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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark one)

or

Commission file number 0-19253

Panera Bread Company

(314) 633-7100
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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  þ   No  o

     As of November 8, 2002, 27,157,008 shares and 1,977,363 shares of the registrant’s Class A and Class B Common Stock, respectively, $.0001 par value, were outstanding.

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PANERA BREAD COMPANY

INDEX

PART I		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS (unaudited)
		Consolidated Balance Sheets as of October 5, 2002 and December 29, 2001		3
		Consolidated Statements of Operations for the twelve and forty weeks ended October 5, 2002 and     October 6, 2001		4
		Consolidated Statements of Cash Flows for the forty weeks ended October 5, 2002 and October 6, 2001		5
		Notes to Consolidated Financial Statements		6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF     OPERATIONS		11
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20
ITEM 4.		CONTROLS AND PROCEDURES		20
PART II		OTHER INFORMATION
ITEM 5.		OTHER INFORMATION		21
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K		21

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share information)

						October 5, 2002				December 29, 2001
ASSETS
Current assets:
	Cash and cash equivalents					$	16,114			$	18,052
	Accounts receivable, less allowance of $32 in 2002 and $67 in 2001						7,791				5,156
	Inventories						4,611				3,459
	Prepaid expenses						1,532				1,649
	Deferred income taxes						6,765				7,289
	Other						287				399
			Total current assets				37,100				36,004
Property and equipment, net							92,403				79,693
Other assets:
	Investments in Government Securities, at amortized cost						9,182				—
	Goodwill						18,970				17,530
	Deposits and other						5,642				5,020
	Deferred income taxes						3,268				5,687
			Total other assets				37,062				28,237
			Total assets			$	166,565			$	143,934
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable					$	5,424			$	5,271
	Accrued expenses						15,558				16,433
	Current portion of deferred revenue						1,013				677
			Total current liabilities				21,995				22,381
Deferred revenue							821				1,125
			Total liabilities				22,816				23,506
Commitments and contingencies
Minority interest							1,373				556
Stockholders’ equity:
	Common stock, $.0001 par value:
		Class A shares authorized 75,000,000; issued 27,254,213 and outstanding 27,145,213 in 2002 and issued 26,018,078 and outstanding 25,909,078 in 2001, respectively					3				3
		Class B shares authorized 10,000,000; issued and outstanding 1,978,163 in 2002 and 2,588,600 in 2001, respectively					—				—
	Treasury stock, carried at cost						(900	)			(900	)
	Additional paid-in capital						106,340				98,101
	Retained earnings						36,933				22,668
			Total stockholders’ equity				142,376				119,872
			Total liabilities and stockholders’ equity			$	166,565			$	143,934

The accompanying notes are an integral part of the consolidated financial statements.

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PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

					For the twelve weeks ended								For the forty weeks ended
					October 5, 2002				October 6, 2001				October 5, 2002				October 6, 2001
Revenues:
	Bakery-cafe sales				$	50,270			$	38,486			$	157,939			$	115,045
	Franchise royalties and fees					6,699				4,481				20,099				13,817
	Commissary sales to franchisees					8,502				5,520				26,712				16,581
			Total revenue			65,471				48,487				204,750				145,443
Costs and expenses:
	Bakery-cafe expenses:
		Cost of food and paper products				15,301				11,986				48,335				35,908
		Labor				14,776				11,017				46,959				33,330
		Occupancy				3,368				2,716				11,118				8,278
		Other operating expenses				6,528				5,107				21,112				15,580
			Total bakery-cafe expenses			39,973				30,826				127,524				93,096
	Commissary cost of sales to franchisees					7,975				5,209				24,749				15,447
	Depreciation and amortization					3,244				2,613				10,171				7,872
	General and administrative expenses					5,735				4,720				18,628				14,479
	Pre-opening expenses					259				126				791				610
			Total costs and expenses			57,186				43,494				181,863				131,504
Operating profit						8,285				4,993				22,887				13,939
Interest expense						11				16				25				77
Other expense, net						76				85				267				107
Minority interest						61				—				131				—
Income before income taxes						8,137				4,892				22,464				13,755
Income taxes						2,970				1,908				8,199				5,358
			Net income		$	5,167			$	2,984			$	14,265			$	8,397
Net income per common share — basic					$	.18			$	.11			$	.49			$	.30
Net income per common share — diluted					$	.17			$	.10			$	.48			$	.29
Weighted average shares of common and common equivalent shares outstanding
	Basic					29,072				27,967				28,834				27,631
	Diluted					30,094				29,345				29,902				28,896

The accompanying notes are an integral part of the consolidated financial statements.

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PANERA BREAD COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

					For the forty weeks ended
					October 5, 2002				October 6, 2001
Cash flows from operations:
	Net income				$	14,265			$	8,397
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				10,171				7,872
		Minority interest				131				—
		Tax benefit from exercise of stock options				5,183				5,007
		Deferred income taxes				2,943				480
		Other				70				36
	Changes in operating assets and liabilities:
		Accounts receivable				(2,676	)			(176	)
		Inventories				(1,095	)			(489	)
		Prepaid expenses				122				588
		Accounts payable				153				(1,415	)
		Accrued expenses				(1,171	)			(182	)
		Deferred revenue				31				(308	)
		Other				(136	)			222
			Net cash provided by operating activities			27,991				20,032
Cash flows from investing activities:
	Purchase of investments					(9,200	)			—
	Additions to property and equipment					(20,838	)			(21,168	)
	Other					—				(749	)
	Acquisitions					(3,267	)			—
	Increase in deposits and other					(615	)			(375	)
			Net cash used in investing activities			(33,920	)			(22,292	)
Cash flows from financing activities:
	Increase in deferred financing costs					—				(6	)
	Exercise of employee stock options					2,337				5,224
	Proceeds from note receivable					248				—
	Principal payments on debt and computer equipment financing					—				(374	)
	Proceeds from issuance of common stock					720				274
	Increase in minority interest					686				—
			Net cash provided by financing activities			3,991				5,118
Net (decrease) increase in cash and cash equivalents						(1,938	)			2,858
Cash and cash equivalents at beginning of period						18,052				9,011
Cash and cash equivalents at end of period					$	16,114			$	11,869

