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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark one)

or

Commission file number 0-19253

Panera Bread Company

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ   No  o

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

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PANERA BREAD COMPANY

INDEX

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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

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

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

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PANERA BREAD COMPANY

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A-BASIS OF PRESENTATION

     The accompanying unaudited, consolidated financial statements of Panera Bread Company and its subsidiaries (the “Company”) have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States. They should be read in conjunction with the financial statements of the Company for the fiscal year ended December 29, 2001, included in the Company’s Form 10-K filing for that year.

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

     The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) that management considers necessary for a fair presentation of its financial position and results of operations for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the entire year.

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

NOTE B-INVESTMENTS

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

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

NOTE C-FRANCHISE ROYALTIES AND FEES AND REVENUE RECOGNITION

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

NOTE D-DEFERRED REVENUE

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E-INCOME TAXES

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

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

NOTE F-ADOPTION OF SFAS 142

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

			For the twelve weeks ended								For the forty weeks ended
			October 5, 2002				October 6, 2001				October 5, 2002				October 6, 2001
Reported net income			$	5,167			$	2,984			$	14,265			$	8,397
Add back: goodwill amortization				—				139				—				464
Adjusted net income			$	5,167			$	3,123			$	14,265			$	8,861
Basic and diluted net income per common share:
	Reported net income per common share — basic		$	.18			$	.11			$	.49			$	.30
	Reported net income per common share — diluted		$	.17			$	.10			$	.48			$	.29
	Goodwill amortization per share — basic		$	—			$	—			$	—			$	.02
	Goodwill amortization per share — diluted		$	—			$	.01			$	—			$	.02
	Adjusted net income per common share — basic		$	.18			$	.11			$	.49			$	.32
	Adjusted net income per common share — diluted		$	.17			$	.11			$	.48			$	.31

The changes in the carrying amount of goodwill at October 5, 2002, are as follows (in thousands):

     Total goodwill at October 5, 2002, is presented net of accumulated amortization of $7.9 million. The components of goodwill include $16.8 million resulting primarily from the original acquisition of the Saint Louis Bread Company in December, 1993, $0.7 million resulting from the purchase of a fresh dough facility in September, 2001, and $1.4 million resulting from the purchase in January, 2002 of three operating bakery-cafes and one bakery-cafe under construction as well as area development rights for the Jacksonville, Florida market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE G-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 twelve weeks ended								For the forty weeks ended
				October 5,				October 6,				October 5,				October 6,
				2002				2001				2002				2001
Net income used in net income per common share — basic				$	5,167			$	2,984			$	14,265			$	8,397
Net income used in net income per common share — diluted				$	5,167			$	2,984			$	14,265			$	8,397
Weighted average number of shares outstanding — basic					29,072				27,967				28,834				27,631
Effect of dilutive securities:
	Employee stock options				1,022				1,378				1,068				1,265
	Weighted average number of shares outstanding — diluted				30,094				29,345				29,902				28,896
Earnings per share:
	Basic:
		Net income per share		$	0.18			$	0.11			$	0.49			$	0.30
	Diluted:
		Net income per share		$	0.17			$	0.10			$	0.48			$	0.29

     For the twelve weeks ended October 5, 2002, 0.3 million stock option shares were excluded in calculating diluted earnings per share, as inclusion would have been antidilutive.

     On June 6, 2002, the shareholders approved an increase in the number of authorized shares of the Company’s Class A and Class B common stock enabling the Company to complete a two-for-one common stock split in the form of a stock dividend. On June 24, 2002, shareholders received one additional share of common stock for each share of common stock held of record as of the close of business on June 10, 2002. The stock split has been reflected in the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. All applicable references to the number of common shares and per share information have been retroactively restated. Previously awarded stock options and other stock programs share amounts have also been adjusted to reflect the stock dividend.

NOTE H-RECENT ACCOUNTING PRONOUNCEMENTS

     In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets” which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that Statement. The Company has adopted SFAS No. 144 for fiscal year 2002. As of October 5, 2002, the adoption of SFAS No. 144 has not affected the Company’s financial statements.

     In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. The Company adopted the provisions of SFAS No. 145 in the second quarter of fiscal 2002. There was no impact on the Company’s financial statements upon adoption.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company will adopt the provisions of SFAS No. 146 in the first quarter of fiscal 2003. The Company believes the impact of the adoption of the provisions of SFAS No. 146 will not have a material impact on the Company’s financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I-ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):

NOTE J-COMMITMENTS AND CONTINGENT LIABILITIES

     The Company is obligated under non-cancelable operating leases for its administrative offices, commissaries, and bakery-cafes. Lease terms are generally for ten years with renewal options at most locations. Generally, the Company is required to pay a proportionate share of real estate taxes, insurance, common area and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts.

     In October 2002, the Company reached an agreement to purchase from a franchisee four operating bakery-cafes as well as the area development rights for the Louisville and Lexington, Kentucky markets. The purchase price is approximately $5.5 million subject to normal closing costs and adjustments. This transaction is expected to close in January 2003.

