest Highway, Crystal Lake, IL Waukegan Road, Glenview, IL
Randall Square, Geneva, IL West Dundee, Buffalo Grove, IL
Waukegan Road, Deerfield, IL
COVELLI FAMILY LIMITED PARTNERSHIP: 6
Altamonte Springs, FL North Eola Drive, Orlando, FL
International Parkway, Lake Mary, FL University Blvd, Orlando, FL
Michigan & Orange, Orlando, FL West Fairbanks, Winter Park, FL
COVELLI FAMILY LIMITED PARTNERSHIP: 1
Brandon Town Center, Brandon, FL
CSC INVESTMENTS, L.L.C.: 2
Market Street, Chattanooga, TN Mercedes Place, Knoxville, TN
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FENWICK GROUP, L.L.C.: 3
East Broad Street, Westfield, NJ Paramus Park Mall, Paramus, NJ
Essex Green Mall, West Orange, NJ
KNEAD BREAD, L.L.C.: 3
East 69(th) Street, Fishers, IN Rivertown Pkwy, Grandville, MI
Merchants Square, Carmel, IN
LEMEK, L.L.C.: 2
Mall of Columbia, Columbia, MD Towson Place Center, Towson, MD
OKLAHOMA CITY BAKERY, INC.: 2
Northwest Expressway, Oklahoma City, OK South Bryant Avenue, Edmond, OK
ORIGINAL BREAD, INC.: 9
Metcalf, Overland Park, KS Oak Park Mall, Overland Park, KS
Mill Street, Kansas City, MO West 23(rd) Street, Lawrence, KS
Mission Road, Prairie Village, KS West 75(th), Overland Park, KS
Nall Ave., Leawood, KS West 119(th) Street, Olathe, KS
North Rock Road, Wichita, KS
OZARK BREADS, INC.: 2
Missouri, Jefferson City, MO North Bishop, Rolla, MO
PANEBRASKA, L.L.C.: 2
Beverly Plaza, Omaha, NE Oakview Plaza, Omaha, NE
PR RESTAURANTS, L.L.C.: 3
Colby Court, Bedford, NH Woodbury Avenue, Portsmouth, NH
Framingham Mall, Framingham, MA
SHOW ME BREAD, L.L.C.: 1
Penny Road, High Point, NC
SLB OF CENTRAL ILLINOIS, L.L.C.: 4
East John Street, Champaign, IL Old Farm Shops, Champaign, IL
North Green Briar Dr., Normal, IL West White Oaks Blvd., Springfield, IL
SLB OF IOWA, L.L.C.: 6
Coral Ridge Mall, Coralville, IA Elmore Crossing, Davenport, IA
Council Street, NE, Cedar Rapids, IA 38(th) Avenue, Moline, IL
85(th) Street, Urbandale, IA Westown Parkway, Des Moines, IA
SLB OF MINNESOTA, L.L.C.: 4
City Center East, Woodbury, MN Poppy Street, Coon Rapids, MN
Country Road 24, Plymouth, MN Promenade Ave., Eagan, MN
ST. LB, INC.: 2
Hurstbourne, KY Mall of St. Matthews, Louisville, KY
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TEXAS BREAD, L.L.C.: 2
Preston Road, Dallas, TX Vista Ridge Mall, Lewisville, TX
TRADITIONAL BAKERY, INC.: 5
East Battlefield, Springfield, MO South Campbell, Springfield, MO
East Sunshine, Springfield, MO South National, Springfield, MO
East 32(nd) Street, Joplin, MO
TRADITIONAL BAKERY, INC.: 5
East 15(th) Street, Tulsa, OK South Lewis Ave., Tulsa, OK
East 51(st) Street, Tulsa, OK Woodland Hills Mall, Tulsa, OK
East 41(st) Street, Tulsa, OK
WHOLESOME GROUP, L.L.C.: 1
West Dussel, Maumee, OH
The following table sets forth the number of Company-operated and
franchise-operated Panera Bread and Saint Louis Bread bakery-cafes which were
open as of the dates indicated:
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DEC. 30, 1995 DEC. 28, 1996 DEC. 27, 1997 DEC. 26, 1998 DEC. 25, 1999
------------- ------------- ------------- ------------- -------------
Company-operated................. 50 52 57 70 81
Franchise-operated............... 8 10 19 45 100
-- -- -- --- ---
Total............................ 58 62 76 115 181
== == == === ===
The following table sets forth the number of Company-operated and
franchise-operated bakery-cafes for the Au Bon Pain Division which were open as
of the dates indicated.