The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A-BASIS OF PRESENTATION

     The accompanying unaudited, consolidated financial statements of Panera Bread Company and its 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 accounting principles generally accepted in the United States. They should be read in conjunction with the financial statements of the Company for the fiscal year ended December 29, 2001, included in the Company’s Form 10-K filing for that year.

     The consolidated financial statements consist of the accounts of Panera Bread Company, its wholly owned subsidiaries Panera, LLC (formerly Panera, Inc.) and Pumpernickel Inc., its 75% interest in its subsidiary Pain Francais, Inc. (currently in the process of voluntary dissolution with the State of New York), and its indirect subsidiaries, Pumpernickel Associates, LLC, Panera Enterprises, Inc., and, through Artisan Bread, LLC, an 86% investment in Cap City Bread, LLC (since its formation in October 2001), in which a minority interest is owned by a joint venture partner.

     The accompanying unaudited consolidated financial statements 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. Interim results are not necessarily indicative of the results that may be expected for the entire year.

     Certain reclassifications, including separating pre-opening expenses from bakery-cafe expenses to increase transparency of such costs, have been made to conform previously reported data to the current presentation.

NOTE B-INVESTMENTS

     Investments consist of United States Treasury notes and mortgage-backed government notes and are classified as long-term investments in the accompanying consolidated balance sheet based upon their stated maturity dates which range from November 2003 to September 2004.

     Management designates the appropriate classification of its investments at the time of purchase based upon its intended holding period and reevaluates such designation at each balance sheet date. At October 5, 2002, all investments are classified as held-to-maturity as the Company has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums to maturity using the effective interest method, which approximates fair value at October 5, 2002.

NOTE C-FRANCHISE ROYALTIES AND FEES AND REVENUE RECOGNITION

     Franchise fees are the result of sales of area development rights and the sale of individual franchise locations to third parties. The initial franchise fee is $35,000 per bakery-cafe to be developed under the Area Development Agreement (ADA). Of this fee, $5,000 is paid at the time of signing of the ADA and is recognized as revenue when it is received, as it is non-refundable and the Company has to perform no other service to earn this fee. The remaining $30,000 is paid at the time an individual franchise agreement is signed and is recognized as revenue upon the opening of the bakery-cafe. Royalties are paid weekly based on the percentage of sales specified in each ADA (from 4.0% to 5.0% of sales). Royalties are recognized as revenue when they are earned.

NOTE D-DEFERRED REVENUE

     Deferred revenue includes unearned franchise fee revenue (which occurs when franchisees prepay opening fees for bakery-cafes that have not opened) and deferred revenue that resulted from a change in soft drink provider in 1999. As a result of this change, the Company received an upfront payment of approximately $2.5 million. These funds are available for both Company-owned and franchised bakery-cafes to cover costs of conversion and transition. The upfront payments are being allocated at a rate of $3,000 per applicable Company-owned and franchised bakery-cafe. The Company is then recognizing the $3,000 per Company-owned bakery-cafe over the five-year life of the soft drink contract.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E-INCOME TAXES

     The effective tax rate for the twelve and forty weeks ended October 5, 2002, and the twelve and forty weeks ended October 6, 2001, was 36.5% and 39.0%, respectively. The reduction in the effective tax rate for the twelve and forty weeks ended October 5, 2002, results from the Company’s restructuring of legal entities to better manage its intellectual property, which resulted in a lower effective state income tax rate.

     For the forty weeks ended October 5, 2002 and October 6, 2001, the Company realized tax benefits of approximately $5.2 million and $5.0 million, respectively, related to the exercise of employee stock options. Such tax benefits serve to reduce the Company’s income tax liability and increase additional paid-in capital. As of October 5, 2002, the Company has net operating loss carryforwards of approximately $16.9 million, which can be carried forward up to 20 years to offset federal taxable income.

NOTE F-ADOPTION OF SFAS 142

     The Company has adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” which establishes new accounting and reporting standards for purchase business combinations and goodwill. All goodwill was determined to have an indefinite useful life as management expects the businesses to which it relates to generate future cash flows indefinitely. Thus, the Company ceased amortizing the existing goodwill at the beginning of its 2002 fiscal year. A reconciliation of earnings and earnings per share following SFAS 142 adoption is as follows (per share amounts may not add due to rounding):

			For the twelve weeks ended								For the forty weeks ended
			October 5, 2002				October 6, 2001				October 5, 2002				October 6, 2001
Reported net income			$	5,167			$	2,984			$	14,265			$	8,397
Add back: goodwill amortization				—				139				—				464
Adjusted net income			$	5,167			$	3,123			$	14,265			$	8,861
Basic and diluted net income per common share: