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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934 (Fee required)
For the fiscal year ended December 26, 1998, or
- ---- Transition report pursuant to Section 13 or l5(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from ______ to ______
Commission file number 0-19253
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Au Bon Pain Co., Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-2723701
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Fid Kennedy Avenue, Boston, MA 02210
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(Address of principal executive offices) (Zip code)
(617) 423-2100
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.0001 par value
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form.
[check mark]
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Aggregate market value of the registrant's voting stock held by
non-affiliates as of March 17, 1999: Class A Common Stock, $.0001 par value:
$71,191,540.
Number of shares outstanding of each of the registrant's classes of common
stock, as of March 17, 1999: Class A Common Stock, $.0001 par value: 10,560,051
shares, Class B Common Stock, $.0001 par value:
1,557,658 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's definitive proxy statement for its Annual Meeting of
Stockholders, to be filed in connection with the Annual Meeting of Stockholders,
is incorporated by reference in response to Part III, Items 10, 11, 12 and 13;
and certain exhibits to the registrant's Form S-1 Registration Statement (File
No. 33-453219), Form S-l Registration Statement (File No. 33-40153), annual
reports on Form 10-K for the fiscal years ended December 27, 1997, December 28,
1996 and December 30, 1995 quarterly report for the period ended July 11, 1998
and Form 8-K filed December 22, 1993, Form 8-K filed August 21, 1998 and Form
8-K filed November 6, 1998, are incorporated by reference in response to Part
IV, Item 14.
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PART I
ITEM 1. BUSINESS
GENERAL
Au Bon Pain Co., Inc. ("the Company") was formed in March 1981 with three
Boston area bakeries and one cookie store serving croissants, breads and
cookies. As of December 26, 1998, the Company had 219 Company-operated and 159
franchised bakery cafes operating under two concepts: the Au Bon Pain Division,
with 151 Company-operated and 114 franchise-operated bakery cafes, and the Saint
Louis Bread Co. Division, which also does business as "Panera Bread" outside of
the Saint Louis area, with 68 Company-operated and 45 franchise-operated bakery
cafes. Both concepts specialize in high quality food for breakfast and lunch,
including fresh baked goods, made-to-order sandwiches on freshly baked breads,
soups, salads, custom roasted coffees, and other cafe beverages. The Au Bon Pain
Division concept, with its major metropolitan locations, serves customers where
they work and shop. Saint Louis Bread Co. Division reaches suburban dwellers and
workers, offering a premium specialty bakery and cafe experience with a
neighborhood emphasis.
The Au Bon Pain Division bakery cafes are principally located in the
following cities: Baltimore, Boston, Chicago, Cleveland, Columbus, Hartford,
Minneapolis, New Haven, New York City, Pittsburgh, Providence and Washington,
DC. Internationally, franchise partners operate Au Bon Pain Division units in
Chile, the Philippines, Indonesia, Thailand, Brazil, the UK and Singapore. In
addition, domestic franchisees currently operate Au Bon Pain Division cafes in
Doubletree Hotels, airports and in certain West Coast and East Coast cities (see
"Properties"). System wide sales for Au Bon Pain, which include Company-operated
and franchised restaurant sales, were approximately $213.0 million for the
fiscal year ended December 26, 1998.
The Saint Louis Bread Co. Division bakery cafes are principally located in
suburban, strip mall and regional mall locations. The concept is currently
operating in Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Massachusetts,
Michigan, Missouri, Ohio, Oklahoma, South Carolina and Texas (see "Properties").
System wide sales for Saint Louis Bread were approximately $114.5 million for
the fiscal year ended December 26, 1998. The Company believes that the
acquisition of Saint Louis Bread has created a number of opportunities. The
Saint Louis Bread suburban bakery cafe concept has proved to be well suited for
suburban locations and offers the Company greater access to these markets,
thereby enhancing the Company's long-term growth prospects.
The Company, together with its wholly-owned subsidiary ABP Holdings, Inc.
("ABPH") have entered into a Stock Purchase Agreement dated August 12, 1998 and
amended on October 28, 1998
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with ABP Corporation (the "Buyer"), an affiliate of Bruckmann, Rosser, Sherrill
& Co., L.P. for the transfer of substantially all of the assets and liabilities
of the Au Bon Pain Division business (the "Au Bon Pain Division") and to sell
all of the outstanding capital stock of ABPH to the Buyer, for a purchase price
of $73,000,000 subject to adjustments, whereby the Buyer will become the owner
of the Au Bon Pain Division (the "Sale"). Although most of the conditions for
the Sale have been satisfied, including approval by the Company's Stockholders
on March 4, 1999, the necessary financing arrangements are not yet complete and
a closing date has not been set.
CONCEPT AND STRATEGY
The Au Bon Pain Division concept focuses on "niche" markets in high
density areas of pedestrian traffic. Target customers of the Au Bon Pain
Division include urban office employees, hospital employees and visitors,
shoppers, travelers, students and other adults who are time sensitive, yet
desire a higher quality breakfast and lunch experience than is typically found
at quick service restaurants. The concept's strategy is to create distinctive
food offerings based on fresh-baked breads and baked goods at reasonable prices.
It strives to offer products of fresher, higher quality and greater variety than
those offered by its competitors. In addition, the Company believes its
operational excellence, speed of service and convenient locations further
differentiate the Company from its competitors. Average revenue per
Company-operated bakery cafe open for the full fiscal year ended December 26,
1998 was approximately $1,045,000 for the Au Bon Pain Division concept.
The Saint Louis Bread Co. Division concept focuses on the emerging
"Specialty Bread/Cafe" category. Its artisan sourdough breads and overall
award-winning bakery expertise are at the heart of the concept's menu. Bread and
baked goods account for approximately 25% of sales. The concept is designed to
deliver against the key baby boomer consumer trends of today, specifically the
need for an efficient but higher self-esteem experience than that offered by
traditional fast food. The concept aims to become a nationally recognized brand
name, and in doing so, hopes to reap the economic benefits that a strong brand
name offers. Its menu, prototype, operating systems, design and real estate
strategy allow it to compete successfully in four sub-businesses: lunch,
breakfast, day-time "chill out" and take home specialty retailing. Average
revenue per Company-operated bakery cafe open for the full fiscal year ended
December 26, 1998 was approximately $1,265,000 for the Saint Louis Bread Co.
Division concept.
The Company believes that excellence in execution is a key to success in
the restaurant industry. The distinctive nature of the Company's menu offerings,
the quality of its restaurant operations, the Company's unique cafe design and
the prime locations of its cafes are integral to the Company's success. The
Company will grow the Au Bon Pain Division concept selectively in its core urban
markets, special real estate situations (hospitals, transportation centers,
etc.) and through continued franchising
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abroad and domestically. The Saint Louis Bread Co. Division concept has
tremendous growth potential in the suburban markets which will be realized
through both Company and franchise efforts.
MENU
The menus across both concepts seek to provide the Company's target
customers with products which build on the strength of the Company's bakery
expertise and meet customers' new and ever-changing taste profiles. The key menu
groups are fresh baked goods, made-to-order sandwiches, soups and cafe
beverages. Included within these menu groups are: a variety of freshly baked
bagels, breads, croissants, muffins, scones, rolls and sweet goods; sandwiches
made-to-order; hearty, unique soups; custom roasted coffees and cafe beverages
such as espresso and cappuccino. A primary difference in menu between the two
concepts is the significant emphasis within the Saint Louis Bread Co. Division
concept on sophisticated artisan and sourdough breads, which supports its
significant take-home business.
The Company regularly reviews and revises its menu offerings to satisfy
changing customer preferences and to maintain customer interest amongst its
target customer groups - "the Trend-Setters" and "the Good Food
Traditionalists." Both of these target customers seek a quality experience that
reflects their discriminating tastes. The major characteristic that sets these
two groups apart is the more enthusiastic embrace of new and nutritional menu
items by the Trend-Setters. New menu items are developed in corporate test
kitchens and then introduced in a limited number of the Company's bakery cafes
to determine customer response and verify that preparation and operating
procedures maintain consistency, high quality standards and profitability. If
successful, they are introduced in all the Au Bon Pain Division or the Saint
Louis Bread Co. Division bakery cafes.
MARKETING
The Company believes it competes on the basis of an entire experience
rather than price. Pricing is structured so that customers perceive good value
at both the Au Bon Pain Division and the Saint Louis Bread Co. Division and can
visit every day (high quality food at reasonable prices). The average customer
purchase is approximately $3.21 at Au Bon Pain and $5.09 at Saint Louis Bread.
Breakfast and lunch checks typically average $2.20 and $4.36, respectively, at
Au Bon Pain and $3.66 and $6.09, respectively, at Saint Louis Bread. The Company
attempts to increase its per location sales through menu development, promotions
and by sponsorship of local community charitable events.
5
To date, the Company has not advertised extensively; rather, it relies on
word of mouth, customer satisfaction and promotional programs to encourage trial
by new customers and to make existing customers aware of new menu offerings.
CATERING
The Au Bon Pain Division operates a catering program which offers a select
group of delivered breakfast and luncheon food items appropriate for on-site
consumption at corporate functions. Customers place orders by toll-free
telephone with trained customer service representatives at the Company's Boston
headquarters. Orders are immediately routed utilizing a computerized delivery
support system to the most appropriate bakery cafe for preparation and delivery.
In 1998, catering sales represented approximately 5.7% of the Au Bon Pain
Division-operated restaurant sales. At present, Saint Louis Bread Co. Division
does not offer catering services. With the predominance of Saint Louis Bread Co.
Division cafes in suburban locations, the Company believes that the potential to
develop significant catering business at the Saint Louis Bread Co. Division is
lower than at the Au Bon Pain Division.
SITE SELECTION
For the Au Bon Pain Division concept, the Company seeks convenient
locations in high-visibility, high-traffic, densely populated areas which are
easily accessible to the target customers. Besides urban office buildings, the
Company also operates in transportation centers, universities and hospitals. The
Company believes that its menu, history of quality retail operations and bakery
cafe designs enable the Company to access locations which may not be available
to traditional quick service restaurants. Successful examples of the Au Bon Pain
Division real estate include the following locations: Copley Place, a shopping
mall/office building in Boston; Brigham and Women's Hospital, a leading medical
center in Boston; South Station, a transportation center in downtown Boston; the
Empire State Building in New York City; the Pittsburgh Airport in Pittsburgh and
George Washington University at 2000 Pennsylvania Avenue in Washington, D.C.
Saint Louis Bread Co. Division locations are typically in suburban strip malls,
free standing locations and regional malls such as the Galleria Mall in Saint
Louis and the Lenox Square Mall in Atlanta.
In 1998, the Company opened one Au Bon Pain bakery cafe in an existing
market. The Company's Au Bon Pain franchisees opened 27 new bakery cafes
domestically and in the Philippines, Indonesia, Thailand, Brazil and England.
During 1998, the Company expanded the number of Company-operated Saint
Louis Bread bakery cafes by 11 to 68 locations in
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new and existing markets. The Saint Louis Bread franchise-operated locations
expanded by 26 to 45 locations.
Both bakery cafe concepts rely on a substantial volume of repeat business.
In evaluating a potential location, the Company studies the surrounding trade
area, obtaining demographic information within that area and information on
quick service breakfast or lunch competitors. Management evaluates the Company's
ability to establish a dominant presence within that area in order to create
entry barriers to other bakery cafe competitors. Based on this information,
sales and return on investment are projected.
The Company uses sophisticated fixtures and materials in the bakery cafe
design for both concepts. The design visually reinforces the distinctive
difference between the Company's bakery cafes and other quick service
restaurants serving breakfast and lunch. Many of the Company's cafes also
feature outdoor cafe seating. The current estimated construction and equipment
costs for a typical Au Bon Pain bakery cafe outside of New York City are
approximately $475,000 before any landlord construction allowance. The estimated
construction and equipment cost for a typical Au Bon Pain bakery cafe in New
York City is approximately $850,000 before any landlord construction allowance.
The current estimated construction and equipment cost for a typical Saint Louis
Bread bakery cafe is approximately $625,000 before any landlord allowance.
The average bakery cafe size ranges between 2,500 and 4,000 square feet.
Currently, all bakery cafes, including franchises, are in leased premises. Lease
terms are typically ten years with one or two five-year renewal options periods
thereafter. Leases typically have a minimum base occupancy charge, charges for a
proportionate share of building operating expenses and real estate taxes, and
contingent percentage rent based on sales above a stipulated sales level.
PRODUCTION
Breads, cookies and pastries sold at Au Bon Pain Division bakery cafes are
baked on premises from frozen dough. Saint Louis Bread Co. Division bakery cafes
use fresh dough for their sourdough breads, certain other breads and bagels, and
frozen dough for most other baked goods products. Baked goods prepared from
frozen dough products represent approximately 30% of the Au Bon Pain Division's
total bakery cafe sales and approximately 17% of the Saint Louis Bread Co.
Division's total bakery cafe sales.
During 1996, the Company completed construction of a state of the art
frozen dough production facility in Mexico, MO to supply frozen dough; this
replaced its original South Boston frozen dough facility which was out of
capacity. On March 23, 1998 the Company sold the Mexico, MO production facility
and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
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approximately $13 million in cash. In conjunction with the sale, the Au Bon Pain
Division and the Saint Louis Bread Co. Division entered into five year supply
agreements with Bunge for the supply of substantially all their frozen dough
needs, excluding bagels, for their domestic bakery cafes. The net proceeds of
the sale were used to reduce debt. The Company recognized a pre-tax loss on the
sale of the facility of approximately $735,000 in the Company's results of
operations for the first quarter of 1998.
The sale of the frozen dough production facility provides economies of
scale in plant production which are reflected in the economics of the five-year
supply agreements and allows the Company to take advantage of Bunge's
significant purchasing power. The five year supply agreements allow the bakery
cafes to continue to offer the same high quality fresh baked goods, as the
frozen dough products purchased from Bunge will be made on the same equipment,
by the same management team, using the same proprietary processes and
specifications as prior to the sale to Bunge.
The Company also operates an Au Bon Pain Division Commissary in South
Boston which produces frozen dough bagels and certain other menu items. Each of
the Saint Louis Bread Co. Division bakery cafes is supported by a regional
commissary which daily provides fresh sourdough and bagel products for baking
and sale within the Saint Louis Bread Co. Division bakery cafes. The Company
operated 9 regional commissaries as of December 26, 1998.
COMPETITION
The Au Bon Pain Division and Saint Louis Bread Co. Division experience
competition from numerous sources in their respective trade areas. Au Bon Pain
Division bakery cafes compete within approximately a two city block radius with
other providers of breakfast and lunch. Saint Louis Bread Co. Division bakery
cafes compete with bread only stores, supermarkets and other bakeries that
supply high quality breads and with other restaurants that seek to use quality
breads to define a breakfast, lunch and light dinner menu. Both divisions
compete for leased space in desirable locations; methods of competition are
price, service and quality of products. Certain of the Company's competitors may
have capital resources exceeding those available to the Company.
MANAGEMENT INFORMATION SYSTEMS
Each Company-operated bakery cafe has computerized cash registers to
collect point-of-sale transaction data, which are used to generate pertinent
marketing information, including product mix and average check. All product
prices are programmed into the system from the Company's corporate office.
The Company's in-store personal computer-based management support system
is designed to assist in labor scheduling and food cost management, to provide
corporate and retail operations management quick access to retail data and to
reduce managers'
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administrative time. The system supplies sales, bank deposit and variance data
to the Company's accounting department in Boston on a daily basis. The Company
uses this data to generate weekly consolidated reports regarding sales and other
key elements, as well as detailed profit and loss statements for each bakery
cafe every four weeks. Additionally, the Company monitors the average check,
customer count, product mix and other sales trends. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
information pertaining to the "Year 2000" issue.
DISTRIBUTION
The Company currently utilizes an independent distributor to distribute
frozen dough products and other materials to Company-operated Au Bon Pain and
Saint Louis Bread bakery cafes. By contracting with an independent distributor,
the Company has been able to eliminate investment in distribution systems and to
focus its managerial and financial resources on its retail operations. The
distributor picks up frozen dough products throughout the week from the plants
and delivers to the cafes. Virtually all other supplies for retail operations,
including paper goods, coffee and small-wares, are contracted for by the Company
and delivered by the vendors to the distributor for delivery to the bakery
cafes. The individual bakery cafes order directly from the distributor two to
three times per week.
Franchised bakery cafes operate under individual contracts with either the
Company's distributor or other regional distributors.
JOINT VENTURES
The Company currently operates 14 Au Bon Pain bakery cafes in New York
City, which are owned under a joint venture agreement between the Company and an
independent investor group. Under the terms of this agreement, the Company has
an obligation to offer the group up to 49% of the equity in each bakery cafe
opened in the metropolitan tri-state area of New York City (New York City, Long
Island, Westchester County (NY), Bergen County (NJ), and Fairfield County (CT)).
The equity participation percentage is based on the cost of the initial
construction upon opening of the bakery cafe. This equity percentage is fixed
prior to the date of the respective bakery cafe openings. The group has no
obligation to participate in any bakery cafe, and the percentage participation
must be elected by the group prior to the opening of the bakery cafe. Each joint
venture bakery cafe must purchase all of its frozen dough products from the
Company and is operated by the Company under a management agreement under which
the Company receives a management fee of 6% of sales of each joint venture
bakery cafe. The Company has agreed to provide a guaranty to one or more
institutional lenders acceptable to the Company to assist
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the group in financing its acquisition of up to 5% of the equity in new bakery
cafes opened after January 1, 1993. As of December 26, 1998, approximately
$40,936 is outstanding under this arrangement.
FRANCHISES
Au Bon Pain
Domestic
The Company currently has domestic franchising agreements with sixteen
organizations: Northern Bakers, Inc., CA One, ABP Southern California, LLC,
Wayne ABP, Inc., R.C. Menzer, Romallso, Inc., The Lauren Group, Inc., FGR Food
Group, Host Marriott Corp., Boston Concessions Group, Inc., Crowne Plaza
Ravinia, ABP Delaware Valley, LLC, DoubleTree Hotels, ABP Caribbean Limited, BP
Oil Company and Statewide Management Group. In general, the Company has two
sources of revenue from its domestic Au Bon Pain franchisees: fees for new
locations and royalties on sales by franchisees. New domestic locations, other
than airport locations, to be developed by franchisees typically require a
$25,000 initial franchise fee per location and a 5% royalty. Airport franchise
fees range between $10,000 and $50,000, depending upon passenger traffic and the
Company's assistance in obtaining the concession. All domestic franchisees are
obligated to use Company-approved ingredients, including Au Bon Pain-approved
frozen dough products.
In 1997, the Company sold 11 bakery cafes to ABP Delaware Valley, LLC for
$2.6 million, in connection with the execution of a franchise area development
agreement covering certain portions of Pennsylvania, New Jersey and Delaware.
The purchase price was paid by delivery of a ten-year note payable to the
Company which bears interest at 8.25% per annum. Under the terms of the area
development agreement, the franchisee must open 17 new bakery cafes according to
a minimum opening schedule in order to maintain development exclusivity in the
territory and has the right to open either the Au Bon Pain Division or the Saint
Louis Bread Co. Division bakery cafes within the specified territory.
International
The Company currently has international franchise development agreements
with developers in Chile, Argentina, Brazil and certain other South American
countries, Thailand, Indonesia, the Philippines, Malaysia, Singapore, United
Kingdom, the Caribbean, Eastern Canada and the Canary Islands. Bakery cafes have
been opened to date in Chile, Indonesia, the Philippines, Thailand, Brazil and
England. Under these agreements, the Company has granted exclusive development
rights to franchise and operate Au Bon Pain bakery cafes in the respective
country or countries. The agreements generally require the payment of up front
development fees, which have ranged from $50,000 to $750,000, a franchise fee,
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typically from $10,000 to $30,000 for each Au Bon Pain bakery cafe opened,
depending upon the size of the location, and royalties from the sale of products
from each bakery cafe of 5% of sales. The developer is, in most instances,
required to open bakery cafes according to a specific minimum schedule. The
Company may also agree to provide advice, consultation and training for the
development of a frozen dough plant. Currently, the Company considers
international franchising and licensing arrangements as a means of business
expansion for its Au Bon Pain concept and is actively pursuing additional
international franchising relationships.
Saint Louis Bread Company
In connection with the Saint Louis Bread acquisition in 1993, the Company
assumed two area development agreements pursuant to which Saint Louis Bread
granted exclusive development rights to two franchisees. One area development
agreement covers the cities of Kansas City, St. Joseph and Topeka, Kansas and
Kansas City, Missouri. The second area development agreement covers various
counties in Missouri and includes the City of Springfield.
In 1996, the Company began a broad-based franchising program. The Company
is actively seeking to extend its Saint Louis Bread franchise relationships
beyond its current franchisees. The Saint Louis Bread unit franchise agreements
typically require the payment of an up-front franchise fee of $35,000 and
continuing royalties of 4% to 5% on sales from each bakery cafe. The franchisees
are required to purchase all of their dough products from sources approved by
Saint Louis Bread.
The Company has entered into 33 separate franchise area development
agreements for a total of approximately 607 bakery cafes of which 45 have been
opened to date. The Company's strategy is to execute growth in a controlled and
disciplined manner. Under the terms of the franchise development agreements, a
schedule is determined with respect to a set number of franchise openings as to
which the developer pays a non-refundable fee. In the event that the schedule is
not adhered to, the developer will lose development exclusivity in the
territory.
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EMPLOYEES
The Company has approximately 712 full-time employees, of whom
approximately 135 are employed in general or administrative functions
principally at or from the Company's executive offices in Boston, Massachusetts;
approximately 10 are employed at the Boston frozen dough plant and the
commissary; approximately 91 are employed in the Saint Louis Bread corporate
office in St. Louis, MO; approximately 14 are employed in the Saint Louis Bread
production facilities in St. Louis, MO, Chicago, IL, Detroit, MI, and Atlanta,
GA; and approximately 283 and 179 are employed in the Au Bon Pain and Saint
Louis Bread retail operations, respectively. The Company also has approximately
5,170 part-time employees, of whom 3,029 and 1,900 are employed in the Au Bon
Pain and Saint Louis Bread bakery cafes, respectively. These totals include the
joint venture locations in New York City. There are no collective bargaining
agreements. The Company considers its employee relations to be excellent.
TRADEMARKS
The "Au Bon Pain" and "Au Bon Pain The Bakery Cafe" names are of material
importance to the Company and are trademarks registered with the United States
Patent and Trademark Office and in certain foreign countries. In addition, the
name "Saint Louis Bread Company" and "Panera Bread" are of material importance
to the Company. "Saint Louis Bread Company" is registered with the United States
Patent and Trademark Office. In addition, "Saint Louis Bread Company and design"
and "Panera Bread" and "Panera Bread and design" and various marks of lesser
importance have been filed with the United States Patent and Trademark Office.
GOVERNMENT REGULATION
Each Company-operated and franchised bakery cafe is subject to regulation
by federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire, alcoholic beverage control and other departments.
Difficulties or failures in obtaining and retaining the required licensing or
approval could result in delays or cancellations in the opening of restaurants.
The Company is also subject to federal and a substantial number of state
laws regulating the offer and sale of franchises. Such laws impose registration
and disclosure requirements on franchisors in the offer and sale of franchises
and may also apply substantive standards to the relationship between franchisor
and franchisee. The Company does not believe that current or potential future
regulations of franchises have or will have any material
12
impact on the Company's operations. The Company is subject to the Fair Labor
Standards Act and various state laws governing such matters as minimum wages,
overtime and other working conditions.
The Company's Boston commissary and the Saint Louis Bread Co. Division
commissaries are subject to various federal, state and local environmental
regulations. Compliance with applicable environmental regulations is not
believed to have any material effect on capital expenditures, earnings or
competitive position of the Company. Estimated capital expenditures for
environmental compliance matters are not material.
The Americans With Disabilities Act prohibits discrimination in employment
and public accommodations on the basis of disability. Under the Americans With
Disabilities Act, the Company could be required to expend funds to modify its
bakery cafes to provide service to, or make reasonable accommodations for the
employment of, disabled persons. The Company believes that compliance with the
requirements of the Americans With Disabilities Act will not have a material
adverse effect on its financial condition, business or operations.
ITEM 2. PROPERTIES
All Company-operated bakery cafes are located in leased premises with
lease terms typically for ten years with one or two five-year renewal option
periods thereafter. Leases typically have a minimum base occupancy charge,
charges for a proportionate share of building operating expenses and real estate
taxes and contingent percentage rent based on sales above a stipulated sales
level. The joint venture bakery cafes operate in leased premises under similar
lease arrangements.
In 1983, Au Bon Pain built its plant and headquarters in South Boston,
Massachusetts. The executive offices occupy approximately 24,000 square feet.
The Company leases the building and the land from the City of Boston under a
long term ground lease. The annual rent is approximately $150,000. The lease
expires, assuming exercise of renewal options, in 2017.
In 1998, the Company leased short-term office space in Waltham, MA to
house its Accounting and Development functions. The annual rent is approximately
$190,000 and the lease expires in 1999.
Au Bon Pain operated its commissary in leased premises in Chelsea,
Massachusetts under a ten year lease expiring in 1998, with an option to extend
for an additional five years. Management closed this facility in 1998 upon lease
expiration (see "Production").
In 1997, Saint Louis Bread leased new office space in Webster Grove, MO
for its corporate offices. The space occupies approximately 10,300 square feet.
The annual rent is approximately
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$144,000. The lease expires, assuming exercise of renewal options, in 2007.
The Company considers its physical properties to be in good operating
condition and suitable for the purposes for which they are used.
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BAKERY CAFE LOCATIONS
Au Bon Pain Bakery Cafes:
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Company-Operated: 151 total as of December 26, 1998
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Boston Market Area: 43
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101 Merrimac Street Filene's
1100 Massachusetts Avenue Harvard Square
15 Harvard Street Hynes Auditorium
176 Federal Street International Place
431 Boylston Street Kendall Square
53 State Street Longwood Galleria
684 Massachusetts Avenue Milk Street
745 Boylston Street MIT
75-101 Federal Street Natick Mall
Arlington Center New England Medical Center
Beacon Hill North Shore Shopping Center
Bowdoin Square Northeastern University
Brattle Street Park Plaza
Brigham & Women's Hospital South Shore Plaza
Burlington Mall South Station
Cambridgeside Galleria Square One Mall
Children's Hospital Tower Records
Church Park Wellesley Center
Coolidge Corner Winter Street
Copley Place Woburn Business Center
Davis Square Worcester Commons
Design Center South Boston
Other New England: 14
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Avon Marketplace, Avon, CT Rockingham Mall, Salem, NH
City Place, Hartford, CT Rhode Island Hospital,
Providence, RI
Fleet Center, Providence, RI St. Francis Hospital,
Hartford, CT
Hartford Civic Center, Hartford, CT Thayer Street, Providence, RI
Mall of New Hampshire, Warwick Mall, Warwick, RI
Manchester, NH
One Broadway, New Haven, CT West Farms Malls,
West Hartford, CT
Pheasant Lane Mall, Nashua, NH Worcester Commons,
Worcester, MA
California Market Area: 1
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353 Sacramento Street, San Francisco
Pittsburgh Market Area: 8
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Fifth Avenue Place Pittsburgh Airport-Landside
Oliver Building Ross Park Mall
Oxford Center Two PPG Place
Pittsburgh Airport-Airside USX Tower
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Washington, D.C. - Baltimore Market Area: 21
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10 North Calvert 800 North Capitol Street
1001 Pennsylvania Avenue, NW Commerce Place
1101 Vermont Avenue, NW Crystal City
1401 Eye Street International Square
1701 Pennsylvania Avenue, NW L'Enfant Plaza
1724 L Street, NW Pentagon City
1801 L Street Springfield Mall
1850 M Street Towson Town Center
2000 Pennsylvania Avenue, NW Union Station
601 Indiana Avenue Warner Building
700 13th Street, NW
Greater New York Area: 41
- --------------------------
101 Hudson Street Empire State Building
16 East 44th Street Exxon Building
222 Broadway JFK Airport-Cart
300 Madison Avenue JFK Airport-American Airlines
420 Fifth Avenue Laguardia Airport
425 Lexington Avenue Long Island Jewish Medical Center
444 Madison Avenue Macy's
54 East 8th Street Manhattan Mall
6 Union Square East Nanuet Mall
60 Broad Street One Metrotech Center
600 Lexington Avenue Port Authority
600 Third Avenue Riverside Square
684 Broadway Rockefeller Center/Time Warner
73 Fifth Avenue Rutgers University
80 Pine Street Short Hills Mall
875 Third Avenue-Down State Street Plaza
875 Third Avenue-Up Westchester Mall
95 Wall Street World Financial-Down
Celanese Building World Financial-Up
Chanin Building World Trade Center
Daily News Building
Midwest Market Area: 23
- ------------------------
122 South Michigan Avenue, Chicago 600 Superior Avenue, Cleveland
123 North Wacker Drive, Chicago Amoco Building, Chicago
125 South Wacker Drive, Chicago BP Building, Cleveland
161 North Clark Street, Chicago Columbus City Center, Columbus
180 North Michigan Avenue, Chicago Federal Reserve, Chicago
181 West Madison, Chicago Grand Avenue, Milwaukee
200 West Adams, Chicago IBM Building, Minneapolis
222 North LaSalle Street, Chicago IDS Center, Minneapolis
30 North LaSalle Street, Chicago Merchandise Mart, Chicago
33 North Dearborn, Chicago Tower City, Cleveland
3rd & Broad, Columbus Woodfield Mall, Schaumburg, IL
500 West Monroe, Chicago
16
Franchise-Operated/Domestic: 74 total as of December 26, 1998
ABP Caribbean Limited: 3
- ------------------------
First Union Bank Building, Miami, FL Jackson Hospital, Miami, FL
Merchandise Mart, Miami, FL
ABP Delaware Valley, LLC: 11
- -----------------------------
30th Street Station, Philadelphia Mellon Building, Philadelphia
Commerce Square Montgomery Mall, Philadelphia
Exton Square Mall, Exton, PA Ten Penn Center, Philadelphia
Graham Building, Philadelphia Two Logan Square, Philadelphia
King of Prussia, PA Two Penn Center, Philadelphia
Liberty Place, Philadelphia
ABP Southern California, LLC: 5
- --------------------------------
Brea Mall, Brea, North County Fair, Escondido
Laguna Hills Mall, Laguna Hills South Lake Avenue, Pasadena
Montclair Plaza, Montclair
Boston Concessions Group: 3
- ---------------------------
Logan International Airport, Logan International Airport,
Terminal B, Boston Terminal BII, Boston
Logan International Airport,
Terminal C, Boston
BP Oil Company: 1
- -----------------
BP Oil, Spring Street, Atlanta, GA
CA One Services, Inc.: 6
- -------------------------
Ft. Lauderdale Airport, Logan International Airport,
Ft Lauderdale, FL Boston, MA
Greater Cincinnati Airport, Newark International Airport,
Hebron, KY Newark, NJ
Hancock International Airport, San Jose International Airport,
Syracuse, NY San Jose, CA
Crowne Plaza Ravinia: 1
- -----------------------
Crowne Plaza, Atlanta
17
DoubleTree Hotels: 21
- ---------------------
Atlanta Airport North Louisville, KY III
Austin, TX Miami Lakes, FL
Boise, ID Norwalk, CT
Hollywood, CA O'Hare, Chicago, IL
Houston, TX Palatine, IL
Jacksonville, FL Philadelphia, PA
Jersey City, NJ Raleigh, NC
Lambert Int'l Airport, St. Louis, MO San Antonio, TX
Las Vegas, NV Syracuse, NY
Largo, MD Tyson's Corner, VA
Louisville, KY I
FGR Food Corp.: 5
- ------------------
Dallas-Fort Worth Airport I Dallas-Fort Worth Airport IV
Dallas-Fort Worth Airport II Dallas-Fort Worth Airport V
Dallas-Fort Worth Airport III
Fortunoff (Wayne ABP, Inc.): 1
- -------------------------------
Wayne Town Center, Wayne, NJ
Host Marriott: 2
- -----------------
Hartsfield Airport, Concourse B, Hartsfield Airport, Concourse D,
Atlanta, GA Atlanta, GA
Northern Bakers, Inc.: 7
- -------------------------
Cape Cod Mall, Hyannis, MA Fox Run Mall, Newington, NH
Carousel Mall, Syracuse, NY Maine Mall, South Portland, ME
Crossgates Mall, Albany, NY Silver City Galleria, Taunton, MA
Dartmouth-Hitchcock Medical
Center, Lebanon, NH
R.C. Menzer: 2
- ---------------
South Hills Village, Pittsburgh, PA Monroeville Mall, Monroeville, PA
Romallso, Inc.: 1
- ------------------
Roosevelt Field Mall, Garden City, NY
Statewide Management Group, Inc.: 2
- -----------------------------------
Long Island College Hospital, NY Pace University, NY
18
The Lauren Group, Inc.: 3
- --------------------------
Choices, Tannersville, PA Woodbury Commons Outlet,
Crossing Factor Store, Central Valley, NY
Tannersville, PA
Franchise-Operated/International: 40 total as of December 26, 1998
ABP Alimentos y Servicios, Chile: 17
- -------------------------------------
Apoquindo/Hendaya Museum of Pre-Columbian Art
Bandera New Providencia
El Bosque Norte Providencia
El Bosque Sud Ripley
Food Garden Santiago Airport-Cart
Gimnasio Santiago Airport-Counter
Homecenter Las Condes Santiago Airport-Duty Free
La Dehasa World Trade Center
Miraflores
GS&P Foods, Inc., The Philippines: 5
- -------------------------------------
EDSA/Shangri-La Mall, Ortegas Taipan Building, Ortegas
PCI Tower, Makati Zeta Building, Manila
Prince Plaza, Manila
PT Ayodhia Pina Pangan, Indonesia: 7
- -------------------------------------
BII Building, Jakarta Plaza Senayan, Jakarta
BNI Building, Jakarta Setia-Budi Atrium, Jakarta
BRI Building, Jakarta Stock Exchange (BEJ), Jakarta
Landmark Building, Jakarta
Royal ABP Co., Ltd, Thailand: 4
- --------------------------------
Lake Rajarda SCB Plaza
Pattaya Sindhorn
BV Hospitality UK Ltd, United Kingdom: 2
- -----------------------------------------
225 The Strand, London Piccadilly, London
ABP Brasil Ltda, Brazil: 3
- ---------------------------
Alameda Santos/Citibank, Sao Paulo Mackenzie University, Sao Paulo
Birmman Building, Sao Paulo
ABP Bakery Cafe Pte Ltd, Singapore/Malaysia: 2
- -----------------------------------------------
The Forum, Singapore International Plaza, Singapore
19
Saint Louis Bread Company Bakery Cafes:
- ---------------------------------------
Company-Operated Bakery Cafes: 68 total as of December 26, 1998
Greater St. Louis Market Area: 31
- ----------------------------------
Ballas, Creve Coeur, MO
Baxter, Ballwin, MO Highway K, O'Fallon, MO
Bogey Hills, St. Charles, MO Kirkwood, MO
Brentwood, St. Louis, MO Main, St. Charles, MO
Cape Girardeau, MO Market, St. Louis, MO
Carondelot, Clayton, MO Northwest Plaza, St. Ann, MO
Central West End, St. Louis, MO Pine, St. Louis, MO
Chesterfield Mall, Chesterfield, MO Soulard, St. Louis, MO
South 9th Street, Columbia, MO
Columbia Mall, Columbia, MO South Central, Clayton, MO
Crestwood Plaza, St. Louis, MO Surrey Plaza, Florissant, MO
Delmar, University City, MO Telegraph Road, St. Louis, MO
Esquire, Clayton, MO Tesson, St. Louis, MO
Four Seasons, Chesterfield, MO West County, Des Peres, MO
Galleria, Richmond Heights, MO Westport Plaza,
Maryland Heights., MO
Gateway One, St. Louis, MO Winchester, MO
Atlanta Market Area: 9
- -----------------------
Briarcliff, Atlanta, GA Lenox Square, Atlanta, GA
Dunwoody, GA Peachtree, Atlanta, GA
Emory Village, Atlanta, GA Sandy Springs, Atlanta, GA
Gwinnett Place, Deluth, GA Town Center, Kennesaw, GA
Haywood Mall, Greenville, SC
Chicago Market Area: 21
- ------------------------
Belleville, IL Park Ridge, IL
Diversey, Chicago, IL Plaza del Grato,
Arlington Heights, IL
Elmwood Park, Elmwood, IL Scharrington Square, Schaumberg, IL
Evanston, IL St. Clair Square,
Fairview Heights, IL
Four Flaggs, Niles, IL Stratford Square Mall, IL
Fox Valley, Aurora, IL Two Rivers Plaza, Bolingbrook, IL
Glen Ellyn Marketplace, Glen Ellyn, IL Vernon Hills, IL
Golf & Meachum, Schaumberg, IL Wheaton, IL
Halsted, Chicago, IL Wilmette, IL
LaGrange Park, IL Winnetka, IL
Orland Square Mall, Orland Park, IL
Massachusetts Market Area: 2
- -----------------------------
Arlington Heights, Arlington, MA Vinnin Square, Swampscott, MA
20
Michigan Market Area: 5
- ------------------------
City Center, Novi, MI Troy Commons, Troy, MI
Lathrope Village, Bloomfield, MI Twelve Oaks Mall, Novi, MI
Orchard Mall, West Bloomfield, MI
Specialty Stores: 2 (not included in total store count)
- -------------------------------------------------------
Rendezvous Cafe, Richmond Heights, MO
City Museum, St. Louis, MO
Franchise-Operated Bakery Cafes: 45 total as of December 26, 1998
Breads of the World: 6
- -----------------------
Blacklick Crossing, Columbus, OH Kenwood Pavilion, Cincinnati, OH
Festival at Sawmill, Dublin, OH Olentangy Plaza, Columbus, OH
Founders Plaza, Gahanna, OH Tuttle Crossing Mall, Columbus, OH
Cadle, L.L.C.: 1
- -----------------
2930 East State Street, Hermitage, PA
Candall, Inc.: 3
- -----------------
4370 Beldon Village Road, Canton, OH Golden Gate Plaza, Mayfield Heights, OH
Boardman Poland Road, Boardman, OH
Carlon Corporation, L.L.C.: 1
- ------------------------------
Ruby Isle Center, Brookfield, WI
Chicago Bread, L.L.C.: 2
- ------------------------
Shops of Deerfield, Deerfield, IL Strathmore Square, Buffalo Grove, IL
Covelli Family Limited Partnership, L.L.P.: 2
- ----------------------------------------------
118 West Fairbanks, Winter Park, FL 296 East Michigan, Orlando, FL
CSC Investments, L.L.C.: 1
- ---------------------------
417 Market Street, Chattanooga, TN
Original Bread, Inc.: 8
- ------------------------
11022 Metcalf, Overland Park, KS 8300 Mission Rd., Prairie Village, KS
11319 West 95th St., Overland Park, KS 8801 West 75th, Overland Park, KS
1605 North Rock Road, Wichita, KS Leawood Town Center, Leawood, KS
520 West 23rd Street, Lawrence, KS Westport, Kansas City, MO
21
Ozark Breads, Inc.: 1
- ----------------------
2510 Missouri, Jefferson City, MO
PR Restaurants, L.L.C.: 1
- --------------------------
Framingham Mall, Framingham, MA
SLB of Central Illinois: 2
- ---------------------------
510 East John Street, Champaign, IL White Oaks Boulevard, Springfield, IL
SLB of Iowa: 3
- ---------------
Coral Ridge Mall, Coralville, IA John Deere Road, Moline, IL
Elmore Crossing, Davenport, IA
SLB of Minnesota, L.C.: 1
- --------------------------
Plymouth Station, Plymouth, MN
St.LB, Inc.: 1
- ---------------
Mall of St. Matthews, Louisville, KY
St.LB of Florida, Inc.: 1
- --------------------------
Brandon Town Center, Brandon, FL
Traditional Bakery, Inc.: 8
- ----------------------------
1570 East Battlefield, Springfield, MO 3800 East 51st Street, Tulsa, OK
1624 East 15th Street, Tulsa, OK 500 South National, Springfield, MO
2401 East 32nd Street, Joplin, MO East Sunshine, Springfield, MO
3265 Falls Parkway, Branson, MO Lewis Avenue, Tulsa, OK
Texas Bread, L.L.C.: 2
- -----------------------
Pepper Square, Dallas, TX Vista Ridge Mall, Lewisville, TX
The Breadbox, L.C.: 1
- ----------------------
Baymeadows, Jacksonville, FL
22
The following table sets forth Company-operated and franchise operated bakery
cafes open at the dates indicated:
Dec. 31, Dec. 30, Dec. 28, Dec. 27, Dec. 26,
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
Company-operated
Au Bon Pain 182 192 177 160 151
Saint Louis Bread 29 50 52 57 68
--- --- --- --- ---
211 242 229 217 219
Franchise-operated
Au Bon Pain 25 29 48 96 114
Saint Louis Bread 6 8 10 19 45
--- --- --- --- ---
31 37 58 115 159
Total
Au Bon Pain 207 221 225 256 265
Saint Louis Bread 35 58 62 76 113
--- --- --- --- ---
242 279 287 332 378
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of security holders during the
fourth quarter of the fiscal year ended December 26, 1998.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
MATTERS.
(a) Market Information.
-------------------
The Company's Class A Common Stock is traded on The Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol ABPCA. The following table sets
forth the high and low sale prices as reported by Nasdaq for the fiscal periods
indicated.
1997 High Low
- ---- ---- ---
First quarter .............................. 8-7/16 5-7/8
Second quarter ............................. 7-3/8 6
Third quarter .............................. 10-1/4 7
Fourth quarter ............................. 9-13/16 7-1/4
1998
- ----
First quarter .............................. 8-5/8 7-1/2
Second quarter ............................. 11-5/8 8
Third quarter .............................. 11-5/8 5-1/4
Fourth quarter ............................. 7-5/16 4-1/8
On March 17, 1999, the last sale price for the Class A Common Stock, as
reported on the Nasdaq National Market System, was $5.875.
(b) Holders.
--------
On March 17, 1999, the Company had approximately 1,390 holders of record
of its Class A Common Stock and approximately 86 holders of its Class B Common
Stock.
(c) Dividends.
---------
The Company has never paid cash dividends on its capital stock and has no
intention of paying cash dividends in the foreseeable future.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
For the fiscal years ended
-------------------------------------------------------------
Dec. 31, Dec. 30, Dec. 28, Dec. 27, Dec. 26,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues:
Restaurant sales $173,436 $216,411 $225,625 $233,212 $237,102
Franchise sales and
other revenues 9,450 10,055 11,309 17,678 12,558
-------- -------- -------- -------- --------
182,886 226,466 236,934 250,890 249,660
Costs and expenses:
Cost of food and
paper products 60,535 77,250 85,631 90,385 87,240
Restaurant
operating expenses 85,139 112,161 115,364 119,537 123,060
Depreciation and
amortization 11,891 14,879 16,195 16,862 12,667
General and
administrative 10,098 12,818 14,979 16,417 18,769
Non-recurring
charges - 8,500 4,435 - 26,236
-------- -------- -------- -------- --------
167,663 225,608 236,604 243,201 267,972
-------- -------- -------- -------- --------
Operating profit (loss) 15,223 858 330 7,689 (18,312)
Interest expense, net 1,727 3,363 5,140 7,204 6,396
Other (income)
expense, net 80 2,016 2,513 212 1,445
Minority interest/(income) 78 (94) (40) (42) (127)
Income(loss) before
provision (benefit)
for income taxes 13,338 (4,427) (7,283) 315 (26,026)
Provision(benefit)
for income taxes 5,497 (2,813) (2,918) (1,492) (5,532)
-------- -------- -------- -------- --------
Net income(loss) $ 7,841 $ (1,614) $ (4,365) $ 1,807 $(20,494)
======== ======== ======== ======== ========
Net income(loss)
per common share - basic $ .69 $ (.14) $ (.37) $ .15 $ (1.72)
======== ======== ======== ======== ========
Net income(loss)
per common share
- diluted $ .68 $ (.14) $ (.37) $ .15 $ (1.72)
======== ======== ======== ======== ========
Weighted average
number of shares
outstanding - basic 11,429 11,621 11,705 11,766 11,943
Weighted average
number of shares
outstanding - diluted 11,624 11,621 11,705 11,913 11,943
Comparable restaurant
sales percentage
increase for
Company-operated
bakery cafes 5.8%(1) 0.5%(1) 0.7% 3.6% 2.1%
(1) Fiscal 1994 included 53 weeks. The 1994 restaurant sales used in this
computation have been adjusted downward to be comparable to fiscal 1995.
25
For the fiscal years ended
------------------------------------------------------
Dec. 31, Dec. 30, Dec. 28, Dec. 27, Dec. 26,
1994 1995 1996 1997 1998(1)
-------- -------- -------- -------- --------
(in thousands, except Company-operated bakery cafes open)
Consolidated Balance
Sheet Data:
Working capital $ (3,439) $ 846 $ (1,748) $ (58) $ (8,239)
Total assets 165,586 193,018 196,428 186,516 153,618
Long-term debt, less
current maturities 19,095 42,502 49,736 42,527 34,089
Convertible
subordinated notes 30,000 30,000 30,000 30,000 30,000
Stockholders' equity 94,164 93,238 90,056 92,274 73,327
Company-operated
bakery cafes open 211 242 229 217 219
(1) The Company intends to repay all of its outstanding debt with the
proceeds from the Sale (see Note 8). The recording of the non-recurring,
non-cash charge during the third quarter of 1998 (see Note 5) caused the Company
to be in violation of certain covenants within the Company's revolving line of
credit agreement. The agreement with the bank group was amended in the Company's
first quarter of fiscal 1999 to eliminate such defaults through the end of the
Company's fiscal year 1999 (December 25, 1999). Although most of the conditions
for the transaction have been satisfied, the necessary financing arrangements
are not yet complete and a closing date has not been set. The closing of the
transaction will result in the repayment of the revolving line of credit at that
time.
26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of certain items included in the Company's consolidated statements of
operations for the periods indicated:
For the fiscal years ended
----------------------------------
Dec. 28, Dec. 27, Dec. 26,
1996 1997 1998
-------- -------- ------
Revenues:
Restaurant sales 95.2% 93.0% 95.0%
Franchise sales and
other revenues 4.8 7.0 5.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Costs and expenses:
Cost of food and paper
products 36.1% 36.0% 34.9%
Restaurant operating
expenses 48.7 47.7 49.3
Depreciation and
amortization 6.8 6.7 5.1
General and administrative 6.3 6.5 7.5
Non-recurring charge 1.9 - 10.5
----- ----- -----
99.8 96.9 107.3
----- ----- -----
Operating margin 0.2 3.1 (7.3)
Interest expense, net 2.2 2.9 2.6
Other expense, net 1.0 0.1 0.6
Minority interest -- -- (0.1)
----- ----- -----
Income(loss) before (benefit)
from income taxes (3.0) 0.1 (10.4)
Benefit from income taxes (1.2) (0.6) (2.2)
----- ----- ------
Net income(loss) (1.8)% 0.7% (8.2)%
===== ===== ======
General
The Company's revenues are derived from restaurant sales, franchise sales
and other revenues. Franchise sales and other revenues include sales of frozen
dough products to franchisees and others, royalty income and franchise fees.
Certain expenses (cost of food and paper products, restaurant operating expenses
and depreciation and amortization) relate primarily to restaurant sales, while
general and administrative expenses relate to all areas of revenue generation.
The Company's fiscal year ends on the last Saturday in December. The
fiscal years from 1996 through 1998 ended on December 28, 1996, December 27,
1997 and December 26, 1998 and included 52, 52 and 52 weeks, respectively. The
Company's fiscal year normally consists of 13 four-week periods, with the first,
second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively,
into the fiscal year.
27
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
---------------------------------------------
Total restaurant sales from Company-operated bakery cafes increased 1.7%
to $237 million in 1998 from $233 million in 1997 and other revenue decreased
29% to $12.6 million in 1998 from $17.7 million in 1997.
Total restaurant sales in the Saint Louis Bread/Panera Bread business unit
increased to $77.5 million in 1998 from $67.2 million in 1997, an increase of
15.3%, and other revenue associated with Saint Louis Bread/Panera Bread
increased to $5.5 million in 1998 from $3.1 million in 1997, an increase of 77%.
The growth in restaurant sales was due to several factors, including incremental
sales of $4.5 million generated from the opening of 11 new Saint Louis Bread Co.
Division-operated bakery cafes opened during 1998 and 6 Saint Louis Bread Co.
Division-operated bakery cafes opened during 1997 and strong comparable
restaurant sales growth of 3.63%, on top of the 9.3% increase in 1997. Other
revenue growth was impacted by an increase in franchise fees and royalties to
$3.5 million in 1998 compared to $2.2 million in 1997, driven by the execution
of new franchise area development agreements, fees from opening new franchise
locations and higher royalty income.
Sales from Company-owned restaurants in the Au Bon Pain Division decreased
3.8% to $159.6 million compared to $166.0 million in 1997, and other revenue
associated with the Au Bon Pain Division decreased 51% to $7.1 million compared
to $14.6 million in 1997. An increase in comparable restaurant sales of 1.5% was
more than offset by the effect of the disposition throughout 1997 and 1998 of a
number of underperforming bakery cafes and the franchising of 11 Company-owned
restaurants in the third quarter of 1997. The decrease in other revenue was
principally due to a decrease in wholesale sales to $3.1 million in 1998, down
from $8.5 million in 1997, due to the sale of the wholesale frozen dough
business included in the sale of the Mexico, Missouri manufacturing facility.
During 1998, the Company recorded $2.0 million in non-recurring, non-cash
charges to write-down the book value of eight underperforming Au Bon Pain cafes
whose leases expired in 1998 and were not renewed, and to record the closing of
one Saint Louis Bread/Panera Bread location. The charge is included as a
separate component of operating expenses and includes a $1.6 million fixed asset
write-down and a $0.4 million other asset write-down.
28
In the first quarter of 1998 the Company sold the Mexico, MO production
facility and its wholesale frozen dough business to Bunge Foods Corporation
("Bunge") for approximately $13 million in cash. In conjunction with the sale,
the Au Bon Pain Division and the Saint Louis Bread Co. Division entered into
five year supply agreements with Bunge for the supply of substantially all their
frozen dough needs, excluding bagels, for their domestic bakery cafes. The
Company recognized a pre-tax loss on the sale of the facility of approximately
$735,000 in the Company's results of operations.
Operating income/(loss) decreased to $(18.3) million in 1998 from $7.7
million in 1997. Operating loss in 1998 included non-recurring charges recorded
by the Company of $26.2 million, including a charge of $24.2 million, related
principally to the write-down of certain assets under Statement of Financial
Accounting Standards, 121 "Accounting for the Impairment of Long-Lived Assets
and for the Long-Lived Assets to be Disposed of" ("SFAS 121"), related to the
planned sale of assets and the closing of eight under-performing Au Bon Pain
cafes and one Saint Louis Bread/Panera Bread cafe. Operating income in 1998 was
favorably impacted by approximately $4.5 million due to the suspension of
depreciation and amortization of the Au Bon Pain Division assets held for sale
as of August 12, 1998, the date of the agreement to sell that business (See Note
5). In addition, a tax benefit of $5.4 million was recorded related to this
charge. The benefit is less than the benefit obtained by applying the statutory
tax rate to the pretax loss due to the fact that some potentially non-deductible
capital losses may arise from the sale and certain deferred state tax
assets will no longer be realizable following the Sale. Before the non-recurring
charges and suspension of depreciation and amortization, operating income
decreased 55% in 1998 to $4.3 million below 1997.
The decline in operating income (before non-recurring charges and
suspension of depreciation) was a result of lower contribution in the Au Bon
Pain Division of $4.3 million, as the Saint Louis Bread Co. Division
contribution was essentially flat in 1998 versus 1997. The lower contribution in
the Au Bon Pain Division was due to several factors. First, the comparable
restaurant sales of 1.5% produced a negative leverage against the normal
inflationary cost elements, reducing contribution. Second, the Au Bon Pain
Division was significantly impacted by extraordinarily high market prices for
butter, increasing food costs. On average, the Company utilizes approximately
22,000 pounds of butter per week with approximately two thirds allocated to the
Au Bon Pain Division and the remaining one third for use within the Saint Louis
Bread Co. Division. The Company's cost of butter was approximately 53%, or $0.62
higher per pound in 1998 than the comparative cost for 1997. Third, results were
impacted by higher food costs in the first quarter of 1998 stemming from
inefficiencies in the Manufacturing Facility prior to the sale at the end of the
first quarter of 1998. In addition, the level of franchise contribution from the
Au Bon Pain International & Trade Channels area was reduced by 55% due both to
the Asian economic crisis and to the pending sale of the Au Bon Pain Division
overall.
