Attached files
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EX-32 - EXHIBIT 32 - PANERA BREAD CO | c91933exv32.htm |
EX-31.2 - EXHIBIT 31.2 - PANERA BREAD CO | c91933exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - PANERA BREAD CO | c91933exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-19253
Panera Bread Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 04-2723701 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
6710 Clayton Road, Richmond Heights, MO | 63117 | |
(Address of Principal Executive Offices) | (Zip Code) |
(314) 633-7100
(Registrants 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As
of November 3, 2009, 30,125,867 shares and 1,392,107 shares of the registrants Class A Common Stock
and Class B Common Stock, respectively, par value $.0001 per share, were outstanding.
PANERA BREAD COMPANY
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
September 29, 2009 | December 30, 2008 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 172,413 | $ | 74,710 | ||||
Short-term investments |
876 | 2,400 | ||||||
Trade accounts receivable, net |
17,504 | 15,198 | ||||||
Other accounts receivable |
6,814 | 9,944 | ||||||
Inventories |
11,206 | 11,959 | ||||||
Prepaid expenses |
26,429 | 14,265 | ||||||
Deferred income taxes |
12,460 | 9,937 | ||||||
Total current assets |
247,702 | 138,413 | ||||||
Property and equipment, net |
407,168 | 417,006 | ||||||
Other assets: |
||||||||
Goodwill |
87,334 | 87,334 | ||||||
Other intangible assets, net |
19,512 | 20,475 | ||||||
Long-term investments |
| 1,726 | ||||||
Deposits and other |
5,905 | 8,963 | ||||||
Total other assets |
112,751 | 118,498 | ||||||
Total assets |
$ | 767,621 | $ | 673,917 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,178 | $ | 4,036 | ||||
Accrued expenses |
124,653 | 109,978 | ||||||
Total current liabilities |
130,831 | 114,014 | ||||||
Deferred rent |
41,877 | 39,780 | ||||||
Other long-term liabilities |
39,117 | 21,437 | ||||||
Total liabilities |
211,825 | 175,231 | ||||||
Commitments and contingencies (Note 7) |
||||||||
EQUITY |
||||||||
Panera Bread Company stockholders equity: |
||||||||
Common stock, $.0001 par value per share: |
||||||||
Class A, 75,000,000 shares authorized; 30,165,466 issued and 29,998,067
outstanding in 2009; and 29,557,849 issued and
29,421,877 outstanding in 2008 |
3 | 3 | ||||||
Class B, 10,000,000 shares authorized; 1,392,107 issued and outstanding in
2009 and 1,398,242 in 2008 |
| | ||||||
Treasury stock, carried at cost; 167,399 shares in 2009 and 135,972 shares in 2008 |
(3,885 | ) | (2,204 | ) | ||||
Additional paid-in capital |
156,854 | 151,358 | ||||||
Accumulated other comprehensive gain (loss) |
69 | (394 | ) | |||||
Retained earnings |
402,755 | 346,399 | ||||||
Total Panera Bread Company stockholders equity |
555,796 | 495,162 | ||||||
Noncontrolling interest |
| 3,524 | ||||||
Total equity |
555,796 | 498,686 | ||||||
Total liabilities and equity |
$ | 767,621 | $ | 673,917 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share information)
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Bakery-cafe sales |
$ | 285,871 | $ | 268,486 | $ | 840,397 | $ | 803,328 | ||||||||
Franchise royalties and fees |
19,369 | 18,144 | 57,153 | 53,682 | ||||||||||||
Fresh dough sales to franchisees |
29,778 | 28,565 | 88,971 | 84,031 | ||||||||||||
Total revenues |
335,018 | 315,195 | 986,521 | 941,041 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Bakery-cafe expenses: |
||||||||||||||||
Cost of food and paper products |
83,715 | 81,556 | 248,765 | 243,895 | ||||||||||||
Labor |
92,682 | 86,639 | 272,892 | 256,843 | ||||||||||||
Occupancy |
24,200 | 22,750 | 71,558 | 66,334 | ||||||||||||
Other operating expenses |
39,880 | 36,934 | 114,736 | 107,098 | ||||||||||||
Total bakery-cafe expenses |
240,477 | 227,879 | 707,951 | 674,170 | ||||||||||||
Fresh dough cost of sales to franchisees |
24,812 | 26,982 | 74,582 | 80,382 | ||||||||||||
Depreciation and amortization |
16,988 | 16,794 | 49,986 | 49,168 | ||||||||||||
General and administrative expenses |
20,195 | 19,951 | 59,041 | 63,409 | ||||||||||||
Pre-opening expenses |
624 | 868 | 1,370 | 2,874 | ||||||||||||
Total costs and expenses |
303,096 | 292,474 | 892,930 | 870,003 | ||||||||||||
Operating profit |
31,922 | 22,721 | 93,591 | 71,038 | ||||||||||||
Interest expense |
163 | 225 | 537 | 1,398 | ||||||||||||
Other (income) expense, net |
1,248 | 461 | 1,090 | 806 | ||||||||||||
Income before income taxes |
30,511 | 22,035 | 91,964 | 68,834 | ||||||||||||
Income taxes |
11,617 | 8,156 | 34,807 | 25,931 | ||||||||||||
Net income |
18,894 | 13,879 | 57,157 | 42,903 | ||||||||||||
Less: net income attributable to noncontrolling interest |
| 139 | 801 | 1,016 | ||||||||||||
Net income attributable to Panera Bread Company |
$ | 18,894 | $ | 13,740 | $ | 56,356 | $ | 41,887 | ||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||||||
Basic |
$ | 0.61 | $ | 0.46 | $ | 1.84 | $ | 1.40 | ||||||||
Diluted |
$ | 0.61 | $ | 0.45 | $ | 1.82 | $ | 1.38 | ||||||||
Weighted average shares of common and common equivalent
shares outstanding: |
||||||||||||||||
Basic |
30,748 | 30,124 | 30,577 | 29,991 | ||||||||||||
Diluted |
31,065 | 30,557 | 30,925 | 30,383 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the 39 Weeks Ended | ||||||||
September 29, 2009 | September 23, 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 57,157 | $ | 42,903 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
49,986 | 49,168 | ||||||
Stock-based compensation expense |
6,464 | 5,685 | ||||||
Tax benefit from exercise of stock options |
(3,102 | ) | (2,957 | ) | ||||
Deferred income taxes |
17,811 | (3,802 | ) | |||||
Other |
900 | 1,838 | ||||||
Changes in operating assets and liabilities, excluding the effect of acquisitions: |
||||||||
Trade and other accounts receivable |
621 | 11,577 | ||||||
Inventories |
753 | 295 | ||||||
Prepaid expenses |
(12,442 | ) | (6,626 | ) | ||||
Accounts payable |
2,142 | 1,453 | ||||||
Accrued expenses |
13,001 | (7,998 | ) | |||||
Deferred rent |
2,097 | 4,133 | ||||||
Other long-term liabilities |
(27 | ) | 4,563 | |||||
Net cash provided by operating activities |
135,361 | 100,232 | ||||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(37,678 | ) | (50,097 | ) | ||||
Acquisitions, net of cash acquired |
| (2,694 | ) | |||||
Investment maturities proceeds |
4,316 | 13,755 | ||||||
Decrease (increase) in deposits and other |
(1,107 | ) | 176 | |||||
Net cash used in investing activities |
(34,469 | ) | (38,860 | ) | ||||
Cash flows from financing activities: |
||||||||
Repurchase of common stock |
(1,681 | ) | (48,878 | ) | ||||
Net payments under credit facility |
| (75,000 | ) | |||||
Exercise of employee stock options |
14,224 | 15,485 | ||||||
Tax benefit from exercise of stock options |
3,102 | 2,957 | ||||||
Proceeds from issuance of common stock under employee benefit plans |
1,247 | 1,472 | ||||||
Purchase of noncontrolling interest |
(20,081 | ) | | |||||
Capitalized debt issuance costs |
| (1,153 | ) | |||||
Net cash used in financing activities |
(3,189 | ) | (105,117 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
97,703 | (43,745 | ) | |||||
Cash and cash equivalents at beginning of period |
74,710 | 68,242 | ||||||
Cash and cash equivalents at end of period |
$ | 172,413 | $ | 24,497 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of Panera Bread Company and its subsidiaries (the
Company) have been prepared in accordance with generally accepted accounting principles in the
U.S. (GAAP), under the rules and regulations of the U.S. Securities and Exchange Commission (the
SEC), and on a basis substantially consistent with the audited consolidated financial statements
of the Company as of and for the fiscal year ended December 30, 2008. These consolidated financial
statements should be read in conjunction with such audited consolidated financial statements, which
were included in the Companys Annual Report on Form 10-K for the fiscal year ended December 30,
2008 and filed with the SEC on February 27, 2009.
The consolidated financial statements consist of the accounts of Panera Bread Company and its
wholly owned direct and indirect consolidated subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
The unaudited consolidated financial statements include all adjustments (consisting of normal
recurring adjustments and accruals) that management considers necessary for a fair statement of its
financial position and results of operations for the interim periods. Interim results are not
necessarily indicative of the results for any other interim period or for the entire year.
Adoption of the FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (ASC). Effective this quarter, the ASC became the single source for all
authoritative GAAP recognized by the FASB and is required to be applied to financial statements
issued for interim and annual periods ending after September 15, 2009. The ASC does not change
GAAP and did not impact the Companys consolidated financial statements.
Subsequent Events
The Company has evaluated the period from September 30, 2009 through November 6, 2009, the date the
financial statements herein were issued, for subsequent events requiring recognition or disclosure
in the financial statements. No material subsequent events were identified.
Accounting Standards Issued Not Yet Adopted
In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial
assets, which is effective for reporting periods beginning after November 15, 2009. This new
guidance limits the circumstances in which a financial asset may be de-recognized when the
transferor has not transferred the entire financial asset or has continuing involvement with the
transferred asset. The concept of a qualifying special-purpose entity, which had previously
facilitated sale accounting for certain asset transfers, is removed by this new guidance. The
Company expects that the adoption of this new guidance will not have a material effect on its
financial position or results of operations.
In June 2009, the FASB issued authoritative guidance on accounting for variable interest entities
(VIE), which is effective for reporting periods beginning after November 15, 2009 and changes the
process for how an enterprise determines which party consolidates a VIE, to a primarily qualitative
analysis. The party that consolidates the VIE (the primary beneficiary) is defined as the party
with (1) the power to direct activities of the VIE that most significantly affect the VIEs
economic performance and (2) the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE. Upon adoption, reporting enterprises must reconsider their conclusions on
whether an entity should be consolidated and should a change result, the effect on net assets will
be recorded as a cumulative effect adjustment to retained earnings. The Company expects that the
adoption of this new guidance will not have a material effect on its financial position or results
of operations.
Note 2. Noncontrolling Interest
Effective December 31, 2008, the Company implemented the accounting standard for the reporting of
noncontrolling interests in the Companys consolidated financial statements and accompanying notes.
This standard changed the accounting and reporting for minority interests, which are to be
recorded initially at fair market value and reported as noncontrolling interests as a component of
equity, separate from the parent companys equity. Purchases or sales of noncontrolling interests
that do not result in a change in control are to be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest is to be included in consolidated
net income in the Consolidated Statements of Operations and upon a loss of control, the interest
sold, as well as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. The Company has applied these presentation and disclosure requirements
retrospectively.