[Enlarge/Download Table]
DEC. 30, 1995 DEC. 28, 1996 DEC. 27, 1997 DEC. 26, 1998 MAY 16, 1999
------------- ------------- ------------- ------------- ------------
Company-operated................. 192 177 160 151 147
Franchise-operated............... 29 48 96 114 120
--- --- --- --- ---
Total............................ 221 225 256 265 267
=== === === === ===
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and legal action in the ordinary course of
its business. The Company believes that all such claims and actions currently
pending against it are either adequately covered by insurance or would not have
a material adverse effect on the Company if decided in a manner unfavorable to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of security holders during the
fourth quarter of the fiscal year ended December 25, 1999.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.
(a) Market Information.
The Company's Class A Common Stock is traded on The Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol PNRA. The following table sets
forth the high and low sale prices as reported by Nasdaq for the fiscal periods
indicated.
[Download Table]
1998 HIGH LOW
---- ----------- ---------
First Quarter............................................... 8 5/8 7 1/2
Second Quarter.............................................. 11 5/8 8
Third Quarter............................................... 11 5/8 5 1/4
Fourth Quarter.............................................. 7 5/16 4 1/8
[Download Table]
1999 HIGH LOW
---- --------- ----------
First Quarter............................................... 7 1/8 5
Second Quarter.............................................. 9 5
Third Quarter............................................... 7 5/8 6 3/16
Fourth Quarter.............................................. 8 1/2 6 1/2
On March 17, 2000, the last sale price for the Class A Common Stock, as
reported on the Nasdaq National Market System, was $6.750.
(b) Holders.
On March 17, 2000, the Company had 1,383 holders of record of its Class A
Common Stock and 80 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.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
FOR THE FISCAL YEARS ENDED
----------------------------------------------------
DEC. 25, DEC. 26, DEC. 27, DEC. 28, DEC. 30,
1999(1) 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Restaurant sales................................. $156,738 $237,102 $233,212 $225,625 $216,411
Franchise sales and other revenues............... 7,384 6,161 5,974 3,556 3,306
Commissary sales to franchisees.................. 7,237 6,397 11,704 7,753 6,749
-------- -------- -------- -------- --------
171,359 249,660 250,890 236,934 226,466
Costs and expenses:
Cost of food and paper products.................. 52,445 81,140 82,578 77,330 74,610
Restaurant operating expenses.................... 79,677 123,060 119,537 115,364 112,161
Commissary cost of sales......................... 6,490 6,100 7,807 8,301 2,640
Depreciation and amortization.................... 6,379 12,667 16,862 16,195 14,879
General and administrative....................... 17,104 18,769 16,417 14,979 12,818
Non-recurring charges............................ 5,545 26,236 -- 4,435 8,500
-------- -------- -------- -------- --------
167,640 267,972 243,201 236,604 225,608
-------- -------- -------- -------- --------
Operating profit (loss)............................ 3,719 (18,312) 7,689 330 858
Interest expenses, net............................. 2,745 6,396 7,204 5,140 3,363
Other (income) expense, net........................ 735 1,445 212 2,513 2,016
Minority interest/(income)......................... (25) (127) (42) (40) (94)
Income (loss) before provision (benefit) for income
taxes and extraordinary items.................... 264 (26,026) 315 (7,283) (4,427)
Provision (benefit) for income taxes............... 511 (5,532) (1,492) (2,918) (2,813)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items........... (247) $(20,494) $ 1,807 $ (4,365) $ (1,614)
-------- -------- -------- -------- --------
Extraordinary loss on the early extinguishment of
debt, net of tax of $197......................... 382 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss).................................. $ (629) $(20,494) $ 1,807 $ (4,365) $ (1,614)
======== ======== ======== ======== ========
Per common share:
Basic:
Income (loss) before extraordinary item.......... $ (.02) $ (1.72) $ .15 $ (.37) $ (.14)
Net income (loss)................................ $ (.05) $ (1.72) $ .15 $ (.37) $ (.14)
Diluted:
Income (loss) before extraordinary item.......... $ (.02) $ (1.72) $ .15 $ (.37) $ (.14)
Net income (loss)................................ $ (.05) $ (1.72) $ .15 $ (.37) $ (.14)
Weighted average shares of common stock
outstanding:
Basic............................................ 12,137 11,943 11,766 11,705 11,621
Diluted.......................................... 12,137 11,943 11,913 11,705 11,621
Comparable restaurant sales percentage increase for
Company-operated bakery-cafes.................... 3.3%(2) 2.1% 3.6% 0.7% 0.5%
--------------------------
(1) Includes the results of the Au Bon Pain Division until it was sold on
May 16, 1999.
(2) 1999 comparable restaurant sales consist of Panera Bread Company
bakery-cafes only.
[Enlarge/Download Table]
AS OF
----------------------------------------------------
DEC. 25, DEC. 26, DEC. 27, DEC. 28, DEC. 30
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT COMPANY-OPERATED
BAKERY-CAFES OPEN)
Consolidated Balance Sheet Data:
Working capital.................................... $ (3,215) $ (8,239) $ (58) $ (1,748) $ 846
Total assets....................................... 91,029 153,618 186,516 196,428 193,018
Long-term debt, less current maturities............ -- 34,089 42,527 49,736 42,502
Convertible subordinated notes..................... -- 30,000 30,000 30,000 30,000
Stockholders' equity............................... 73,246 73,327 92,274 90,056 93,238
Company-operated bakery-cafes open................. 81(3) 219 217 229 242
--------------------------
(3) Consists of Panera Bread Company-owned stores only at the end of 1999.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth the percentage relationship to total revenue,
except where otherwise indicated, of certain items included in the Company's
consolidated statements of operations for the periods indicated. Percentages may
not add due to rounding:
[Enlarge/Download Table]
FOR THE FISCAL YEARS ENDED
---------------------------------------
DECEMBER 25 DECEMBER 26 DECEMBER 27
1999 1998 1997
----------- ----------- -----------
Revenues:
Restaurant sales....................................... 91.5% 95.0% 93.0%
Franchise and other revenues........................... 4.3 2.5 2.4
Commissary sales to franchisees........................ 4.2 2.5 4.6
----- ----- -----
Total Revenues....................................... 100.0% 100.0% 100.0%
===== ===== =====
Cost and Expenses:
Restaurant cost of sales (1)
Cost of food and paper products...................... 33.4% 34.2% 35.4%
Labor................................................ 29.0 28.4 27.3
Occupancy............................................ 9.9 11.8 12.2
Other................................................ 12.0 11.7 11.8
----- ----- -----
Total Restaurant Cost of Sales..................... 84.3% 86.1% 86.7%
----- ----- -----
Commissary cost of sales (2)............................. 89.7% 95.4% 66.7%
Depreciation and amortization............................ 3.7 5.1 6.7
General and administrative............................... 10.0 7.5 6.5
Non-recurring charges.................................... 3.2 10.5 --
----- ----- -----
Operating profit (loss).................................. 2.2 (7.3) 3.1
Interest expenses, net................................... 1.6 2.6 2.9
Other expense, net....................................... 0.4 0.3 0.1
Loss on sale of assets................................... -- 0.3 --
Minority interest........................................ -- (0.1) --
----- ----- -----
Income (loss) before income taxes and extraordinary
item................................................... 0.2 (10.4) 0.1
Income tax provision (benefit)........................... 0.3 (2.2) (0.6)
Income (loss) before extraordinary item.................. (0.1) (8.2) 0.7
Extraordinary loss ffrom early extinguishment of debt,
net of tax............................................. 0.2 -- --
----- ----- -----
Net (loss)/income........................................ (0.4)% (8.2)% 0.7%
===== ===== =====
------------------------
(1) As a percentage of Company restaurant sales.
(2) As a percentage of commissary sales to franchisees.
INTRODUCTION
Panera Bread Company (referred to as "the Company", "Panera Bread", or in
the first person notation of "we", "us", and "our") began operations in
October 1987 as the Saint Louis Bread Company with the opening of its first
bakery-cafe in Saint Louis, Missouri. On December 22, 1993, the Saint Louis
Bread Company was acquired by Au Bon Pain, Co., Inc. At the time of the
acquisition the Saint Louis Bread Company had 19 company-operated bakery-cafes
and one franchised unit. Through 1998, Saint Louis Bread Company continued to
grow while owned by Au Bon Pain, expanding the concept into other markets
through the opening of 51 Company owned bakery-cafes and 44 franchise-operated
bakery-cafes. In August, 1998, the Company entered into a Stock Purchase
Agreement to sell the Au Bon Pain Division
15
to ABP Corporation (the "Buyer"). The transaction was consummated on May 16,
1999 and is detailed more completely later in this document. The Company now
consists of the Panera Bread/Saint Louis Bread Company bakery-cafes and its
related franchise operations. At the end of fiscal year 1999, there were 81
company-owned (including two specialty bakery-cafes) and 100 franchised
bakery-cafes operating in 24 states.