     The Company is a prime tenant or guarantor for certain operating leases of the former Au Bon Pain Division. The liability from leases or guarantees will continue to decrease over time as these operating leases expire or are not renewed. Aggregate minimum requirements under non-cancelable operating leases for the Au Bon Pain Division on which the Company is a guarantor were approximately $56.5 million at October 5, 2002. Currently, the Company has not had to make any payments related to the Au Bon Pain leases or guarantees. Au Bon Pain continues to have primary liability for these operating leases.

     The Company is subject to legal proceedings and claims that arise in the normal course of business. In the opinion of management, the ultimate liabilities with respect to these actions will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE K-BUSINESS SEGMENT INFORMATION

     The Company operates three business segments. The Company Bakery-Cafe Operations segment is comprised of the operating activities of the 125 bakery-cafes owned by the Company. These bakery-cafes sell fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other complementary products through on-premise sales. All of the fresh dough products used by company-owned bakery-cafe operations are purchased from the Commissary Operations segment.

During the twelve weeks ended October 5, 2002, the Company changed its measurement of bakery-cafe operating profits to exclude pre-opening expenses. These expenses are now shown as a separate line item on the Consolidated Statements of Operations. This will improve transparency of such costs. The previously reported results have been restated as follows:

     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 Company name and also the costs to monitor the operations of these bakery-cafes. Under the terms of the agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Panera Bread Company name.

     The Commissary Operations segment supplies fresh dough items and other proprietary frozen dough items to both company-owned and franchise-owned bakery-cafes. The fresh dough is sold to both company-owned and franchised bakery-cafes at a cost equal to 27% of the retail value of the product. The sales and related costs to the franchise 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 food and paper products line item on the Consolidated Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources among segments.

				For the twelve weeks ended								For the forty weeks ended
				October 5, 2002				October 6, 2001				October 5, 2002				October 6, 2001
				(in thousands)
Revenues:
	Company bakery-cafe operations			$	50,270			$	38,486			$	157,939			$	115,045
	Franchise operations				6,699				4,481				20,099				13,817
	Commissary operations				14,590				8,574				43,266				25,735
	Intercompany sales eliminations				(6,088	)			(3,054	)			(16,554	)			(9,154	)
		Total revenues		$	65,471			$	48,487			$	204,750			$	145,443
Operating profit:
	Company bakery-cafe operations			$	9,423			$	6,884			$	26,532			$	19,352
	Franchise operations				5,868				3,852				17,377				11,746
	Commissary operations				1,401				1,086				5,845				3,730
	Unallocated general and administrative expenses				(4,904	)			(4,090	)			(15,905	)			(12,407	)
	Pre-opening expenses				(259	)			(126	)			(791	)			(610	)
		Operating profit before depreciation and amortization expense		$	11,529			$	7,606			$	33,058			$	21,811
Depreciation and amortization expense:
	Company bakery-cafe operations			$	2,092			$	1,608			$	6,666			$	4,749
	Commissary operations				602				318				1,742				942
	Corporate administration				550				687				1,763				2,181
		Total depreciation and amortization expense		$	3,244			$	2,613			$	10,171			$	7,872

NOTE L-ACQUISITION

     On January 22, 2002, the Company purchased, from a franchisee, the assets of three operating bakery-cafes and one bakery-cafe under construction as well as the area development rights for the Jacksonville, Florida market for a net cash purchase price of approximately $3.3 million. The acquisition was financed with cash on hand. The Consolidated Statements of Operations include the results of operations of the three operating bakery-cafes from the date of acquisition. A summary of the assets acquired and liabilities assumed in the acquisition follows (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in the Company’s Consolidated Statements of Operations for the periods indicated. Percentages may not add due to rounding:

					For the twelve weeks ended								For the forty weeks ended
					October 5, 2002				October 6, 2001				October 5, 2002				October 6, 2001
Revenues:
	Bakery-cafe sales					76.8	%			79.4	%			77.1	%			79.1	%
	Franchise royalties and fees					10.2				9.2				9.8				9.5
	Commissary sales to franchisees					13.0				11.4				13.1				11.4
			Total revenue			100.0	%			100.0	%			100.0	%			100.0	%
Costs and expenses:
	Bakery-cafe expenses(1):
		Cost of food and paper products				30.4				31.1				30.6				31.2
		Labor				29.4				28.6				29.7				29.0
		Occupancy				6.7				7.1				7.0				7.2
		Other operating expenses				13.0				13.3				13.4				13.5
			Total bakery-cafe expenses			79.5				80.1				80.7				80.9
	Commissary cost of sales to franchisees(2)					93.8				94.4				92.7				93.2
	Depreciation and amortization					5.0				5.4				5.0				5.4
	General and administrative expenses					8.8				9.7				9.1				10.0
	Pre-opening expenses					0.4				0.3				0.4				0.4
Operating profit						12.7				10.3				11.2				9.6
Interest expense						—				—				—				0.1
Other expense (income), net						0.1				0.2				0.1				0.1
Minority interest						0.1				—				0.1				—
Income before income taxes						12.4				10.1				11.0				9.5
Income taxes						4.5				3.9				4.0				3.7
			Net income			7.9	%			6.2	%			7.0	%			5.8	%