6
Table of Contents
The following tables illustrate the changes in equity for the thirteen weeks ended September 23,
2008 and September 29, 2009, respectively (in thousands):
Accumulated | ||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Compre- | Additional | Compre- | Noncon- | |||||||||||||||||||||||||||||||||
hensive | Common Stock | Treasury | Paid-in | Retained | hensive | trolling | ||||||||||||||||||||||||||||||
Total | Income | Class A | Class B | Stock | Capital | Earnings | Income (Loss) | Interest | ||||||||||||||||||||||||||||
Balance, June 24, 2008 |
$ | 442,056 | $ | | $ | 3 | $ | | $ | (1,364 | ) | $ | 133,415 | $ | 307,110 | $ | | $ | 2,892 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
13,879 | 13,879 | | | | | 13,740 | | 139 | |||||||||||||||||||||||||||
Comprehensive income |
13,879 | $ | 13,879 | |||||||||||||||||||||||||||||||||
Issuance of common stock |
352 | | | | 352 | | | | ||||||||||||||||||||||||||||
Exercise of employee stock options |
5,687 | | | | 5,687 | | | | ||||||||||||||||||||||||||||
Stock-based compensation expense |
2,039 | | | | 2,039 | | | | ||||||||||||||||||||||||||||
Repurchase of common stock |
(825 | ) | | | (825 | ) | | | | | ||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
1,301 | | | | 1,301 | | | | ||||||||||||||||||||||||||||
Windfall pool adjustment on stock-based compensation |
3,297 | | | | 3,297 | | | | ||||||||||||||||||||||||||||
Balance, September 23, 2008 |
$ | 467,786 | $ | 3 | $ | | $ | (2,189 | ) | $ | 146,091 | $ | 320,850 | $ | | $ | 3,031 | |||||||||||||||||||
Balance, June 30, 2009 |
$ | 532,605 | $ | | $ | 3 | $ | | $ | (2,537 | ) | $ | 151,324 | $ | 383,861 | $ | (46 | ) | $ | | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
18,894 | 18,894 | | | | | 18,894 | | | |||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
115 | 115 | | | | | | 115 | | |||||||||||||||||||||||||||
Total other comprehensive income |
115 | 115 | ||||||||||||||||||||||||||||||||||
Comprehensive income |
19,009 | $ | 19,009 | |||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
(8 | ) | | | | (8 | ) | | | | ||||||||||||||||||||||||||
Adjustment to noncontrolling interest |
(742 | ) | | | | (742 | ) | | | | ||||||||||||||||||||||||||
Issuance of common stock |
445 | | | | 445 | | | | ||||||||||||||||||||||||||||
Exercise of employee stock options |
3,076 | | | | 3,076 | | | | ||||||||||||||||||||||||||||
Stock-based compensation expense |
2,177 | | | | 2,177 | | | | ||||||||||||||||||||||||||||
Repurchase of common stock |
(1,348 | ) | | | (1,348 | ) | | | | | ||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
582 | | | | 582 | | | | ||||||||||||||||||||||||||||
Balance, September 29, 2009 |
$ | 555,796 | $ | 3 | $ | | $ | (3,885 | ) | $ | 156,854 | $ | 402,755 | $ | 69 | $ | | |||||||||||||||||||
7
Table of Contents
The following tables illustrate the changes in equity for the thirty-nine weeks ended
September 23, 2008 and September 29, 2009, respectively (in thousands):
Accumulated | ||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Compre- | Additional | Compre- | Noncon- | |||||||||||||||||||||||||||||||||
hensive | Common Stock | Treasury | Paid-in | Retained | hensive | trolling | ||||||||||||||||||||||||||||||
Total | Income | Class A | Class B | Stock | Capital | Earnings | Income (Loss) | Interest | ||||||||||||||||||||||||||||
Balance, December 25, 2007 |
$ | 448,179 | $ | | $ | 3 | $ | | $ | (1,188 | ) | $ | 168,386 | $ | 278,963 | $ | | $ | 2,015 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
42,903 | 42,903 | | | | | 41,887 | | 1,016 | |||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
| | | | | | | | | |||||||||||||||||||||||||||
Total other comprehensive income |
| | ||||||||||||||||||||||||||||||||||
Comprehensive income |
42,903 | $ | 42,903 | |||||||||||||||||||||||||||||||||
Issuance of common stock |
1,472 | | | | 1,472 | | | | ||||||||||||||||||||||||||||
Exercise of employee stock options |
15,468 | | | | 15,468 | | | | ||||||||||||||||||||||||||||
Stock-based compensation expense |
5,685 | | | | 5,685 | | | | ||||||||||||||||||||||||||||
Repurchase of common stock |
(48,878 | ) | | | (1,001 | ) | (47,877 | ) | | | | |||||||||||||||||||||||||
Tax benefit from exercise of stock options |
2,957 | | | | 2,957 | | | | ||||||||||||||||||||||||||||
Balance, September 23, 2008 |
$ | 467,786 | $ | 3 | $ | | $ | (2,189 | ) | $ | 146,091 | $ | 320,850 | $ | | $ | 3,031 | |||||||||||||||||||
Balance, December 30, 2008 |
$ | 498,686 | $ | | $ | 3 | $ | | $ | (2,204 | ) | $ | 151,358 | $ | 346,399 | $ | (394 | ) | $ | 3,524 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||
Net income |
57,157 | 57,157 | | | | | 56,356 | | 801 | |||||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
463 | 463 | | | | | | 463 | | |||||||||||||||||||||||||||
Total other comprehensive income |
463 | 463 | ||||||||||||||||||||||||||||||||||
Comprehensive income |
57,620 | $ | 57,620 | |||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
(23,124 | ) | | | | (18,799 | ) | | | (4,325 | ) | |||||||||||||||||||||||||
Adjustment to noncontrolling interest |
(742 | ) | | | | (742 | ) | | | | ||||||||||||||||||||||||||
Issuance of common stock |
1,247 | | | | 1,247 | | | | ||||||||||||||||||||||||||||
Exercise of employee stock options |
14,224 | | | | 14,224 | | | | ||||||||||||||||||||||||||||
Stock-based compensation expense |
6,464 | | | | 6,464 | | | | ||||||||||||||||||||||||||||
Repurchase of common stock |
(1,681 | ) | | | (1,681 | ) | | | | | ||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
3,102 | | | | 3,102 | | | | ||||||||||||||||||||||||||||
Balance, September 29, 2009 |
$ | 555,796 | $ | 3 | $ | | $ | (3,885 | ) | $ | 156,854 | $ | 402,755 | $ | 69 | $ | | |||||||||||||||||||
During the thirteen weeks ended September 29, 2009, the Company recorded an adjustment of $0.7
million to noncontrolling interest to properly reflect deferred taxes prior to the purchase of the
remaining 49 percent of Paradise Bakery & Café, Inc. (Paradise). This adjustment was recorded to
additional paid-in capital as a result of the June 2, 2009 purchase of the remainder of Paradise.
Purchase of Noncontrolling Interest
On February 1, 2007, the Company purchased 51 percent of the outstanding stock of Paradise, then owner and operator of 22 bakery-cafes and one commissary and
franchisor of 22 bakery-cafes and one commissary, for a purchase price of $21.1 million plus $0.5
million in acquisition costs. As a result, Paradise became a majority-owned consolidated
subsidiary of the Company, with its operating results included in the Companys Consolidated
Statements of Operations and the 49 percent portion of equity attributable to Paradise presented as
minority interest, and subsequently as noncontrolling interest, in the Companys Consolidated
Balance Sheets. In connection with this transaction, the Company received the right to purchase
the remaining 49 percent of the outstanding stock of Paradise after January 1, 2009 at a
contractually determined value, which approximated fair value. In addition, the related agreement
provided that if the Company did not exercise its right to purchase the remaining 49 percent of the
outstanding stock of Paradise by June 30, 2009, the remaining Paradise owners had the right to
purchase the Companys 51 percent interest in Paradise thereafter for $21.1 million.
On June 2, 2009, the Company exercised its right to purchase the remaining 49 percent of the
outstanding stock of Paradise, excluding certain agreed upon assets totaling $0.7 million, for a
purchase price of $22.3 million, $0.1 million in transaction costs, and settlement of $3.4 million
of debt owed to the Company by the shareholders of the remaining 49 percent of Paradise.
Approximately $20.0 million of the purchase price, as well as the transaction costs, were paid on
June 2, 2009, with $2.3 million retained by the Company for certain holdbacks. The holdbacks are
primarily for certain indemnifications and expire on the second anniversary of the transaction
closing date, June 2, 2011, with any remaining holdback amounts reverting to the prior
shareholders of the remaining 49 percent of Paradise. The transaction was accounted for as an
equity transaction, by adjusting the carrying amount of the noncontrolling interest balance to
reflect the change in the Companys ownership interest in Paradise, with the difference between
fair value of the consideration paid and the amount by which the noncontrolling interest was
adjusted recognized in equity attributable to the Company. During the thirteen weeks ended
September 29, 2009, certain holdback amounts and additional
transaction costs totaling $0.01 million were paid.
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The following table illustrates the effect on the Companys equity of its purchase of the remaining
49 percent of outstanding stock of Paradise on June 2, 2009 (in thousands):
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Net income attributable to the Company |
$ | 18,894 | $ | 13,740 | $ | 56,356 | $ | 41,887 | ||||||||
Decrease in equity for purchase of noncontrolling
interest |
(8 | ) | | (18,799 | ) | | ||||||||||
Change from net income attributable to the
Company
and the purchase of noncontrolling interest |
$ | 18,886 | $ | 13,740 | $ | 37,557 | $ | 41,887 | ||||||||
Note 3. Fair Value Measurements
Effective December 26, 2007, the Company implemented the accounting standard regarding disclosures
for financial assets, financial liabilities, non-financial assets and non-financial liabilities
recognized or disclosed at fair value in the consolidated financial statements on a recurring basis
(at least annually). Effective December 30, 2008, the Company also implemented the accounting
standard for non-financial assets and non-financial liabilities reported or disclosed at fair value
on a non-recurring basis, the adoption of which had no impact on the Company in the thirty-nine
weeks ended September 29, 2009. This standard defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. This standard also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The following describes the three levels of inputs used to
measure fair value:
Level 1 Quoted market prices in active markets for identical assets or liabilities.
Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 Unobservable inputs that are not corroborated by market data.
The Companys $71.1 million and $76.6 million in cash equivalents at September 29, 2009 and
December 30, 2008, respectively, were recorded at fair value in the Consolidated Balance Sheets
based on quoted market prices for identical securities (Level 1 inputs).
At September 29, 2009 and December 30, 2008, the Companys investments were recorded at fair value
in the Consolidated Balance Sheets and consisted of units of beneficial interest in the Columbia
Strategic Cash Portfolio (the Columbia Portfolio), an enhanced cash fund previously sold as an
alternative to traditional money-market funds. The Columbia Portfolio includes investments in
certain asset-backed securities and structured investment vehicles that are collateralized by
sub-prime mortgage securities or related to mortgage securities, among other assets. As a result
of adverse market conditions that have unfavorably affected the fair value and liquidity
availability of collateral underlying the Columbia Portfolio, it was overwhelmed with withdrawal
requests from investors and the Columbia Portfolio was closed, with a restriction placed upon the
cash redemption ability of its holders in the fourth quarter of fiscal 2007.
As the Columbia Portfolio units are no longer trading and, therefore, have little or no price
transparency, the Company assessed the fair value of the underlying collateral for the Columbia
Portfolio through the review of current investment ratings, as available, coupled with the
evaluation of the liquidation value of assets held by each investment and their subsequent
distribution of cash. The Company then utilized this assessment of the underlying collateral from
multiple indicators of fair value, which were then adjusted to reflect the expected timing of
disposition and market risks to arrive at an estimated fair value of the Columbia Portfolio units
of $0.661 per unit, or $0.9 million, as of September 29, 2009, and $0.650 per unit, or $4.1
million, as of December 30, 2008. Based on the valuation methodology used to determine the fair
value, the Columbia Portfolio is classified within Level 3 of the fair value hierarchy. Realized
and unrealized gains/(losses) relating to the Columbia Portfolio are classified in other (income)
expense, net in the Consolidated Statements of Operations.
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The following table sets forth a summary of the changes in the fair value of the Companys Level 3
financial asset for the periods indicated (in thousands):
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Beginning balance |
$ | 2,282 | $ | 13,544 | $ | 4,126 | $ | 23,198 | ||||||||
Net realized and unrealized gains/(losses)(1) |
899 | (513 | ) | 1,066 | (1,360 | ) | ||||||||||
Redemptions |
(2,305 | ) | (4,948 | ) | (4,316 | ) | (13,755 | ) | ||||||||
Ending balance |
$ | 876 | $ | 8,083 | $ | 876 | $ | 8,083 | ||||||||
(1) | Includes $0.8 million of realized gains on redemptions received in the thirteen weeks ended
September 29, 2009 and $0.1 million of unrealized gains attributable to the change in fair
value of units held as of September 29, 2009; $0.5 million of unrealized losses in the
thirteen weeks ended September 23, 2008 attributable to the change in fair value of units held
as of September 23, 2008; $1.3 million of realized gains on redemptions received in the
thirty-nine weeks ended September 29, 2009, offset by $0.2 million of unrealized losses
attributable to changes in fair value of Columbia Portfolio units during the thirty-nine weeks
ended September 29, 2009; and $2.0 million of unrealized losses attributable to the change in
fair value of units during the thirty-nine weeks ended September 23, 2008, offset by $0.6
million of realized gains on redemptions received in the thirty-nine weeks ended September 23,
2008. |
Information and the markets relating to these investments remain dynamic, and there may be
further declines in the value of these investments, the value of the collateral held by these
entities, and the liquidity of the Companys investments. To the extent the Company determines
there is a further decline in fair value, it may recognize additional realized and unrealized
losses in future periods up to the aggregate amount of these investments. The Company included
$0.9 million of the remaining fair value of its Columbia Portfolio units in short-term investments
in the Consolidated Balance Sheets at September 29, 2009, as the Company reasonably believes this
amount of cash redemptions will be received within the next twelve months based on the redemptions
received to-date and recent representations from the Columbia Portfolio management. However, the
Columbia Portfolio has not made any formal commitments on the availability or timing of future
redemptions.