The Company intends to continue to expand the number of company-owned and
franchised restaurants. Our expansion strategy is to develop markets that
complement our existing commissary operations enabling us to take advantage of
operational and distribution efficiencies. In addition, we will continue to
expand into new markets where an adequate return on capital can be obtained.
The Company's commissary system is a significant competitive advantage for
the Company. While requiring a major commitment of capital, the commissaries
assure both consistent quality and supply of fresh dough products to both
company-owned and franchised bakery-cafes. In order to develop a specific market
with our concept, a commissary must be available to service the market. A
commissary may begin operations by serving one bakery-cafe, however, as our
target markets are developed and built out over time, the commissary becomes
more efficient. In addition, the commissary system allows the company to control
product quality for both company-owned and franchised bakery-cafes thereby
increasing product consistency and enhancing brand identity. It is the intention
of the Company to focus its immediate growth in areas that allow it to continue
to gain efficiencies within its current commissary structure by focusing in
areas that geographically complement markets already served by an existing
commissary unit.
The Company's revenues are derived from restaurant sales, commissary sales
to franchisees and franchise and other revenues. Commissary sales to franchisees
are the sales of commissary fresh dough products to our franchisees. Franchise
and other revenues include royalty income and franchise fees. The cost of food
and paper products, labor, occupancy, and other operating expenses relate
primarily to restaurant sales. The cost of commissary sales relates to the sale
of dough products to our franchisees. General and administrative and
depreciation expenses relate to all areas of revenue generation.
The Company's fiscal year ends on the last Saturday in December. The
Company's fiscal year normally consists of 13 four-week periods, with the first,
second, and third quarters ending 16 weeks, 28 weeks, and 40 weeks,
respectively, into the fiscal year.
RESULTS OF OPERATIONS
As noted earlier, in August 1998, the Board of Directors of Au Bon Pain
entered into a Stock Purchase agreement whereby the Au Bon Pain Division was
sold to ABP Corporation (the "Buyer"). On May 16, 1999, the Company completed
its transaction to sell the Au Bon Pain Division. For the fiscal year ended
December 25, 1999, the Company has recorded a pre-tax loss of $5.5 million
related to the transaction and a $0.6 million pre-tax ($0.4 million after-tax)
extraordinary loss related to the early extinguishment of debt from the proceeds
of the sale. Results of operations in the third and fourth quarters of 1999
reflect the results of the Panera Bread Company as a stand alone entity while
results of operations for the fiscal year ended December 25, 1999, also include
the results of the divested Au Bon Pain Division for the period December 27,
1998, through May 16, 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
REVENUES
Total restaurant sales from company-operated bakery-cafes declined 33.9% to
$156.7 million in 1999 from $237.1 million in 1998. The reason for this decline
was the sale of the Au Bon Pain Division as of May 16, 1999. As a stand-alone
entity, Panera Bread's 1999 restaurant sales increased 25.7% to $97.4 million
from $77.5 million in 1998. Several factors contributed to the growth in Panera
Bread's restaurant
16
sales including the opening of 12 new bakery-cafes in 1999, and a 3.3% increase
in comparable restaurant sales.
Franchise and other revenues rose to $7.4 million in 1999 from $6.2 million
in 1998, a 19.4% increase. For Panera Bread on a stand-alone basis, franchise
and other revenues rose to $6.4 million in 1999, from $3.5 million in 1998, an
increase of 82.9%. This increase was primarily driven by a 170.6% rise in
franchise royalties to $4.6 million in 1999 from $1.7 million in 1998. The
increase in royalty activity can be attributed to the addition of 56 franchised
bakery-cafes in 1999 and the higher sales volumes achieved in 1999. The average
annualized sales volume for all franchised bakery-cafes in 1999 was
$1.5 million compared to $1.3 million in 1998.
During 1999, 4 franchise area development agreements were signed
representing commitments for the development of 60 bakery-cafes. As of
December 25, 1999, there were franchise commitments in place for the development
of an additional 543 bakery-cafes. In 1999, the Company opened 68 new
bakery-cafes including 12 company-owned and 56 franchised bakery-cafes
representing a 57% increase in the number of bakery-cafes opened as of the end
of fiscal year 1999 compared to prior year-end.
Commissary sales to franchisees increased 12.5% in 1999 to $7.2 million from
$6.4 million in 1998. On a stand-alone basis, Panera Bread's commissary sales to
franchisees increased to $6.3 million in 1999, a 215.0% increase from 1998 sales
of $2.0 million. The increase in sales to franchisees can be attributed to the
addition of 56 franchised bakery-cafes in 1999 and higher bakery-cafe unit
volumes achieved in 1999.
COSTS AND EXPENSES
The cost of food and paper products was $52.4 million, or 33.4% of Company
restaurant sales, in 1999 compared to $81.1 million, or 34.2% of Company
restaurant sales, in 1998. The cost of food and paper products does not include
food costs that are associated with the commissary operations that sell fresh
dough products to franchised bakery-cafes. The primary reason for the decline
was that the Au Bon Pain units historically ran at a higher food cost percentage
than the Panera Bread units. With the sale of the Au Bon Pain Division in May,
1999, the full year results were more heavily weighted to the Panera Bread
units.
The costs associated with the sale of fresh dough products to franchises are
included in commissary cost of sales, and include the cost of sales, salaries,
benefits, and other operating expenses, excluding depreciation associated with
the sale of fresh dough products to our franchisees. In 1999, commissary cost of
sales as a percentage of commissary sales to franchisees declined to 89.7% from
95.4% in 1998. The decline is due to the commissaries becoming more efficient as
they service more bakery-cafes. Only one new commissary was opened in 1999 while
Panera Bread added 68 new bakery-cafes on a system-wide basis.
The cost of labor as a percentage of restaurant revenues increased to 29.0%
in 1999 from 28.4% in 1998. The overall increase in labor for the year is
primarily due to an increase in the average hourly wage rate driven by low
unemployment and a highly competitive labor market.
The cost of occupancy as a percentage of restaurant revenue decreased to
9.9% in 1999 from 11.8% in 1998. The decrease is due primarily to increased
sales volumes at company-operated bakery-cafes and the sale of the Au Bon Pain
Division, which had historically run higher occupancy costs due to their
locations in the downtown areas of larger cities.
Other restaurant operating expenses increased as a percentage of restaurant
revenues to 12.0% in 1999 from 11.7% in 1998. The increase is primarily due to
increases in the fixed costs associated with the opening of 12 new bakery-cafes
in 1999 and a small increase in advertising at the Panera Bread bakery-cafes
during the year.
Depreciation and amortization decreased as a percentage of total revenue to
3.7% in 1999 from 5.1% in 1998. The decrease was primarily due to the sale of
the Au Bon Pain Division assets and to the
17
suspension of depreciation and amortization associated with those assets held
for sale after August 12, 1998.
General and administrative expenses increased as a percentage of total
revenues to 10.0% in 1999 from 7.5% in 1998. The increase included a charge for
transitional overhead services provided to Panera Bread by the buyer of the Au
Bon Pain business unit through the end of the year at the same time that Panera
Bread was experiencing increased costs associated with building its accounting
and information systems infrastructure.
Operating income (loss) increased to $3.7 million in 1999 from $(18.3)
million in 1998. Operating income in 1999 was reduced by a $5.5 million
non-recurring charge related to the sale of the Au Bon Pain Division. Operating
income in 1999 was increased by $4.7 million due to the elimination of
depreciation and amortization expense associated with the Au Bon Pain Division
assets sold in 1999. The operating loss in 1998 included non-recurring charges
recorded by the Company of $26.2 million, including a charge of $24.2 million,
related principally to the write down of certain assets 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") related to
the planned sale of assets and the closing of eight underperforming Au Bon Pain
cafes and one Panera Bread bakery-cafe. Operating income in 1998 was favorably
impacted by approximately $4.5 million as a result of the suspension of
depreciation and amortization of the Au Bon Pain Division assets held for sale
as of August 12, 1998, the date of the agreement to sell that business. Before
the non-recurring charges and suspension of depreciation and amortization,
operating income increased by 32.4% in 1999 to $4.5 million in 1999 from
$3.4 million in 1998.