Note 4. Inventories
Inventories consisted of the following (in thousands):
September 29, 2009 | December 30, 2008 | |||||||
Food: |
||||||||
Fresh dough facilities: |
||||||||
Raw materials |
$ | 2,636 | $ | 3,040 | ||||
Finished goods |
513 | 319 | ||||||
Bakery-cafes: |
||||||||
Raw materials |
6,195 | 6,533 | ||||||
Paper goods |
1,862 | 2,021 | ||||||
Retail merchandise |
| 46 | ||||||
$ | 11,206 | $ | 11,959 | |||||
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Note 5. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
September 29, 2009 | December 30, 2008 | |||||||
Compensation and related employment taxes |
$ | 35,453 | $ | 22,508 | ||||
Unredeemed gift cards |
24,142 | 33,042 | ||||||
Insurance |
16,481 | 12,482 | ||||||
Capital expenditures |
8,973 | 6,448 | ||||||
Taxes, other than income tax |
8,953 | 4,898 | ||||||
Rent |
5,394 | 4,567 | ||||||
Fresh dough operations |
4,586 | 5,191 | ||||||
Utilities |
3,770 | 3,258 | ||||||
Deferred revenue |
2,621 | 2,024 | ||||||
Advertising |
2,286 | 3,698 | ||||||
Deferred purchase price |
2,258 | | ||||||
Income taxes payable |
| 1,259 | ||||||
Other |
9,736 | 10,603 | ||||||
$ | 124,653 | $ | 109,978 | |||||
Note 6. Credit Facility
The Company and certain of its direct and indirect subsidiaries, as guarantors, are parties to an
amended and restated credit agreement (the Amended and Restated Credit Agreement) with Bank of
America, N.A. and other lenders party thereto, which provides for a secured revolving credit
facility of $250.0 million to be used for general corporate purposes, including working capital,
capital expenditures, and permitted acquisitions and share repurchases. The credit facility, which
is collateralized by the capital stock of the Companys present and future material subsidiaries,
will become due on March 7, 2013, subject to acceleration upon certain specified events of default.
As of September 29, 2009, the Company had no balance outstanding under the Amended and Restated
Credit Agreement. The Company incurred $0.1 million and $0.3 million of commitment fees for the
thirteen and thirty-nine weeks ended September 29, 2009, respectively, and accrued interest at
September 29, 2009 related to the commitment fees was inconsequential. As of September 29, 2009,
the Company was in compliance with all covenants in the Amended and Restated Credit Agreement.
Note 7. Commitments and Contingencies
Lease Obligations
As of September 29, 2009, the Company guaranteed operating leases of 29 franchisee locations and
seven locations of its former Au Bon Pain division, or its franchisees, which the Company accounts
for in accordance with the accounting standard for guarantees. These leases have terms expiring on
various dates from October 31, 2009 to December 31, 2023 and have a potential amount of future
rental payments of approximately $33.0 million as of September 29, 2009. The obligation from these
leases will generally continue to decrease over time as these operating leases expire. The Company
has not recorded a liability for certain of these guarantees as they arose prior to the
implementation of this accounting standard for guarantees and, unless modified, are exempt from its
requirements. The Company did not record a liability for those guarantees issued after the
effective date of this accounting standard because the fair value of each such lease guarantee was
determined by the Company to be insignificant based on analysis of the facts and circumstances of
each such lease and each such franchisees performance, and the Company did not believe it was
probable it would be required to perform under any guarantees at the time the guarantees were
issued. The Company has not had to make any payments related to any of these guaranteed leases. Au
Bon Pain or the applicable franchisees continue to have primary liability for these operating
leases.
During the first quarter of fiscal 2008, the Company recorded a reserve of $1.2 million relating to
the termination of operating leases for specific sites, which the Company had determined not to
develop. During the thirteen weeks ended September 29, 2009, there were no significant changes
made to the accrual. During the thirty-nine weeks ended September 29, 2009, the Company decreased
the reserve by $0.3 million primarily due to its subsequent determination to move forward with the
development of one of the sites and due to the settlement of one lease. No other significant
changes were made to the accrual during the thirty-nine weeks ended September 29, 2009. As of
September 29, 2009 and December 30, 2008, the Company had $0.6 million and $0.9 million accrued in
its Consolidated Balance Sheets relating to the reserve for termination of these specific leases.
11
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Related Party Credit Agreement
In order to facilitate the Companys opening of the first Panera Bread bakery-cafes in Canada, on
September 10, 2008, the Companys Canadian subsidiary, Panera Bread ULC, as lender, entered into a
Cdn. $3.5 million secured revolving credit facility agreement (the Credit Agreement) with
Millennium Bread Inc., as borrower (Millennium), and certain of Millenniums present and future
subsidiaries (the Franchisee Guarantors), which have entered into franchise agreements with
Panera Bread ULC, to operate three Panera Bread bakery-cafes in Canada. Covenants under the Credit
Agreement require Millennium to maintain a certain level of cash equity contributions or
subordinated loans from its shareholders in relation to principal outstanding under the Credit
Agreement. The borrowings under the Credit Agreement bear interest at the per annum rate of 7.58
percent, calculated daily and payable monthly in arrears on the last business day of each fiscal
month. The credit facility, which is collateralized by present and future property and assets of
Millennium and the Franchisee Guarantors, as well as the personal guarantees of certain
individuals, became due on September 9, 2009. On September 9, 2009 the maturity date was extended
to December 9, 2009. The credit facility is subject to acceleration upon certain specified events
of default, including breaches of representations or covenants, failure to pay other material
indebtedness or a change of control of Millennium, as defined in the Credit Agreement. The
proceeds from the credit facility may be used by Millennium to pay costs and expenses to develop
and construct the Franchisee Guarantors bakery-cafes and for their day-to-day operating
requirements.
As part of the franchise agreement between Millennium and Panera Bread ULC, Panera Bread ULC
developed and equipped three bakery-cafes as typical Panera Bread bakery-cafes in accordance with
the Companys current design and construction standards and specifications as applied by Panera
Bread ULC, in its sole discretion. Millennium was required to pay Panera Bread ULC an amount equal
to the total cost of development of the bakery-cafes, which included all costs and expenses
incurred by Panera Bread ULC in connection with selection and development of the bakery-cafes;
however, no overhead expenses of Panera Bread ULC were included in the total cost. On September
15, 2008, October 27, 2008, and December 16, 2008, Panera Bread ULC delivered possession of the
bakery-cafes in Canada to Millennium, which bakery-cafes subsequently opened on October 6, 2008,
November 10, 2008, and January 26, 2009, respectively. The total development cost billed to
Millennium for these three bakery-cafes was approximately Cdn. $3.7 million. On April 7, 2009,
Millennium requested a Cdn. $3.5 million advance under the Credit Agreement, which was applied
against the outstanding receivable as previously described. The remaining Cdn. $0.2 million
receivable was resolved during the thirteen weeks ended September 29, 2009. The Cdn. $3.5 million
note receivable from Millennium is included in other accounts receivable in the Consolidated
Balance Sheets as of September 29, 2009.
Legal Proceedings
On January 25, 2008 and February 26, 2008, purported class action lawsuits were filed against the
Company and three of the Companys current or former executive officers by the Western Washington
Laborers-Employers Pension Trust and by Sue Trachet, respectively, on behalf of investors who
purchased the Companys common stock during the period between November 1, 2005 and July 26, 2006.
Both lawsuits were filed in the United States District Court for the Eastern District of Missouri,
St. Louis Division. Each complaint alleges that the Company and the other defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and Rule 10b-5 under the Exchange Act in connection with the Companys disclosure of system-wide
sales and earnings guidance during the period from November 1, 2005 through July 26, 2006. Each
complaint seeks, among other relief, class certification of the lawsuit, unspecified damages, costs
and expenses, including attorneys and experts fees, and such other relief as the court might find
just and proper. On June 23, 2008, the lawsuits were consolidated and the Western Washington
Laborers-Employers Pension Trust was appointed lead plaintiff in the lawsuit. On August 7, 2008,
the plaintiff filed an amended complaint, which extended the class period to November 1, 2005
through July 26, 2007. The Company believes it and the other defendants have meritorious defenses
to each of the claims in the lawsuit and the Company is prepared to vigorously defend the lawsuit.
On October 6, 2008, the Company filed a motion to dismiss all of the claims in the lawsuit. On
November 20, 2008, the plaintiff filed an opposition to the Companys motion to dismiss, and on
December 3, 2008, the Company filed a reply memorandum in support of its motion to dismiss. On
June 25, 2009, the Court converted the Companys motion to one for summary judgment and denied it
without prejudice. The Court simultaneously gave the Company until July 20, 2009 to file a new
motion for summary judgment, which deadline the Court subsequently extended until August 10, 2009.
On August 10, 2009, the Company filed a motion for summary judgment. On September 9, 2009, the
plaintiff filed a request to deny or continue the Companys motion for summary judgment to allow
the plaintiff to conduct discovery. On October 2, 2009, the Court held a hearing on the
plaintiffs request, at which it ordered plaintiff to provide notice of the discovery it seeks
within 10 days. On October 12, 2009, the plaintiff provided such notice, and on October 23, 2009,
the Company filed its response thereto. There can be no assurance that the Company will be
successful, and an adverse resolution of the lawsuit could have a material adverse effect on the
Companys consolidated financial position and results of operations in the period in which the
lawsuit is resolved. The Company is not presently able to reasonably estimate potential losses, if
any, related to the lawsuit and as such, has not recorded a liability in its Consolidated Balance
Sheets.
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On February 22, 2008, a shareholder derivative lawsuit was filed against the Company as nominal
defendant and against certain of its current or former officers and certain current directors. The
lawsuit was filed by Paul Pashcetto in the Circuit Court of St. Louis, Missouri. The complaint
alleges, among other things, breach of fiduciary duty, abuse of control, waste of corporate assets
and unjust enrichment between November 5, 2006 and February 22, 2008. The complaint seeks, among
other relief, unspecified damages, costs and expenses, including attorneys fees, an order
requiring the Company to implement certain corporate governance reforms, restitution from the
defendants and such other relief as the court might find just and proper. The Company believes it
and the other defendants have
meritorious defenses to each of the claims in this lawsuit and the Company is prepared to
vigorously defend the lawsuit. On July 18, 2008, the Company filed a motion to dismiss all of the
claims in this lawsuit. On August 29, 2008, the plaintiff filed an opposition to the Companys
motion to dismiss, and on September 10, 2008, the Company filed a reply memorandum in support of
its motion to dismiss. There can be no assurance that the Company will be successful, and an
adverse resolution of the lawsuit could have a material adverse effect on the Companys
consolidated financial position and results of operations in the period in which the lawsuit is
resolved. The Company is not presently able to reasonably estimate potential losses, if any,
related to the lawsuit and as such, has not recorded a liability in its Consolidated Balance
Sheets.
On February 22, 2008, a purported class action lawsuit was filed against the Company and one of its
subsidiaries by Pati Johns, a former employee of the Company, in the United States District Court
for the District of Northern California. The complaint alleged, among other things, violations of
the Fair Labor Standards Act and the California Labor Code for failure to pay overtime and
termination compensation. Although the Company believes that its policies and practices were
lawful and that it had meritorious defenses to each of the claims in this case, following mediation
with the plaintiff, the Company entered into a settlement agreement in late fiscal 2008, which has
been approved by the court. As a result, the Company accrued approximately $0.5 million in legal
settlement costs for the fiscal year ended December 30, 2008, which it paid during the thirteen
weeks ended June 30, 2009.
In addition, the Company is subject to other routine legal proceedings, claims and litigation in
the ordinary course of its business. Defending lawsuits requires significant management attention
and financial resources and the outcome of any litigation, including the matters described above,
is inherently uncertain. The Company does not, however, currently expect that the costs to resolve
these routine matters will have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
Other
The Company is subject to on-going federal and state income and sales tax audits, and any
unfavorable rulings could materially and adversely affect its financial condition or results of
operations. The Company believes reserves for these matters are adequately provided for in its
consolidated financial statements.
Note 8. Business Segment Information
The Company operates three business segments. Its Bakery-Cafe Operations segment is comprised of
the operating activities of the bakery-cafes owned directly and indirectly by the Company. The
Company-owned bakery-cafes conduct business under the Panera Bread®, Saint Louis Bread
Co.® or Paradise Bakery & Café® names. These bakery-cafes offer some or all
of the following: fresh baked goods, made-to-order sandwiches on freshly baked breads, soups,
salads, custom roasted coffees, and other complementary products through on-premise sales, as well
as catering.
The Franchise Operations segment is comprised of the operating activities of the franchise business
unit which licenses qualified operators to conduct business under the Panera Bread or Paradise
Bakery & Café names and also monitors the operations of these bakery-cafes. Under the terms of most
of the agreements, the licensed operators pay royalties and fees to the Company in return for the
use of the Panera Bread or Paradise Bakery & Café names.
The Fresh Dough Operations segment supplies fresh dough items and indirectly supplies proprietary
sweet goods items through a contract manufacturing arrangement as well as other items to both
Company-owned and franchise-operated bakery-cafes. The fresh dough is sold to a number of both
Company-owned and franchise-operated bakery-cafes at a delivered cost generally not to exceed 27
percent of the retail value of the end product. The sales and related costs to the
franchise-operated bakery-cafes are separately stated line items in the Consolidated Statements of
Operations. The operating profit related to the sales to Company-owned bakery-cafes is classified
as a reduction of the costs in the cost of food and paper products in the Consolidated Statements
of Operations.
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Information related to the Companys three business segments follows (in thousands):
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Company bakery-cafe operations |
$ | 285,871 | $ | 268,486 | $ | 840,397 | $ | 803,328 | ||||||||
Franchise operations |
19,369 | 18,144 | 57,153 | 53,682 | ||||||||||||
Fresh dough operations |
52,204 | 51,940 | 158,506 | 152,763 | ||||||||||||
Intercompany sales eliminations |
(22,426 | ) | (23,375 | ) | (69,535 | ) | (68,732 | ) | ||||||||
Total revenues |
$ | 335,018 | $ | 315,195 | $ | 986,521 | $ | 941,041 | ||||||||
Segment profit: |
||||||||||||||||
Company bakery-cafe operations |
$ | 45,394 | $ | 40,607 | $ | 132,446 | $ | 129,158 | ||||||||
Franchise operations |
18,140 | 15,121 | 53,077 | 46,410 | ||||||||||||
Fresh dough operations |
4,966 | 1,583 | 14,389 | 3,649 | ||||||||||||
Total segment profit |
$ | 68,500 | $ | 57,311 | $ | 199,912 | $ | 179,217 | ||||||||
Depreciation and amortization |
$ | 16,988 | $ | 16,794 | $ | 49,986 | $ | 49,168 | ||||||||
Unallocated general and administrative expenses |
18,966 | 16,928 | 54,965 | 56,137 | ||||||||||||
Pre-opening expenses |
624 | 868 | 1,370 | 2,874 | ||||||||||||
Interest expense |
163 | 225 | 537 | 1,398 | ||||||||||||
Other (income) expense, net |
1,248 | 461 | 1,090 | 806 | ||||||||||||
Income before income taxes |
$ | 30,511 | $ | 22,035 | $ | 91,964 | $ | 68,834 | ||||||||
Depreciation and amortization: |
||||||||||||||||
Company bakery-cafe operations |
$ | 14,092 | $ | 13,730 | $ | 41,411 | $ | 39,979 | ||||||||
Fresh dough operations |
1,899 | 2,006 | 5,754 | 5,972 | ||||||||||||
Corporate administration |
997 | 1,058 | 2,821 | 3,217 | ||||||||||||
Total depreciation and amortization |
$ | 16,988 | $ | 16,794 | $ | 49,986 | $ | 49,168 | ||||||||
Capital expenditures: |
||||||||||||||||
Company bakery-cafe operations |
$ | 12,954 | $ | 12,671 | $ | 32,422 | $ | 46,005 | ||||||||
Fresh dough operations |
1,015 | 892 | 2,650 | 1,730 | ||||||||||||
Corporate administration |
1,064 | 1,162 | 2,606 | 2,362 | ||||||||||||
Total capital expenditures |
$ | 15,033 | $ | 14,725 | $ | 37,678 | $ | 50,097 | ||||||||
September 29, 2009 | December 30, 2008 | |||||||
Segment assets: |
||||||||
Company bakery-cafe operations |
$ | 506,349 | $ | 503,928 | ||||
Franchise operations |
4,603 | 5,951 | ||||||
Fresh dough operations |
48,481 | 50,699 | ||||||
Total segment assets |
$ | 559,433 | $ | 560,578 | ||||
Unallocated trade and other accounts
receivable |
2,435 | 2,435 | ||||||
Unallocated property and equipment |
14,650 | 13,673 | ||||||
Unallocated deposits and other |
5,354 | 5,109 | ||||||
Other unallocated assets |
185,749 | 92,122 | ||||||
Total assets |
$ | 767,621 | $ | 673,917 | ||||
Unallocated trade and other accounts receivable relates primarily to rebates; unallocated
property and equipment relates primarily to corporate property and equipment; unallocated
deposits and other relates primarily to collateral deposits with insurance carriers, Company-owned
life insurance program, and capitalized debt issuance costs; and other unallocated assets relates
primarily to cash and cash equivalents, investments, and deferred income taxes.
14
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Note 9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except for per share data):
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Amounts used for basic and diluted per share calculations: |
||||||||||||||||
Net income attributable to Panera Bread Company |
$ | 18,894 | $ | 13,740 | $ | 56,356 | $ | 41,887 | ||||||||
Weighted average number of shares outstanding basic |
30,748 | 30,124 | 30,577 | 29,991 | ||||||||||||
Effect of dilutive stock-based employee compensation |
317 | 433 | 348 | 392 | ||||||||||||
Weighted average number of shares outstanding diluted |
31,065 | 30,557 | 30,925 | 30,383 | ||||||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||||||
Basic |
$ | 0.61 | $ | 0.46 | $ | 1.84 | $ | 1.40 | ||||||||
Diluted |
$ | 0.61 | $ | 0.45 | $ | 1.82 | $ | 1.38 | ||||||||
Approximately 0.4 million and 0.5 million weighted-average stock options, restricted stock and
stock-settled appreciation rights for the thirteen weeks ended and 0.3 million and 0.6 million for
the thirty-nine weeks ended September 29, 2009 and September 23, 2008, respectively, were excluded
in calculating diluted earnings per share as the exercise price exceeded fair market value and
inclusion would have been antidilutive.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Matters discussed in this report and in our public disclosures, whether written or oral, relating
to future events or our future performance, including any discussion, express or implied, of our
anticipated growth, operating results, future earnings per share, plans and objectives, contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements are often identified by the
words believe, positioned, estimate, project, target, continue, intend, expect,
future, anticipates, and similar expressions that are not statements of historical fact. These
statements are not guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Our actual results and timing of certain events could
differ materially from those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under Risk Factors and elsewhere in this
report and in our other public filings with the U.S. Securities and Exchange Commission, or the
SEC. It is routine for internal projections and expectations to change as the year or each quarter
in the year progresses, and therefore it should be clearly understood that all forward-looking
statements and the internal projections and beliefs upon which we base our expectations included in
this report or other periodic reports are made only as of the date made and may change. While we
may elect to update forward-looking statements at some point in the future, we do not undertake any
obligation to update any forward-looking statements whether as a result of new information, future
events or otherwise.
General
Panera Bread Company and its subsidiaries may be referred to as the Company, Panera Bread, or
in the first person notation of we, us, and our in the following discussion.
Our revenues are derived from Company-owned bakery-cafe sales, fresh dough sales to franchisees,
and franchise royalties and fees. Fresh dough sales to franchisees are primarily the sales of fresh
dough products and sales of tuna and cream cheese to certain of our franchisees. Franchise
royalties and fees include royalty income and franchise fees. The cost of food and paper products,
labor, occupancy, and other operating expenses relate primarily to Company-owned bakery-cafe sales.
The cost of fresh dough sales to franchisees relates primarily to the sale of fresh dough products
and tuna and cream cheese to franchisees. General and administrative, depreciation and
amortization, and pre-opening expenses relate to all areas of revenue generation.
Use of Non-GAAP Measurements
We include in this report information on Company-owned, franchise-operated and system-wide
comparable bakery-cafe sales percentages. Company-owned comparable bakery-cafe sales percentages
are based on sales from bakery-cafes that have been in operation and Company-owned for at least 18
months. Franchise-operated comparable bakery-cafe sales percentages are based on sales from
franchised bakery-cafes, as reported by franchisees, that have been in operation and
franchise-operated for at least 18 months. System-wide comparable bakery-cafe sales percentages are
based on sales at both Company-owned and franchise-operated bakery-cafes that have been in
operation and Company-owned or franchise-operated for at least 18 months. Acquired Company-owned
and franchise-operated bakery-cafe locations and other restaurant or bakery-cafe concepts are
excluded from comparable bakery-cafe sales until we have held a 100 percent ownership interest
therein for at least 18 months. Comparable bakery-cafe sales exclude closed locations and
currently, Paradise Bakery & Café, Inc., or Paradise, locations.
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Comparable bakery-cafe sales percentages are non-GAAP financial measures, which should not be
considered in isolation or as a substitute for other measures of performance prepared in accordance
with generally accepted accounting principles in the U.S., or GAAP, and may not be equivalent to
comparable bakery-cafe sales as defined or used by other companies. We do not record
franchise-operated bakery-cafe sales as revenues. However, royalty revenues are calculated based on
a percentage of franchise-operated bakery-cafe sales, as reported by franchisees. We use
franchise-operated and system-wide sales information internally in connection with store
development decisions, planning, and budgeting analyses. We believe franchise-operated and
system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates
an understanding of financial performance and the overall direction and trends of sales and
operating income, helps us appreciate the effectiveness of our advertising and marketing
initiatives to which our franchisees also contribute based on a percentage of their sales, and
provides information that is relevant for comparison within the industry.
We also include in this report information on Company-owned, franchise-operated and system-wide
average weekly sales. Average weekly sales are calculated by dividing total net sales by operating
weeks. Accordingly, year-over-year results reflect sales for all locations, whereas comparable
bakery-cafe sales exclude closed locations and Paradise and are based on sales for bakery-cafes
that have been in operation and owned for at least 18 months. New stores typically experience an
opening honeymoon period during which they generate higher average weekly sales in the first 12
to 16 weeks they are open as customers settle-in to normal usage patterns from initial trial of
the location. On average, the settle-in experienced is 5 percent to 10 percent less than the
average weekly sales during the honeymoon period. As a result, year-over-year results of average
weekly sales are generally lower than the results in comparable bakery-cafe sales. This results
from the relationship of the number of bakery-cafes in the honeymoon phase, the number of
bakery-cafes in the settle-in phase, and the number of bakery-cafes in the comparable bakery-cafe
base.
Executive Summary of Results
For the thirteen weeks ended September 29, 2009, we earned $0.61 per diluted share with the
following performance on key metrics: system-wide comparable bakery-cafe sales grew 2.8 percent
(3.3 percent for Company-owned bakery-cafes and 2.5 percent for franchise-operated bakery-cafes);
system-wide average weekly sales increased 1.9 percent to $39,383 ($38,655 for Company-owned
bakery-cafes and $39,913 for franchise-operated bakery-cafes); 19 new bakery-cafes opened
system-wide (nine Company-owned bakery-cafes and ten franchise-operated bakery-cafes); and two
franchise-operated bakery-cafes closed. Our results for the thirteen weeks ended
September 29, 2009 of $0.61 per diluted share included $0.04 per diluted share of net charges
primarily to increase reserves for certain state sales tax audit exposures, which were partially
offset by a gain recorded on both, the redemptions we received during the quarter on our investment
in the Columbia Strategic Cash Portfolio, referred to as the Columbia Portfolio, and the change in
the recorded fair value of the units held as of September 29, 2009.
For the thirteen weeks ended September 23, 2008, we earned $0.45 per diluted share with the
following performance on key metrics: system-wide comparable bakery-cafe sales grew 3.3 percent
(3.0 percent for Company-owned bakery-cafes and 3.5 percent for franchise-operated bakery-cafes);
system-wide average weekly sales increased 1.5 percent to $38,633 ($37,424 for Company-owned
bakery-cafes and $39,550 for franchise-operated bakery-cafes); and 24 new bakery-cafes opened
system-wide (seven Company-owned bakery-cafes and 17 franchise-operated bakery-cafes). Our results
for the thirteen weeks ended September 23, 2008 of $0.45 per diluted share included a $0.01 per
diluted share net charge from the write-down of our investment in the Columbia Portfolio, partially
offset by the gain recorded on the redemptions received during the quarter. Our results for the
thirteen weeks ended September 23, 2008 also reflected the significant increase in commodity prices
year-over-year that is further discussed below under Results of Operations Costs and Expenses.
For the thirty-nine weeks ended September 29, 2009, we earned $1.82 per diluted share with the
following performance on key metrics: system-wide comparable bakery-cafe sales grew 1.0 percent
(1.0 percent for Company-owned bakery-cafes and 1.1 percent for franchise-operated bakery-cafes);
system-wide average weekly sales increased 0.2 percent to $39,033 ($38,178 for Company-owned
bakery-cafes and $39,657 for franchise-operated bakery-cafes); 47 new bakery-cafes opened
system-wide (17 Company-owned bakery-cafes and 30 franchise-operated bakery-cafes); and ten
bakery-cafes closed system-wide (four Company-owned bakery-cafes and six franchise-operated
bakery-cafes). Our results for the thirty-nine weeks ended September 29, 2009 of $1.82 per diluted
share included $0.08 per diluted share net charges primarily to increase reserves for certain state
sales tax audit exposures and to write-off smallwares related to the rollout of new china,
partially offset by a gain recorded on both, the redemptions received during the period on our
investment in the Columbia Portfolio and the change in the recorded fair value of the units held
during the period.
For the thirty-nine weeks ended September 23, 2008, we earned $1.38 per diluted share with the
following performance on key metrics: system-wide comparable bakery-cafe sales grew 3.7 percent
(4.3 percent for Company-owned bakery-cafes and 3.4 percent for franchise-operated bakery-cafes);
system-wide average weekly sales increased 1.9 percent to $38,939 ($37,830 for Company-owned
bakery-cafes and $39,783 for franchise-operated bakery-cafes); 70 new bakery-cafes opened
system-wide (27 Company-owned bakery-cafes and 43 franchise-operated bakery-cafes); and six
bakery-cafes closed system-wide (four Company-owned bakery-cafes and two franchise-operated
bakery-cafes). In addition, beginning in the first quarter of fiscal 2008, we adjusted our 2008
development plans and made a determination to raise our sales hurdles for new bakery-cafe
development and to no longer develop specific sites. As a result of this determination, we recorded
a charge of $2.8 million, or $0.07 per diluted share, for the thirty-nine weeks ended September 23,
2008, to general and administrative expenses related to severance, the write-off of capitalized
assets and overhead costs and the termination of leases for specific sites that we decided to no
longer develop. Our results for the thirty-nine weeks ended September 23, 2008 of $1.38 per diluted
share also included an aggregate $0.04 per diluted share negative impact from unfavorable tax
adjustments and the net loss
recorded on both the redemptions received during the period on our investment in the Columbia
Portfolio and the change in the recorded fair value of the units held during the period. Our
results for the thirty-nine weeks ended September 23, 2008 also reflected the significant increase
in commodity prices year-over-year that is further discussed below under Results of Operations
Costs and Expenses.