Interest expense as a percentage of total revenue decreased to 1.6% in 1999
from 2.6% in 1998. This reduction is due primarily to the repayment of the
Company's outstanding debt with the proceeds of the sale of the Au Bon Pain
Division.
In connection with the early extinguishment of debt, the Company recorded a
$.4 million extraordinary loss net of $.2 million of taxes. The debt was repaid
with the proceeds from the sale of the Au Bon Pain Division.
INCOME TAXES
The income tax provision was $.5 million in 1999 compared to an income tax
benefit of $5.5 million in 1998. The 1999 effective tax rate was 194% primarily
due to State income taxes, the non-deductible meals and entertainment allowance
as well as non-deductible goodwill. The $5.5 million benefit in 1998 was
primarily due to a $24.2 million charge taken to write-down the value of the Au
Bon Pain Division assets in connection with the sale offset principally by a
valuation allowance related to state net operating loss carryforwards and
capital losses related to the sale.
As of December 25, 1999, the Company had federal net operating loss
carryforwards of approximately $24.8 million, as well as approximately
$4.9 million of federal tax credit carryforwards available to reduce future
income taxes. The federal net operating loss carryforwards expire principally in
the year 2018. The tax credit carryforwards include approximately $3.7 million
of federal Alternative Minimum Tax Credits which have an indefinite life and
$1.2 million of federal jobs tax credits which expire in the years beginning
with 2009-2010. The Company provided a valuation allowance of $4.7 million to
reduce its deferred tax assets to a level which, more likely than not, will be
realized. The valuation allowance is primarily attributable to the potential for
the non-deductibility of capital losses related to the taxable loss on the Sale
of the Au Bon Pain Division and the expectation that certain deferred state tax
assets will be unrealizable following the Sale. The Company reevaluates the
positive and negative evidence impacting the realization of its deferred tax
assets on an annual basis.
18
NET LOSS
The net loss in 1999 was $.6 million compared to a net loss of
$20.5 million in 1998. The net loss in 1999 included a $5.5 million
non-recurring charge related to the sale of the Au Bon Pain Division and a
$.4 million after tax extraordinary loss from the early extinguishment of debt
from the proceeds from the sale. 1998's results included a $26.2 million charge
taken as a result of the write-down of the value of the Au Bon Pain Division
assets in connection with the sale as well as closure of eight underperforming
Au Bon Pain Cafes and one Panera Bread Bakery Cafe.
Other than the non-recurring charges, net income in 1999 was higher than
1998 primarily due to higher operating earnings and lower interest expense.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES
Total restaurant sales from Company-operated bakery-cafes increased 1.7% to
$237 million in 1998 from $233 million in 1997 and other revenue decreased 29%
to $12.6 million in 1998 from $17.7 million in 1997.
Total restaurant sales for Panera Bread as a stand-alone entity increased to
$77.5 million in 1998 from $67.2 million in 1997, an increase of 15.3%, and
other revenue associated with the Company increased to $5.5 million in 1998 from
$3.1 million in 1997, an increase of 77%. The growth in restaurant sales was due
to several factors, including incremental sales of $4.5 million generated from
the opening of 11 new Panera Bread-operated bakery-cafes opened during 1998 and
6 Panera Bread-operated bakery-cafes opened during 1997 and strong comparable
restaurant sales growth of 3.63%, on top of the 9.3% increase in 1997. Other
revenue growth was impacted by an increase in franchise fees and royalties to
$3.5 million in 1998 compared to $2.2 million in 1997, driven by the execution
of new franchise area development agreements, fees from opening new franchise
locations and higher royalty income. Commissary sales to franchises decreased to
$6.4 million in 1998 from $11.7 million in 1997. The decrease was primarily due
to the sale of the Mexico, Missouri plant to Bunge Foods in March, 1998. As a
result, a third party was selling product to franchisees instead of the Company.