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The following table sets forth the percentage relationship to total revenues, except where
otherwise indicated, of certain items included in the Consolidated Statements of Operations for the
periods indicated. Percentages may not add due to rounding:
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Bakery-cafe sales |
85.3 | % | 85.2 | % | 85.2 | % | 85.4 | % | ||||||||
Franchise royalties and fees |
5.8 | 5.8 | 5.8 | 5.7 | ||||||||||||
Fresh dough sales to franchisees |
8.9 | 9.1 | 9.0 | 8.9 | ||||||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Bakery-cafe expenses (1): |
||||||||||||||||
Cost of food and paper products |
29.3 | % | 30.4 | % | 29.6 | % | 30.4 | % | ||||||||
Labor |
32.4 | 32.3 | 32.5 | 32.0 | ||||||||||||
Occupancy |
8.5 | 8.5 | 8.5 | 8.3 | ||||||||||||
Other operating expenses |
14.0 | 13.8 | 13.7 | 13.3 | ||||||||||||
Total bakery-cafe expenses |
84.1 | 84.9 | 84.2 | 83.9 | ||||||||||||
Fresh dough cost of sales to franchisees (2) |
83.3 | 94.5 | 83.8 | 95.7 | ||||||||||||
Depreciation and amortization |
5.1 | 5.3 | 5.1 | 5.2 | ||||||||||||
General and administrative expenses |
6.0 | 6.3 | 6.0 | 6.7 | ||||||||||||
Pre-opening expenses |
0.2 | 0.3 | 0.1 | 0.3 | ||||||||||||
Total costs and expenses |
90.5 | 92.8 | 90.5 | 92.5 | ||||||||||||
Operating profit |
9.5 | 7.2 | 9.5 | 7.5 | ||||||||||||
Interest expense |
| 0.1 | 0.1 | 0.1 | ||||||||||||
Other (income) expense, net |
0.4 | 0.1 | 0.1 | 0.1 | ||||||||||||
Income before income taxes |
9.1 | 6.9 | 9.3 | 7.3 | ||||||||||||
Income taxes |
3.5 | 2.6 | 3.5 | 2.8 | ||||||||||||
Net income |
5.6 | 4.4 | 5.8 | 4.5 | ||||||||||||
Less: net income attributable to noncontrolling interest |
| | 0.1 | 0.1 | ||||||||||||
Net income attributable to Panera Bread Company |
5.6 | % | 4.4 | % | 5.7 | % | 4.5 | % | ||||||||
(1) | As a percentage of bakery-cafe sales. |
|
(2) | As a percentage of fresh dough sales to franchisees. |
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The following table sets forth certain information and other data relating to Company-owned
and franchise-operated bakery-cafes for the periods indicated:
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Number of bakery-cafes: |
||||||||||||||||
Company-owned: |
||||||||||||||||
Beginning of period |
566 | 548 | 562 | 532 | ||||||||||||
Bakery-cafes opened |
9 | 7 | 17 | 27 | ||||||||||||
Bakery-cafes closed |
| | (4 | ) | (4 | ) | ||||||||||
End of period |
575 | 555 | 575 | 555 | ||||||||||||
Franchise-operated: |
||||||||||||||||
Beginning of period |
779 | 722 | 763 | 698 | ||||||||||||
Bakery-cafes opened |
10 | 17 | 30 | 43 | ||||||||||||
Bakery-cafes closed |
(2 | ) | | (6 | ) | (2 | ) | |||||||||
End of period |
787 | 739 | 787 | 739 | ||||||||||||
System-wide: |
||||||||||||||||
Beginning of period |
1,345 | 1,270 | 1,325 | 1,230 | ||||||||||||
Bakery-cafes opened |
19 | 24 | 47 | 70 | ||||||||||||
Bakery-cafes closed |
(2 | ) | | (10 | ) | (6 | ) | |||||||||
End of period |
1,362 | 1,294 | 1,362 | 1,294 | ||||||||||||
Comparable bakery-cafe sales growth results for the periods indicated were as follows:
For the 13 Weeks Ended | For the 39 Weeks Ended | |||||||||||||||
September 29, 2009 | September 23, 2008 | September 29, 2009 | September 23, 2008 | |||||||||||||
Company-owned |
3.3 | % | 3.0 | % | 1.0 | % | 4.3 | % | ||||||||
Franchise-operated |
2.5 | % | 3.5 | % | 1.1 | % | 3.4 | % | ||||||||
System-wide |
2.8 | % | 3.3 | % | 1.0 | % | 3.7 | % |
Results of Operations
Revenues
Total revenues for the thirteen weeks ended September 29, 2009 increased 6.3 percent to $335.0
million compared to $315.2 million for the thirteen weeks ended September 23, 2008. The growth in
total revenues for the thirteen weeks ended September 29, 2009 compared to the same period in 2008
was primarily due to the opening of 79 new bakery-cafes system-wide since September 23, 2008 and to
the 2.8 percent increase in system-wide comparable bakery-cafe sales for the thirteen weeks ended
September 29, 2009. The system-wide average weekly sales per bakery-cafe for the periods indicated
were as follows:
For the 13 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
System-wide average weekly sales |
$ | 39,383 | $ | 38,633 | 1.9 | % |
Total revenues for the thirty-nine weeks ended September 29, 2009 increased 4.9 percent to $986.5
million compared to $941.0 million for the thirty-nine weeks ended September 23, 2008. The growth
in total revenues for the thirty-nine weeks ended September 29, 2009 compared to the same period in
2008 was primarily due to the opening of 79 new bakery-cafes system-wide since September 23, 2008
and, to a lesser extent, the 1.0 percent increase in system-wide comparable bakery-cafe sales for
the thirty-nine weeks ended September 29, 2009. The system-wide average weekly sales per
bakery-cafe for the periods indicated were as follows:
For the 39 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
System-wide average weekly sales |
$ | 39,033 | $ | 38,939 | 0.2 | % |
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Bakery-cafe sales for the thirteen weeks ended September 29, 2009 increased 6.5 percent to $285.9
million compared to $268.5 million for the thirteen weeks ended September 23, 2008. The increase in
bakery-cafe sales for the thirteen weeks ended September 29, 2009 compared to the same period in
2008 was primarily due to the opening of 25 new Company-owned bakery-cafes since September 23, 2008
and to the 3.3 percent increase in comparable Company-owned bakery-cafe sales for the thirteen
weeks ended September 29, 2009. This 3.3 percent growth in comparable bakery-cafe sales was driven
by approximately 1.8 percent of transaction growth and 1.5 percent average check growth. Average
check growth, in turn, was comprised of retail price increases of 2.3 percent and negative mix
impact of 0.8 percent in comparison to the same period in the prior year. In total, Company-owned
bakery-cafe sales as a percentage of total revenues increased by 0.1 percentage point to 85.3
percent for the thirteen weeks ended September 29, 2009 as compared to 85.2 percent for the same
period in 2008. In addition, the increase in average weekly sales for Company-owned bakery-cafes
for the thirteen weeks ended September 29, 2009 compared to the same period in 2008 was due to an
increase in transactions and average check growth. The average weekly sales per Company-owned
bakery-cafe and the number of operating weeks for the periods indicated were as follows:
For the 13 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
Company-owned average weekly sales |
38,655 | 37,424 | 3.3 | % | ||||||||
Company-owned number of operating
weeks |
7,396 | 7,174 | 3.1 | % |
Bakery-cafe sales for the thirty-nine weeks ended September 29, 2009 increased 4.7 percent to
$840.4 million compared to $803.3 million for the thirty-nine weeks ended September 23, 2008. The
increase in bakery-cafe sales for the thirty-nine weeks ended September 29, 2009 compared to the
same period in 2008 was primarily due to the opening of 25 new Company-owned bakery-cafes since
September 23, 2008 and to the 1.0 percent increase in comparable Company-owned bakery-cafe sales
for the thirty-nine weeks ended September 29, 2009. This 1.0 percent growth in comparable
bakery-cafe sales was driven by approximately 1.4 percent average check growth offset by 0.4
percent of transaction decline. Average check growth, in turn, was comprised of retail price
increases of 3.1 percent and negative mix impact of 1.7 percent in comparison to the same period in
the prior year. In total, Company-owned bakery-cafe sales as a percentage of total revenues
decreased by 0.2 percentage points to 85.2 percent for the thirty-nine weeks ended September 29,
2009 as compared to 85.4 percent for the same period in 2008. In addition, the increase in average
weekly sales for Company-owned bakery-cafes for the thirty-nine weeks ended September 29, 2009
compared to the same period in 2008 was due to an increase in average check growth and our 2008
strategy to increase focus on our return on invested capital, including raising our sales hurdles
for new bakery-cafes to focus our real estate decision-making process on building bakery-cafes that
we believe can deliver a 50 percent or greater probability against our revised return on investment
goals. The average weekly sales per Company-owned bakery-cafe and the number of operating weeks for
the periods indicated were as follows:
For the 39 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
Company-owned average weekly sales |
$ | 38,178 | $ | 37,830 | 0.9 | % | ||||||
Company-owned number of operating
weeks |
22,013 | 21,235 | 3.7 | % |
Franchise royalties and fees for the thirteen weeks ended September 29, 2009 increased 7.2 percent
to $19.4 million compared to $18.1 million for the thirteen weeks ended September 23, 2008. The
components of franchise royalties and fees for the periods indicated were as follows (in
thousands):
For the 13 Weeks Ended | ||||||||
September 29, 2009 | September 23, 2008 | |||||||
Franchise royalties |
$ | 19,080 | $ | 17,607 | ||||
Franchise fees |
289 | 537 | ||||||
Total |
$ | 19,369 | $ | 18,144 | ||||
The increase in franchise royalty and fee revenues for the thirteen weeks ended September 29, 2009
compared to the same period in 2008 was primarily due to the opening of 54 franchise-operated
bakery-cafes since September 23, 2008 and the 2.5 percent increase in comparable franchise-operated
bakery-cafe sales for the thirteen weeks ended September 29, 2009. The average weekly sales per
franchise-operated bakery-cafe and the related number of operating weeks for the periods indicated
were as follows:
For the 13 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
Franchise-operated average weekly sales |
$ | 39,913 | $ | 39,550 | 0.9 | % | ||||||
Franchise-operated number of operating
weeks |
10,162 | 9,463 | 7.4 | % |
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Table of Contents
Franchise royalties and fees for the thirty-nine weeks ended September 29, 2009 increased 6.6
percent to $57.2 million compared to $53.7 million for the thirty-nine weeks ended September 23,
2008. The components of franchise royalties and fees for the periods indicated were as follows (in
thousands):
For the 39 Weeks Ended | ||||||||
September 29, 2009 | September 23, 2008 | |||||||
Franchise royalties |
$ | 56,256 | $ | 52,255 | ||||
Franchise fees |
897 | 1,427 | ||||||
Total |
$ | 57,153 | $ | 53,682 | ||||
The increase in franchise royalty and fee revenues for the thirty-nine weeks ended September 29,
2009 compared to the same period in 2008 can be attributed to the opening of 54 franchise-operated
bakery-cafes since September 23, 2008, and to a lesser extent, 1.1 percent increase in comparable
franchise-operated bakery-cafe sales for the thirty-nine weeks ended September 29, 2009. The
average weekly sales per franchise-operated bakery-cafe and the related number of operating weeks
for the periods indicated were as follows:
For the 39 Weeks Ended | Percentage | |||||||||||
September 29, 2009 | September 23, 2008 | Change | ||||||||||
Franchise-operated average weekly sales |
$ | 39,657 | $ | 39,783 | -0.3 | % | ||||||
Franchise-operated number of operating
weeks |
30,163 | 27,916 | 8.1 | % |
As of September 29, 2009, there were 787 franchise-operated bakery-cafes open and commitments to
open 236 additional franchise-operated bakery-cafes. The timetables for opening these additional
bakery-cafes are established in Area Development Agreements, referred to as ADAs, with franchisees,
which provide for the majority to open in the next four to five years. In fiscal 2009, we expect
our franchisees to open approximately 35 new franchise-operated bakery-cafes. An ADA requires a
franchisee to develop a specified number of bakery-cafes on or before specified dates. If a
franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and
develop Company-owned locations or develop locations through new area developers in that market. We
may exercise one or more alternative remedies to address defaults by area developers, including not
only development defaults, but also defaults in complying with our operating and brand standards
and other covenants under the ADAs and franchise agreements. We may waive compliance with certain
requirements under our ADAs and franchise agreements if we determine that such action is warranted
under the particular circumstances.
Fresh dough sales to franchisees for the thirteen weeks ended September 29, 2009 increased 4.2
percent to $29.8 million compared to $28.6 million for the thirteen weeks ended September 23, 2008.
Fresh dough sales to franchisees for the thirty-nine weeks ended September 29, 2009 increased 6.0
percent to $89.0 million compared to $84.0 million for the thirty-nine weeks ended September 23,
2008. The increase in fresh dough sales to franchisees was primarily driven by the previously
described increased number of franchise-operated bakery-cafes opened since September 23, 2008 and
due to increases in our sales prices of dough products to franchisees compared to the same periods
in the prior year.
Costs and Expenses
The cost of food and paper products includes the costs associated with our fresh dough operations
that sell fresh dough products to Company-owned bakery-cafes, as well as the cost of food and paper
products supplied by third-party vendors and distributors. The costs associated with our fresh
dough operations that sell fresh dough products to the franchise-operated bakery-cafes are excluded
from the cost of food and paper products and are shown separately as fresh dough cost of sales to
franchisees in the Consolidated Statements of Operations.
The cost of food and paper products was $83.7 million, or 29.3 percent of bakery-cafe sales, for
the thirteen weeks ended September 29, 2009 compared to $81.6 million, or 30.4 percent of
bakery-cafe sales for the comparable period in 2008. This decrease in the cost of food and paper
products as a percentage of bakery-cafe sales was principally due to decreases in certain commodity
costs including wheat and fuel, as well as cost savings in other procurement areas; category
management initiatives such as product mix management and pricing strategy; and improved leverage
of our fresh dough manufacturing costs due to additional bakery-cafe openings and higher comparable
bakery-cafe sales. For the thirteen weeks ended September 29, 2009, our previously locked-in
average all-in cost of wheat was approximately $10.00 per bushel
versus approximately $15.50 per
bushel for the same period in 2008. For the thirteen weeks ended September 29, 2009, there was an
average of 62.7 bakery-cafes per fresh dough facility, compared to an average of 62.3 for the same
period in 2008.
20
Table of Contents
The cost of food and paper products was $248.8 million, or 29.6 percent of bakery-cafe sales, for
the thirty-nine weeks ended September 29, 2009 compared to $243.9 million, or 30.4 percent of
bakery-cafe sales for the comparable period in 2008. This decrease in the cost of food and paper
products as a percentage of bakery-cafe sales was principally due to decreases in certain commodity
costs including wheat
and fuel; category management initiatives such as product mix management and pricing strategy; cost
savings in procurement; and improved leverage of our fresh dough manufacturing costs due to
additional bakery-cafe openings. For the thirty-nine weeks ended September 29, 2009, our previously
locked-in average all-in cost of wheat was approximately $10.25 per bushel versus approximately
$15.00 per bushel for the same period in 2008. For the thirty-nine weeks ended September 29, 2009,
there was an average of 62.1 bakery-cafes per fresh dough facility, compared to an average of 61.4
for the same period in 2008.
Labor expense was $92.7 million, or 32.4 percent of bakery-cafe sales, for the thirteen weeks ended
September 29, 2009 compared to $86.6 million, or 32.3 percent of bakery-cafe sales, for the
thirteen weeks ended September 23, 2008. The modest increase in labor expense as a percentage of
bakery-cafe sales was primarily a result of wage rate inflation only partially offset by improved
leverage from higher comparable bakery-cafe sales. Labor expense was $272.9 million, or 32.5
percent of bakery-cafe sales, for the thirty-nine weeks ended September 29, 2009 compared to $256.8
million, or 32.0 percent of bakery-cafe sales, for the thirty-nine weeks ended September 23, 2008.
The modest increase in labor expense as a percentage of bakery-cafe sales was primarily a result of
wage rate inflation outpacing sales growth, increasing medical costs and our investment in staffing
for certain sampling events.
Occupancy cost was $24.2 million, or 8.5 percent of bakery-cafe sales, for the thirteen weeks ended
September 29, 2009 compared to $22.8 million, or 8.5 percent of bakery-cafe sales, for the thirteen
weeks ended September 23, 2008. The consistency in occupancy cost as a percentage of bakery-cafe
sales was primarily a result of rising average per square foot costs driven by our expansion into
newer, higher cost markets, such as those on the west coast, and increasing numbers of urban,
free-standing and drive-thru bakery-cafe locations, offset by improved leverage from higher
comparable bakery-cafe sales. Occupancy cost was $71.6 million, or 8.5 percent of bakery-cafe
sales, for the thirty-nine weeks ended September 29, 2009 compared to $66.3 million, or 8.3 percent
of bakery-cafe sales, for the thirty-nine weeks ended September 23, 2008. The modest increase in
occupancy cost as a percentage of bakery-cafe sales was primarily a result of rising average per
square foot costs driven by our expansion into newer, higher cost markets, such as those on the
west coast, and increasing numbers of urban, free-standing and drive-thru bakery-cafe locations.
Other operating expenses were $39.9 million, or 14.0 percent of bakery-cafe sales, for the thirteen
weeks ended September 29, 2009 compared to $36.9 million, or 13.8 percent of bakery-cafe sales, for
the thirteen weeks ended September 23, 2008. The increase in other operating expenses as a
percentage of bakery-cafe sales was due primarily to the impact of our marketing initiatives,
partially offset by improved leverage from higher comparable bakery-cafe sales. Other operating
expenses were $114.7 million, or 13.7 percent of bakery-cafe sales, for the thirty-nine weeks ended
September 29, 2009 compared to $107.1 million, or 13.3 percent of bakery-cafe sales, for the
thirty-nine weeks ended September 23, 2008. The increase in other operating expenses as a
percentage of bakery-cafe sales was due primarily to the impact of our marketing initiatives and a
charge for the write-off of smallwares of approximately $1.1 million.
Fresh dough cost of sales to
franchisees were $24.8 million, or 83.3 percent of fresh dough sales to franchisees, for
the thirteen weeks ended September 29, 2009, compared to
$27.0 million, or 94.5 percent of fresh dough sales to franchisees, for the thirteen weeks
ended September 23, 2008. The decrease in the fresh dough cost
of sales to franchisees as a percentage of fresh dough sales to
franchisees for the thirteen weeks
ended September 29, 2009 compared to the same period in 2008 was primarily the result of the
aforementioned decrease in wheat and fuel costs. Fresh dough cost of sales to franchisees were
$74.6 million, or 83.8 percent of fresh dough sales to franchisees, for the thirty-nine
weeks ended September 29, 2009, compared to $80.4 million, or 95.7 percent of fresh dough facility sales to franchisees, for the thirty-nine
weeks ended September 23, 2008. The decrease in the fresh dough
cost of sales to franchisees as a percentage
of fresh dough sales to franchisees for the thirty-nine weeks ended September 29,
2009 compared to the same period in 2008 was primarily the result of the aforementioned decrease in wheat and fuel costs, as well as
the year-over-year roll-in of dough pricing taken in the first half of 2008, partially offset by
lower sales of our fresh dough units per bakery-cafe.
General and administrative expenses were $20.2 million, or 6.0 percent of total revenues, for the
thirteen weeks ended September 29, 2009 compared to $20.0 million, or 6.3 percent of total
revenues, for the thirteen weeks ended September 23, 2008. General and administrative expenses were
$59.0 million, or 6.0 percent of total revenues, for the thirty-nine weeks ended September 29, 2009
compared to $63.4 million, or 6.7 percent of total revenues, for the thirty-nine weeks ended
September 23, 2008. The year-over-year decrease in general and administrative expenses as a percent
of total revenues for both the thirteen and thirty-nine weeks ended September 29, 2009 was
primarily due to disciplined expense management, and, for the thirteen weeks ended September 29,
2009, due to improved leverage of our expenses from higher sales. In addition, in the thirty-nine
weeks ended September 23, 2008, there was a charge of $2.8 million for severance, a write-off of
capitalized assets and overhead costs and the termination of leases for specific sites that we
decided to no longer develop in connection with the adjustment of our 2008 development plans.
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Interest Expense
Interest expense was $0.2 million, or zero percent of total revenues, for the thirteen weeks ended
September 29, 2009 compared to $0.2 million, or 0.1 percent of total revenues, for the thirteen
weeks ended September 23, 2008. Interest expense was $0.5 million, or 0.1 percent of total
revenues, for the thirty-nine weeks ended September 29, 2009 compared to $1.4 million, or 0.1
percent of total revenues, for the thirty-nine weeks ended September 23, 2008. The decrease in
interest expense for both the thirteen and thirty-nine weeks ended September 29, 2009 compared to
the same periods in 2008 was primarily a result of higher levels of debt outstanding during fiscal
2008 while there was no debt outstanding in fiscal 2009.
Other Income and Expense, net
Other income and expense, net was $1.2 million of expense, or 0.4 percent of total revenues, for
the thirteen weeks ended September 29, 2009 compared to $0.5 million of expense, or 0.1 percent of
total revenues, for the thirteen weeks ended September 23, 2008. Other income and expense, net for
the thirteen weeks ended September 29, 2009 was comprised of a $2.5 million charge for a potential
state sales tax audit exposure, partially offset by a gain of $0.9 million related to the Columbia
Portfolio, and $0.4 million related to interest income and other factors. Other income and expense,
net for the thirteen weeks ended September 23, 2008 was primarily comprised of a $0.5 million loss
attributable to the Columbia Portfolio.
Other income and expense, net was $1.1 million of expense, or 0.1 percent of total revenues, for
the thirty-nine weeks ended September 29, 2009 compared to $0.8 million of expense, or 0.1 percent
of total revenues, for the thirty-nine weeks ended September 23, 2008. Other income and expense,
net for the thirty-nine weeks ended September 29, 2009 was comprised of a $3.5 million charge for a
potential state sales tax audit exposure, partially offset by a net gain of $1.1 million related to
the Columbia Portfolio, and $1.3 million related to interest income from higher cash on-hand, and
other factors. Other income and expense, net for the thirty-nine weeks ended September 23, 2008 was
comprised of a net $1.4 million of a loss attributable to the Columbia Portfolio, partially offset
by $0.6 million related to interest income and other factors.
Income Taxes
The provision for income taxes was $11.6 million for the thirteen weeks ended September 29, 2009
compared to $8.2 million for the thirteen weeks ended September 23, 2008. The tax provision for the
thirteen weeks ended September 29, 2009 and September 23, 2008 reflects a combined federal, state,
and local effective tax rate of 38.1 percent and 37.2 percent respectively. The increase in the
effective tax rate in the thirteen weeks ended September 29,
2009 compared to the same period in 2008 was primarily a result of the
impact of certain changes in state tax laws.
The provision for income taxes was $34.8 million for the thirty-nine weeks ended September 29,
2009, compared to $25.9 million for the thirty-nine weeks ended September 23, 2008. The tax
provision for the thirty-nine weeks ended both September 29, 2009 and September 23, 2008 reflects a
combined federal, state, and local effective tax rate of 38.2 percent. The consistency in the
effective tax rate between the thirty-nine weeks ended September 29, 2009 and September 23, 2008
was primarily a result of the impact of certain changes in state tax laws resulting in an increase
in the year-over-year effective tax rate for the thirty-nine weeks ended September 29, 2009; and
our recording of a $1.0 million increase in our reserves in the thirty-nine weeks ended September
23, 2008 for potential exposures relating to various ongoing tax audits and legal and legislative
developments in certain jurisdictions not yet under audit, offset by a $0.5 million favorable
provision to return adjustment to recognize the benefit of tax credits not previously recognized.
Liquidity and Capital Resources
Cash and cash equivalents were $172.4 million at September 29, 2009, compared with $74.7 million at
December 30, 2008. This $97.7 million increase was
primarily a result of $135.4 million of cash
generated from operations, $14.2 million received from the exercise of employee stock options, and
$4.3 million received in investment maturity proceeds, partially
offset by $37.7 million used for
capital expenditures and $20.1 million used to purchase the remaining 49 percent of Paradise during
the thirty-nine weeks ended September 29, 2009. Our primary source of liquidity is cash provided by
operations, although we have also borrowed under our credit facility principally to finance
repurchases of our common stock. Historically, our principal requirements for cash have primarily
resulted from capital expenditures for the development of new Company-owned bakery-cafes, for
maintaining or remodeling existing Company-owned bakery-cafes, for purchasing existing
franchise-operated bakery-cafes or ownership interests in other restaurant or bakery-cafe concepts,
for developing, maintaining or remodeling fresh dough facilities, and for other capital needs such
as enhancements to information systems and other infrastructure.
We had working capital of $116.9 million at September 29, 2009 compared to $24.4 million at
December 30, 2008. The increase in working capital resulted primarily from the previously described
increase in cash and cash equivalents of $97.7 million, a $12.2 million increase in prepaid
expenses, resulting from the timing of the payment of estimated federal and state income taxes, and
a $2.5 million and $2.3 million increase in deferred income taxes and trade accounts receivable,
respectively, partially offset by an increase in accrued expenses of $14.7 million, a decrease in
other accounts receivable of $3.1 million, an increase in accounts payable of $2.1 million, and a
decrease in short-term investments and inventories of $1.5 million and $0.8 million, respectively.