Sales from Company-owned restaurants in the Au Bon Pain Division decreased
3.8% to $159.6 million compared to $166.0 million in 1997, and other revenue
associated with the Au Bon Pain Division decreased 51% to $7.1 million compared
to $14.6 million in 1997. An increase in comparable restaurant sales of 1.5% was
more than offset by the effect of the disposition throughout 1997 and 1998 of a
number of underperforming bakery-cafes and the franchising of 11 Company-owned
restaurants in the third quarter of 1997. The decrease in other revenue was
principally due to a decrease in wholesale sales to $3.1 million in 1998, down
from $8.5 million in 1997, due to the sale of the wholesale frozen dough
business included in the sale of the Mexico, Missouri manufacturing facility.
COSTS AND EXPENSES
The cost of food and paper products was $81.1 million, or 34.2% of Company
restaurant sales in 1998 compared to $82.6 million, or 35.4% of Company
restaurant sales in 1997. The cost of food and paper products does not include
costs that are associated with the commissary operations that sell fresh dough
products to franchisees. The costs associated with those sales are included in
commissary costs of sales. Commissary cost of sales increased from 66.7% in 1997
to 95.4% in 1998. The increase was due to sale of the Mexico, Missouri
production facility in the first quarter of 1998.
Labor costs as a percentage of restaurant sales increased to 28.4% in 1998
from 27.3% in 1997. The overall increase is due primarily to an increase in the
average hourly wage driven by a highly competitive labor market.
19
Occupancy costs as a percentage of restaurant sales decreased to 11.8% in
1998 from 12.2% in 1997. This decrease was primarily due to an increase in
restaurant sales and the closing of nine Au Bon Pain Division cafes in 1998.
Other operating expenses remained relatively stable at 11.8% of restaurant
sales in 1997 versus 11.7% in 1998.
During 1998, the Company recorded $2.0 million in non-recurring, non-cash
charges to write-down the book value of eight underperforming Au Bon Pain
Division cafes whose leases expired in 1998 and were not renewed, and to record
the closing of one Saint Louis Bread/Panera Bread location. The charge is
included as a separate component of operating expenses and includes a
$1.6 million fixed asset write-down and a $0.4 million other asset write-down.
In the first quarter of 1998 the Company sold the Mexico, Missouri
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, for their domestic
bakery-cafes. The Company recognized a pre-tax loss on the sale of the facility
of approximately $735,000 in the Company's results of operations.
Operating income/(loss) decreased to $(18.3) million in 1998 from
$7.7 million in 1997. Operating loss in 1998 included non-recurring charges
recorded by the Company of $26.2 million, including a charge of $24.2 million,
related principally to the write-down of certain assets 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"), related to
the planned sale of assets, and the closing of eight under-performing Au Bon
Pain Division cafes and one Saint Louis Bread/Panera Bread bakery-cafe.
Operating income in 1998 was favorably impacted by approximately $4.5 million
due to the suspension of depreciation and amortization of the Au Bon Pain
Division assets held for sale as of August 12, 1998, the date of the agreement
to sell that business. Before the non-recurring charges and suspension of
depreciation and amortization, operating income decreased 55% in 1998 to
$4.3 million below 1997.
The decline in operating income (before non-recurring charges and suspension
of depreciation) was a result of lower contribution in the Au Bon Pain Division
of $4.3 million, as the Saint Louis Bread Co. Division contribution was
essentially the same in 1998 versus 1997. The lower contribution in the Au Bon
Pain Division was due to several factors. First, the comparable restaurant sales
of 1.5% produced a negative leverage against the normal inflationary cost
elements, reducing contribution. Second, results were impacted by inefficiencies
in the manufacturing facility prior to the sale at the end of the first quarter
of 1998. In addition, the level of franchise contribution from the Au Bon Pain
International & Trade Channels area was reduced by 55% due both to the Asian
economic crisis and to the pending sale of the Au Bon Pain Division overall.
Before the non-recurring charge, operating profit in the Saint Louis Bread
Co. Division in 1998 was essentially the same at $6.5 million compared to 1997,
as increases in store profit from Company-owned cafes and greater franchise
income in 1998 were largely offset by higher overhead costs, particularly
related to the field organization which increased approximately $1.4 million
over 1997, and an increase in commissary infrastructure expenses, in
anticipation of the projected growth in both the Company-owned and franchise
operated cafes.
During 1998, 12 Saint Louis Bread Co. Division franchise area development
agreements were signed and 4 existing agreements were amended, representing
commitments for the development of 259 bakery-cafes and increasing the number of
franchise commitments to a total of 562 remaining bakery-cafes to be developed.