We believe that our cash flow from
operations and available borrowings under our existing credit facility will be sufficient to fund
our cash requirements for the foreseeable future.
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A summary of our cash flows, for the periods indicated, were as follows (in thousands):
For the 39 Weeks Ended | ||||||||
September 29, 2009 | September 23, 2008 | |||||||
Cash flows provided by (used in): |
||||||||
Operating activities |
$ | 135,361 | $ | 100,232 | ||||
Investing activities |
(34,469 | ) | (38,860 | ) | ||||
Financing activities |
(3,189 | ) | (105,117 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
$ | 97,703 | $ | (43,745 | ) | |||
Operating Activities
Cash flows provided by operating activities for the thirty-nine weeks ended September 29, 2009
primarily resulted from net income, adjusted for non-cash items such as depreciation and
amortization, stock-based compensation expense, deferred income taxes, and the tax benefit from
exercise of stock options, an increase in non-acquisition accrued expenses, accounts payable and
deferred rent, partially offset by an increase in prepaid expenses. Cash flows provided by
operating activities for the thirty-nine weeks ended September 23, 2008 primarily resulted from net
income, adjusted for non-cash items, such as depreciation and amortization, stock-based
compensation expense, deferred income taxes, and the tax benefit from exercise of stock options, a
decrease in trade and other accounts receivable, and an increase in other long-term liabilities and
deferred rent, partially offset by a decrease in non-acquisition accrued expenses and an increase
in prepaid expenses.
Investing Activities
Capital expenditures are the largest ongoing component of our investing activities and include
expenditures for new Company-owned bakery-cafes and fresh dough facilities, improvements to
existing Company-owned bakery-cafes and fresh dough facilities, and other capital needs. A summary
of capital expenditures for the periods indicated consisted of the following (in thousands):
For the 39 Weeks Ended | ||||||||
September 29, 2009 | September 23, 2008 | |||||||
New bakery-cafe and fresh dough facilities |
$ | 17,472 | $ | 34,323 | ||||
Bakery-cafe and fresh dough facility improvements |
15,760 | 12,144 | ||||||
Other capital needs |
4,446 | 3,630 | ||||||
Total |
$ | 37,678 | $ | 50,097 | ||||
Our capital requirements, including development costs related to the opening or acquisition of
additional bakery-cafes and fresh dough facilities and maintenance and remodel expenditures, have
been and will continue to be significant. Our future capital requirements and the adequacy of
available funds will depend on many factors, including the pace of expansion, real estate markets,
site locations, and the nature of the arrangements negotiated with landlords. We believe that our
cash flows from operations and available borrowings under our existing credit facility will be
sufficient to fund our capital requirements for the foreseeable future. We currently anticipate
total capital expenditures for fiscal 2009 of approximately $60 million, which consists of the
following: approximately $30 million related to the opening of approximately 30 new Company-owned
bakery-cafes and the costs incurred on early fiscal 2010 openings; approximately $15 million
related to the remodeling of existing bakery-cafes; and approximately $15 million related to the
remodeling and expansion of fresh dough facilities, as well as other capital needs including
expenditures on our concept, information technology, and infrastructure. We further expect future
bakery-cafes will require, on average, an investment per bakery-cafe (excluding pre-opening
expenses which are expensed as incurred) of approximately $0.9 million, which is net of landlord
allowances and excludes capitalized development overhead.
We used $2.7 million of cash flows for acquisitions in the thirty-nine weeks ended September 23,
2008, net of cash acquired, for required payments of the remaining acquisition purchase price of
$2.5 million, including accrued interest, for certain acquisitions completed in the first half of
fiscal 2007. During the thirty-nine weeks ended September 23, 2008, we also paid additional
purchase price of approximately $0.2 million related to the settlement of certain purchase price
adjustments for our first quarter 2007 Paradise acquisition. As of December 30, 2008 and September
29, 2009, we had no accrued purchase price remaining from previously completed acquisitions.
Historically, we invested a portion of our cash balances on hand in a private placement of units of
beneficial interest in the Columbia Strategic Cash Portfolio, or Columbia Portfolio, which is an
enhanced cash fund previously sold as an alternative to traditional money-market funds. These
investments are subject to credit, liquidity, market and interest rate risk. For example, the
Columbia Portfolio includes investments in certain asset-backed securities and structured
investment vehicles that are collateralized by sub-prime mortgage securities or related to mortgage
securities, among other assets. As a result of adverse market conditions that have unfavorably
affected
the fair value, liquidity availability of collateral underlying the Columbia Portfolio, it was
overwhelmed with withdrawal requests from investors and the Columbia Portfolio was closed, with a
restriction placed upon the cash redemption ability of its holders in the fourth quarter of 2007.
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As the Columbia Portfolio units are no longer trading and, therefore, have little or no price
transparency, we assessed the fair value of the underlying collateral for the Columbia Portfolio
through review of current investment ratings, as available, coupled with the evaluation of the
liquidation value of assets held by each investment and their subsequent distribution of cash. We
then utilized this assessment of the underlying collateral from multiple indicators of fair value,
which were then adjusted to reflect the expected timing of disposition and market risks to arrive
at an estimated fair value of the Columbia Portfolio units of $0.661 per unit, or $0.9 million, as
of September 29, 2009, and $0.650 per unit, or $4.1 million, as of December 30, 2008. During the
thirty-nine weeks ended September 29, 2009, we received $4.3 million of cash redemptions at an
average net asset value of $0.859 per unit, which we classified as investment maturity proceeds
provided by investing activities. In total, we recognized a net realized and unrealized loss on the
Columbia Portfolio units of $1.1 million during the thirty-nine weeks ended September 29, 2009
related to the fair value measurements and redemptions received and included the net gain in net
cash provided by operating activities. During the thirty-nine weeks ended September 23, 2008, we
received $13.8 million of cash redemptions at an average net asset value of $0.978, which we
classified as investment maturity proceeds provided by investing activities. In total, we
recognized a net realized and unrealized loss on the Columbia Portfolio units of $1.4 million in
the thirty-nine weeks ended September 23, 2008 related to the fair value measurements and
redemptions received and included the net loss in net cash provided by operating activities.
Information and the markets relating to these investments remain dynamic, and there may be further
declines in the value of these investments, the value of the collateral held by these entities, and
the liquidity of our investments. To the extent we determine there is a further decline in fair
value, we may recognize additional realized and unrealized losses in future periods up to the
aggregate amount of these investments. We have included the $0.9 million remaining fair value of
the Columbia Portfolio units in short-term investments in our Consolidated Balance Sheets at
September 29, 2009, as we reasonably believe this amount of redemptions will be received within the
next twelve months based on the redemptions received to-date and recent representations from the
Columbia Portfolio management. However, the Columbia Portfolio has not made any formal commitments
on the availability or timing of future redemptions.
Financing Activities
Financing activities for the thirty-nine weeks ended September 29, 2009 included $20.1 million used
to purchase the remaining interest of Paradise and $1.7 million to repurchase our Class A common
stock, partially offset by $14.2 million received from the exercise of employee stock options, $3.1
million received from the tax benefit from exercise of stock options, and $1.2 million received
from the issuance of common stock under employee benefit plans. Financing activities for the
thirty-nine weeks ended September 23, 2008 included $75.0 million used for net payments under our
credit facility, $48.9 million used to repurchase our Class A common stock and $1.2 million used for debt issuance costs, partially offset by
$15.5 million received from the exercise of employee stock options, $3.0 million received from the
tax benefit from the exercise of stock options, and $1.5 million received from the issuance of common
stock under employee benefit plans.
On June 2, 2009, we exercised our right to purchase the remaining 49 percent of the outstanding
stock of Paradise, excluding certain agreed upon assets totaling $0.7 million, for a purchase price
of $22.3 million, $0.1 million in transaction costs, and settlement of $3.4 million of debt owed to
us by the shareholders of the remaining 49 percent of Paradise. Approximately $20.0 million of the
purchase price, as well as the transaction costs, were paid on June 2, 2009, with $2.3 million
retained by us for certain holdbacks. The holdbacks are primarily for certain indemnifications and
expire on the second anniversary of the transaction closing date, with any remaining holdback
amounts reverting to the prior shareholders of the remaining 49 percent of Paradise. The
transaction was accounted for as an equity transaction, by adjusting the carrying amount of the
noncontrolling interest balance to reflect the change in our ownership interest in Paradise, with
the difference between fair value of the consideration paid and the amount by which the
noncontrolling interest was adjusted recognized in equity attributable to us.
We have historically repurchased shares of our Class A common stock through a share repurchase
program approved by our Board of Directors from participants of the Panera Bread 1992 Stock
Incentive Plan and the Panera Bread 2006 Stock Incentive Plan, or collectively, the Plans, which
are netted and surrendered as payment for applicable tax withholding on the vesting of their
restricted stock. During the thirty-nine weeks ended September 29, 2009, we repurchased 31,427
shares of Class A common stock surrendered by participants of the Plans at a weighted-average price
of $53.48 per share for an aggregate purchase price of $1.7 million pursuant to the terms of the
Plans and the applicable award agreements. During the thirty-nine weeks ended September 28, 2008,
we repurchased 20,015 shares of Class A common stock surrendered by participants of the Plans at a
weighted-average price of $50.01 per share for an aggregate purchase price of $1.0 million pursuant
to the terms of the Plans and the applicable award agreements. Also during the thirty-nine weeks
ended September 23, 2008, we repurchased 1,413,358 shares of Class A common stock in connection
with our share repurchase program at a weighted-average price of $33.87 per share, for an aggregate
purchase price of $47.9 million.
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On March 7, 2008, we, and certain of our direct and indirect subsidiaries, as guarantors, entered
into an amended and restated credit agreement, referred to as the Amended and Restated Credit
Agreement, with Bank of America, N.A., and other lenders party thereto to amend and restate in its
entirety our Credit Agreement, dated as of November 27, 2007, by and among us, Bank of America,
N.A., and the
lenders party thereto, referred to as the Original Credit Agreement. Pursuant to our request under
the terms of the Original Credit Agreement, the Amended and Restated Credit Agreement increased the
size of our secured revolving credit facility from $75.0 million to $250.0 million. We may select
interest rates equal to (a) the Base Rate (which is defined as the higher of Bank of America prime
rate and the Federal Funds Rate plus 0.50 percent), or (b) LIBOR plus an Applicable Rate, ranging
from 0.75 percent to 1.50 percent, based on our Consolidated Leverage Ratio, as each term is
defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement
allows us from time to time to request that the credit facility be further increased by an amount
not to exceed, in the aggregate, $150.0 million, subject to receipt of lender commitments and other
conditions precedent. The Amended and Restated Credit Agreement contains financial covenants that,
among other things, require the maintenance of certain leverage and fixed charges coverage ratios.
The credit facility, which is secured by the capital stock of our present and future material
subsidiaries, will become due on March 7, 2013, subject to acceleration upon certain specified
events of defaults, including breaches of representations or covenants, failure to pay other
material indebtedness or a change of control of our Company, as defined in the Amended and Restated
Credit Agreement. The proceeds from the credit facility will be used for general corporate
purposes, including working capital, capital expenditures, and permitted acquisitions and share
repurchases. As of September 29, 2009, we had no balance outstanding under the Amended and Restated
Credit Agreement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon the
consolidated financial statements and notes to the consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial
statements requires us to make estimates, judgments and assumptions, which we believe to be
reasonable, based on the information available. These estimates and assumptions affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. Variances in the estimates or assumptions used could yield materially different
accounting results. On an ongoing basis, we evaluate the continued appropriateness of our
accounting policies and resulting estimates to make adjustments we consider appropriate under the
facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our
operating results and financial position, and we apply those accounting policies in a consistent
manner. As described in Item 7., Managements Discussion and Analysis of Financial Condition and
Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 30,
2008, we consider our policies on accounting for revenue recognition, valuation of goodwill,
self-insurance, income taxes, lease obligations, and stock-based compensation to be the most
critical in the preparation of the consolidated financial statements because they involve the most
difficult, subjective, or complex judgments about the effect of matters that are inherently
uncertain. There have been no material changes to our application of critical accounting policies
and significant judgments and estimates since December 30, 2008.
Contractual Obligations and Other Commitments
We currently anticipate total capital expenditures for fiscal 2009 of approximately $60 million,
which consists of the following: approximately $30 million related to the opening of approximately
30 new Company-owned bakery-cafes and the costs incurred on early fiscal 2010 openings;
approximately $15 million related to the remodeling of existing bakery-cafes; and approximately $15
million related to the remodeling and expansion of fresh dough facilities as well as other capital
needs including expenditures on our concept, information technology, and infrastructure. We further
expect future bakery-cafes will require, on average, an investment per bakery-cafe (excluding
pre-opening expenses which are expensed as incurred) of approximately $0.9 million, which is net of
landlord allowances and excludes capitalized development overhead. We expect to fund these
expenditures principally through internally generated cash flow and available borrowings under our
existing credit facility.
In addition to our planned capital expenditure requirements, we have certain other contractual and
committed cash obligations. Our contractual cash obligations consist of noncancelable operating
leases for our bakery-cafes, fresh dough facilities and trucks and administrative offices; purchase
obligations primarily for certain commodities; and uncertain tax positions. Lease terms for our
trucks are generally for six to eight years. Lease terms for our bakery-cafes, fresh dough
facilities, and administrative offices are generally for ten years, with renewal options at most
locations, and generally require us to pay a proportionate share of real estate taxes, insurance,
common area, and other operating costs. Certain bakery-cafe leases provide for contingent rental
(i.e. percentage rent) payments based on sales in excess of specified amounts and/or for scheduled
rent increases during the lease terms or for rental payments commencing at a date other than the
date of initial occupancy.
Off-Balance Sheet Arrangements
As of September 29, 2009, we guaranteed operating leases of 29 franchisee locations and seven
locations of our former Au Bon Pain division, or its franchisees, which we account for in
accordance with the accounting requirements for guarantees. These leases have terms expiring on
various dates from October 31, 2009 to December 31, 2023 and have a potential amount of future
rental payments of approximately $33.0 million as of September 29, 2009. The obligation from these
leases will generally continue to decrease over time as these operating leases expire. We have not
recorded a liability for certain of these guarantees as they arose prior to the implementation of
the accounting requirements for guarantees and, unless modified, are exempt from its requirements.
We have not recorded a liability for those guarantees issued after the effective date of the
accounting requirements because the fair value of each such lease guarantee was
determined by us to be insignificant based on analysis of the facts and circumstances of each such
lease and each such franchisees performance, and we did not believe it was probable we would be
required to perform under any guarantees at the time the guarantees were issued. We have not had to
make any payments related to any of these guaranteed leases. Au Bon Pain or the applicable
franchisees continue to have primary liability for these operating leases.
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Related Party Credit Agreement
In order to facilitate our opening of the first Panera Bread bakery-cafes in Canada, on September
10, 2008, our Canadian subsidiary, Panera Bread ULC, as lender, entered into a Cdn. $3.5 million
secured revolving credit facility agreement with Millennium Bread Inc., or Millennium, as borrower,
and certain of Millenniums present and future subsidiaries, which we refer to as Franchisee
Guarantors, who have entered into franchise agreements with Panera Bread ULC to operate three
Panera Bread bakery-cafes in Canada. Covenants under the credit agreement require Millennium to
maintain a certain level of cash equity contributions or subordinated loans from its shareholders
in relation to principal outstanding under the credit agreement. The borrowings under the credit
agreement bear interest at the per annum rate of 7.58 percent, calculated daily and payable monthly
in arrears on the last business day of each of Panera Bread ULCs fiscal month. The credit
facility, which is collateralized by present and future property and assets of Millennium and the
Franchisee Guarantors, as well as the personal guarantees of certain individuals, became due on
September 9, 2009. On September 9, 2009 the maturity date was extended to December 9, 2009. The
credit facility is subject to acceleration upon certain specified events of default, including
breaches of representations or covenants, failure to pay other material indebtedness or a change of
control of Millennium, as defined in the Credit Agreement. The proceeds from the credit facility
may be used by Millennium to pay costs and expenses to develop and construct the Franchisee
Guarantors bakery-cafes and for their day-to-day operating requirements.
As part of the franchise agreement between Millennium and Panera Bread ULC, Panera Bread ULC
developed and equipped three bakery-cafes as typical Panera Bread bakery-cafes in accordance with
our current design and construction standards and specifications as applied by Panera Bread ULC, in
its sole discretion. Millennium was required to pay Panera Bread ULC an amount equal to the total
cost of development of the bakery-cafes, which includes any and all costs and expenses incurred by
Panera Bread ULC in connection with selection and development of the bakery-cafes; however, no
overhead expenses of Panera Bread ULC was included in total cost. On September 15, 2008, October
27, 2008, and December 16, 2008, Panera Bread ULC delivered possession of the bakery-cafes in
Canada to Millennium, which bakery-cafes subsequently opened on October 6, 2008, November 10, 2008,
and January 26, 2009, respectively. The total development cost billed to Millennium for these three
bakery-cafes was approximately Cdn. $3.7 million. On April 7, 2009, Millennium requested a Cdn.
$3.5 million advance under the Credit Agreement, which was applied against the outstanding
receivable as previously described. The remaining Cdn. $0.2 million receivable was resolved during
the thirteen weeks ended September 29, 2009. The Cdn. $3.5 million note receivable from Millennium
is included in other accounts receivable in the Consolidated Balance Sheets as of September 29,
2009.
Accounting Standards Issued Not Yet Adopted
In June 2009, the Financial Accounting Standard Board, or FASB, issued authoritative guidance on
accounting for transfers of financial assets, which is effective for reporting periods beginning
after November 15, 2009. This new guidance limits the circumstances in which a financial asset may
be de-recognized when the transferor has not transferred the entire financial asset or has
continuing involvement with the transferred asset. The concept of a qualifying special-purpose
entity, which had previously facilitated sale accounting for certain asset transfers, is removed by
this new guidance. We expect that the adoption of this new guidance will not have a material effect
on our financial position or results of operations.
In June 2009, the FASB issued authoritative guidance on accounting for variable interest entities,
referred to as VIE, which is effective for reporting periods beginning after November 15, 2009 and
changes the process for how an enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary beneficiary) is defined as
the party with (1) the power to direct activities of the VIE that most significantly affect the
VIEs economic performance and (2) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE. Upon adoption, reporting enterprises must reconsider their
conclusions on whether an entity should be consolidated and should a change result, the effect on
net assets will be recorded as a cumulative effect adjustment to retained earnings. We expect that
the adoption of this new guidance will not have a material effect on our financial position or
results of operations.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There were no material changes in the quantitative and qualitative information about market risk
since the end of our most recent fiscal year. For further information, see Item 7A. of our Annual
Report on Form 10-K for the fiscal year ended December 30, 2008.
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Item 4. | Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of September 29, 2009. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act are recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act are accumulated and communicated to the
companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of September 29, 2009, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the third fiscal quarter ended September 29, 2009
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
On January 25, 2008 and February 26, 2008, purported class action lawsuits were filed against us
and three of our current or former executive officers by the Western Washington Laborers-Employers
Pension Trust and by Sue Trachet, respectively, on behalf of investors who purchased our common
stock during the period between November 1, 2005 and July 26, 2006. Both lawsuits were filed in the
United States District Court for the Eastern District of Missouri, St. Louis Division. Each
complaint alleges that we and the other defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 under the Exchange
Act in connection with our disclosure of system-wide sales and earnings guidance during the period
from November 1, 2005 through July 26, 2006. Each complaint seeks, among other relief, class
certification of the lawsuit, unspecified damages, costs and expenses, including attorneys and
experts fees, and such other relief as the court might find just and proper. On June 23, 2008, the
lawsuits were consolidated and the Western Washington Laborers-Employers Pension Trust was
appointed lead plaintiff in the lawsuit. On August 7, 2008, the plaintiff filed an amended
complaint, which extended the class period to November 1, 2005 through July 26, 2007. We believe
that we and the other defendants have meritorious defenses to each of the claims in the lawsuit and
we are prepared to vigorously defend the lawsuit. On October 6, 2008, we filed a motion to dismiss
all of the claims in the lawsuit. On November 20, 2008, the plaintiff filed an opposition to our
motion to dismiss, and on December 3, 2008, we filed a reply memorandum in support of our motion to
dismiss. On June 25, 2009, the Court converted our motion to one for summary judgment and denied it
without prejudice. The Court simultaneously gave us until July 20, 2009 to file a new motion for
summary judgment, which deadline the Court subsequently extended until August 10, 2009. On August
10, 2009, we filed a motion for summary judgment. On September 9, 2009, the plaintiff filed a
request to deny or continue our motion for summary judgment to allow the plaintiff to conduct
discovery. On October 2, 2009, the Court held a hearing on the plaintiffs request, at which it
ordered the plaintiff to provide notice of the discovery it seeks within 10 days. On October 12,
2009, the plaintiff provided such notice, and on October 23, 2009, we filed our response thereto.
There can be no assurance that we will be successful, and an adverse resolution of the lawsuit
could have a material adverse effect on our consolidated financial position and results of
operations in the period in which the lawsuit is resolved. We are not presently able to reasonably
estimate potential losses, if any, related to the lawsuit and as such, have not recorded a
liability in our Consolidated Balance Sheets.
On February 22, 2008, a shareholder derivative lawsuit was filed against us as nominal defendant
and against certain of our current or former officers and certain current directors. The lawsuit
was filed by Paul Pashcetto in the Circuit Court of St. Louis, Missouri. The complaint alleges,
among other things, breach of fiduciary duty, abuse of control, waste of corporate assets and
unjust enrichment between November 5, 2006 and February 22, 2008. The complaint seeks, among other
relief, unspecified damages, costs and expenses, including attorneys fees, an order requiring us
to implement certain corporate governance reforms, restitution from the defendants and such other
relief as the court might find just and proper. We believe that we and the other defendants have
meritorious defenses to each of the claims in this lawsuit and we are prepared to vigorously defend
the lawsuit. On July 18, 2008, we filed a motion to dismiss all of the claims in this lawsuit. On
August 29, 2008, the plaintiff filed an opposition to our motion to dismiss, and on September 10,
2008, we filed a reply memorandum in support of our motion to dismiss. There can be no assurance
that we will be successful, and an adverse resolution of the lawsuit could have a material adverse
effect on our consolidated financial position and results of operations in the period in which the
lawsuit is resolved. We are not presently able to reasonably estimate potential losses, if any,
related to the lawsuit and as such, have not recorded a liability in our Consolidated Balance
Sheets.
On February 22, 2008, a purported class action lawsuit was filed against us and one of our
subsidiaries by Pati Johns, a former employee of ours, in the United States District Court for the
District of Northern California. The complaint alleged, among other things, violations of the Fair
Labor Standards Act and the California Labor Code for failure to pay overtime and termination
compensation. Although we believe that our policies and practices were lawful and that we had
meritorious defenses to each of the claims in this case, following mediation with the plaintiff, we
entered into a settlement agreement in late fiscal 2008, which has been approved by the court. As a
result, we accrued approximately $0.5 million in legal settlement costs for the fiscal year ended
December 30, 2008, which we paid during the thirteen weeks ended June 30, 2009.
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In addition, we are subject to other routine legal proceedings, claims and litigation in the
ordinary course of its business. Defending lawsuits requires significant management attention and
financial resources and the outcome of any litigation, including the matters described above, is
inherently uncertain. We do not, however, currently expect that the costs to resolve these routine
matters will have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
Item 1A. | Risk Factors |
Our business is subject to a number of risks, including those identified in Item 1A. Risk
Factors of our 2008 Annual Report on Form 10-K, that could have a material effect on our business,
results of operations, financial condition and/or liquidity and that could cause our operating
results to vary significantly from period to period. As of September 29, 2009, there have been no
material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K,
although we may disclose changes to such factors or disclose additional factors from time to time
in our future filings with the SEC.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the third quarter of fiscal 2009, we repurchased Class A common stock as follows:
Approximate Dollar | ||||||||||||||||
Total Number of | Value of Shares That | |||||||||||||||
Shares Purchased as | May Yet Be Purchased | |||||||||||||||
Total Number of | Average Price | Part of Publicly | Under the Announced | |||||||||||||
Period | Shares Purchased (1) | Paid per Share | Announced Program | Program | ||||||||||||
July 1, 2009 - July 28, 2009 |
17 | $ | 42.95 | | $ | | ||||||||||
July 29, 2009 - September
1, 2009 |
19,770 | 53.36 | | | ||||||||||||
September 2, 2009 -
September 29, 2009 |
5,579 | 52.42 | | | ||||||||||||
Total |
25,366 | $ | 53.15 | | $ | | ||||||||||
(1) | Represents Class A common stock surrendered by participants under the Panera Bread 1992
Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan as payment of applicable
tax withholding on the vesting of restricted stock. Shares so surrendered by the participants
are repurchased by us pursuant to the terms of those plans and the applicable award agreements
and not pursuant to publicly announced share repurchase programs. |
Item 6. | Exhibits |
Exhibit | ||||
Number | Description | |||
31.1 | Certification by Chief Executive Officer. |
|||
31.2 | Certification by Chief Financial Officer. |
|||
32 | Certification Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive
Officer and Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Panera Bread Company (Registrant) |
||||
Dated: November 6, 2009 | By: | /s/ Ronald M. Shaich | ||
Ronald M. Shaich | ||||
Chairman and Chief Executive Officer (on behalf of registrant and as principal executive officer) |
||||
Dated: November 6, 2009 | By: | /s/ Jeffrey W. Kip | ||
Jeffrey W. Kip | ||||
Senior Vice President, Chief Financial Officer (principal financial officer) |
||||
Dated: November 6, 2009 | By: | /s/ Amy L. Kuzdowicz | ||
Amy L. Kuzdowicz | ||||
Vice President, Controller | ||||
Dated: November 6, 2009 | By: | /s/ Mark D. Wooldridge | ||
Mark D. Wooldridge | ||||
Director, Assistant Controller and Chief Accounting Officer |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Certification by Chief Executive Officer. |
|||
31.2 | Certification by Chief Financial Officer. |
|||
32 | Certification Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive
Officer and Chief Financial Officer. |
30