In addition, 37 Saint Louis Bread Co. Division bakery-cafes were opened in 1998,
including 11 company-owned cafes and 26 franchise-operated cafes. Within the Au
Bon Pain Division, 27 franchise-operated units were opened in 1998.
20
INCOME TAXES
The income tax benefit was $5.5 million in 1998 compared to $1.5 million in
1997. The 1998 effective income tax benefit of 21.3% was primarily due to the
$24.2 million charge taken to write down the value of the Au Bon Pain Division
assets in connection with the sale, offset principally by a valuation allowance
related to state net operating loss carryforwards and capital losses related to
the sale.
NET INCOME (LOSS)
Lower operating income in 1998 versus 1997, as well as a $26.2 million
charge taken as a result of the writedown of the value of the Au Bon Pain assets
in connection with the sale as well as closure of eight underperforming Au Bon
Pain Cafes and one Panera Bread Bakery-Cafe partially offset by deferred tax
benefits and lower interest costs incurred in 1998, produced a significant
decrease in net income for the year ended December 26, 1998. The net loss for
the year ended December 26, 1998 was $(20.5) million versus net income of
$1.8 million for the year ended December 27, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were unchanged at $1.9 million at December 25,
1999, versus $1.9 million at December 26, 1998. 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.
Effective May 16, 1999, the Company completed its transaction to sell the Au
Bon Pain Division. In the second quarter of 1999 the Company repaid all of its
outstanding debt with the proceeds from the Sale. In connection with the early
retirement of debt, in the second quarter of 1999, the Company recorded an after
tax extraordinary non-cash charge of approximately $.4 million.
Concurrently with the sale of the Au Bon Pain business unit effective
May 16, 1999, the Company amended its existing credit facility to reduce the
unsecured revolving line of credit to $10.0 million, reflecting reduced needs
for debt financing. Amounts outstanding under the amended facility bear interest
at either LIBOR plus 2.25% or the commercial bank's prime rate plus .75%, at the
Company's option. As of December 25, 1999, the Company had $9.4 million
available to it under the $10.0 million revolving line of credit, reduced by a
$0.6 million outstanding standby letter of credit.
Excluding the non-recurring charges, operating income plus depreciation and
amortization was $16.0 million in 1999 versus $21.2 million in 1998. A total of
$6.7 million was provided by operating activities in 1999 compared to
$20.5 million in 1998. In 1999, funds provided by operating activities decreased
primarily as a result of a decrease in depreciation, and an increase in accounts
receivable. This decrease was partially offset in an increase in deferred
revenue of $2.0 million related to an upfront payment received from a soft drink
provider.
The Company received $57.3 million and utilized $11.2 million for investing
activities in 1999 and 1998, respectively. The investing activities in 1999
consisted primarily of additions to property and equipment, and the sale of the
assets of the Au Bon Pain business unit. The Company used the proceeds of the
sale to repay its outstanding debt.
Total capital expenditures in 1999 of $15.3 million were related primarily
to the opening of 12 new company-operated bakery-cafes, the construction of 1
commissary, and to maintaining or remodeling the existing bakery-cafes. The
expenditures were mainly funded by net cash from operating activities of
$6.7 million, and cash remaining from the sale of the Au Bon Pain business unit
after repayment of all outstanding debt.
21
The Company utilized $63.9 million and $8.3 million from financing
activities in 1999 and 1998, respectively. The financing activities in 1999
included repayment of all outstanding debt with the proceeds from the sale of Au
Bon Pain, proceeds from and payments on the revolving line of credit, and the
issuance of common stock under the Company's employee stock option and employee
stock purchase plan. The financing activities in 1998 included proceeds from and
principal payment on long term debt, and the issuance of common stock under the
Company's employee stock option and employee stock purchase plans.
The Company had a working capital deficit of $3.2 million and $8.2 million
for the years ended December 25, 1999, and December 26, 1998, respectively. The
decrease in the deficit in 1999 was primarily due to an increase in deferred
income taxes, a decrease in assets held for sale in connection with the sale of
the Au Bon Pain Division partially offset by an increase in accrued expenses.
The Company has experienced no short term or long term liquidity difficulties
having been able to finance its operations through internally generated cash
flow and its revolving line of credit.
In 2000, the Company currently anticipates spending approximately
$16-17 million principally for the opening of new bakery-cafes, the opening of
one to two additional commissaries, and for maintaining and remodeling existing
cafes. 