29
Before the non-recurring charge, operating profit in the Saint Louis Bread
Co. Division in 1998 was essentially flat at $6.5 million compared to 1997, as
increases in store profit from company-owned cafes and greater franchise income
in 1998 were largely offset by higher overhead costs, particularly related to
the field organization which increased approximately $1.4 million over 1997, and
an increase in commissary infrastructure expenses, in anticipation of the
projected growth in both the Company-owned and franchise operated cafes.
During 1998, 12 Saint Louis Bread Co. Division franchise area
development agreements were signed and 4 existing agreements were
amended, representing commitments for the development of 259 bakery
cafes and increasing the number of franchise commitments to a total
of 562 remaining bakery cafes to be developed. In addition, 37 Saint
Louis Bread Co. Division bakery cafes were opened in 1998, including
11 company-owned cafes and 26 franchise-operated cafes. Within the
Au Bon Pain Division, 27 franchise-operated units were opened in 1998.
Fiscal Year 1997 Compared to Fiscal Year 1996
---------------------------------------------
Total restaurant sales from Company-operated bakery cafes increased 3.1%
to $233 million in 1997 from $226 million in 1996 due to several factors.
Incremental sales of $7.6 million were generated from the opening of 6 new Saint
Louis Bread Co. Division-operated bakery cafes opened throughout 1997 and 3 Au
Bon Pain Division and 2 Saint Louis Bread Co. Division-operated bakery cafes
opened throughout 1996. In addition, comparable restaurant sales increases in
the Saint Louis Bread Co. Division and the Au Bon Pain Division contributed to
the sales growth. Restaurant sales increased 18.3% in the Saint Louis Bread Co.
business due to the store openings and strong comparable restaurant sales of
9.3%, which were slightly offset by the sale of one Saint Louis Bread Co.
Division -operated restaurant in connection with the execution of a franchise
area development agreement. Sales from Company-owned restaurants in the Au Bon
Pain Division declined 1.7% as the sales from new Company-operated restaurants
and an increase in comparable restaurant of 1.6% sales were more than offset by
the effect of the disposition throughout 1997 of a number of underperforming
bakery cafes.
Other revenues increased to $17.7 million in 1997 from $11.3 million in
1996, principally from growth in wholesale sales to $8.0 million in 1997, from
$5.7 million in 1996 and an increase in franchise revenue to $9.4 million in
1997, from $5.5 million in 1996. The wholesale sales increase was due to
additional customers and distribution. The franchise revenue increase was driven
by the execution of new franchise area development agreements, fees from opening
new franchise locations and higher royalty income.
30
Operating income increased to $7.7 million in 1997 from $330,000 in 1996.
Operating income in 1996 included a non-recurring charge recorded by the Company
of $4.4 million ($3.8 million after-tax), related principally to the write-down
of certain assets under FAS #121. Before the non-recurring charge, operating
income increased 61% in 1997 to $2.9 million above 1996, driven by increased
sales and contribution, especially in the Saint Louis Bread Co. Division, where
a significant increase in franchise contribution of $1.3 million combined with
sales growth and operational efficiencies drove Saint Louis Bread Co. Division's
operating income to nearly double compared to 1996. In addition, manufacturing
contribution improved by $1.6 million versus 1996, as the new production
facility opened in 1996 in Mexico, MO stabilized its operating performance.
Operating margin in the Au Bon Pain Division declined by .5 points in 1997
versus 1996, due to higher food and paper costs of 1.2 points caused by higher
commodity costs for butter and the use of less than full capacity in the
manufacturing facility in Mexico, Missouri. Restaurant operating expenses
decreased by .7 points as sales growth and the closing of unprofitable
restaurants provided leverage against occupancy of 0.4 points and store overhead
costs of 0.38 points. Depreciation and amortization and general and
administrative expenses as a percentage of revenue remained flat with the prior
year.
Operating margin in the Saint Louis Bread Co. Division increased by 4.3
points or $3.9 million versus the prior year, as higher sales leveraged the
fixed costs within the operational expenses and significantly higher franchise
contribution increased operating margin. Food and paper costs were .4 points
lower in 1997 versus 1996, as operational efficiencies offset commodity cost
increases. Restaurant operating expenses as a percentage of revenue declined by
1.3 points with the sales improvement providing leverage against occupancy
costs, which declined by .5 points, overhead costs, which declined by .1 points
and labor, which declined by .6 points. Franchise contribution grew by over
700%, increasing margin by 1.5 points in 1997 versus 1996, as the broad-based
franchise program initiated in 1996 for the Saint Louis Bread Co. Division
successfully expanded the number of committed stores to 356 total stores.
Benefit from Income Taxes
Fiscal Year 1998 Compared to Fiscal Year 1997
- ---------------------------------------------
The Company had a benefit from income taxes of $2.9 million, $1.5 and $5.5
million for the years ended December 28, 1996, December 27, 1997 and December
26, 1998 respectively, due to federal and state net operating loss
carryforwards, tax credit carryforwards and the fact that the Company has
incurred net losses. As of December 26, 1998, the Company had federal net
operating loss carryforwards of approximately $8.5 million, as well as
approximately $4.7 million of federal tax credit carryforwards available for
income tax purposes. The federal net operating loss
31
carryforwards expire in the year 2018. The tax credit carryforwards include
approximately $3.5 million of federal Alternative Minimum Tax Credits which have
an indefinite life and $1.2 million of federal jobs tax credits which expire in
the years 2009-2010. For the year ended December 26, 1998, the Company provided
a valuation allowance of $4.7 million to reduce its deferred tax assets to a
level which, more likely than not, will be realized. The valuation allowance is
primarily attributable to the potential for the non-deductibility of capital
losses related to the taxable loss on the planned Sale of the Au Bon Pain
Division and the expectation that all deferred state tax assets will be
unrealizable following the sale. The Company reevaluates the positive and
negative evidence impacting the realization of its deferred tax assets on an
annual basis.
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
The Company had a benefit from income taxes of $2.8 million, $2.9 million
and $1.5 million for the years ended December 30, 1995, December 28, 1996 and
December 27, 1997, respectively, due to federal and state net operating loss
carryforwards, tax credit carryforwards and the fact that the Company has
incurred net losses. As of December 27, 1997, the Company had federal and state
net operating loss carryforwards of approximately $40.0 million, as well as
approximately $3.1 million of tax credit carryforwards available for income tax
purposes. Approximately $13.1 million of these carryforwards expire in the years
2000-2002, while the remaining $26.9 million expires in the years 2010-2012. For
the year ended December 31, 1997, the Company provided a valuation allowance of
$1.3 million to reduce its deferred tax assets to a level which, more likely
than not, will be realized. The valuation allowance is primarily attributable to
the potential expiration of charitable contribution deduction carryforwards and
certain state net operating loss carryforwards.
Net income (loss)
Fiscal Year 1998 Compared to Fiscal Year 1997
---------------------------------------------
Lower operating income in 1998 versus 1997, partially offset by deferred
tax benefits and lower interest costs incurred in 1998, produced a significant
decrease in net income for the year ended December 26, 1998 versus net income of
$1.8 million for the year ended December 27, 1997.
Fiscal Year 1997 Compared to Fiscal Year 1996
---------------------------------------------
Higher operating income in 1997 versus 1996 and deferred tax assets
generated during 1997 from federal net operating loss carryforwards and tax
credit carryforwards (see "Benefit from Income Taxes"), partially offset by
higher interest costs incurred
32
in 1997, produced a significant increase in net income for the year ended
December 27, 1997 versus a net loss of $4.3 million for the year ended December
28, 1996, which included a non-recurring charge of $3.8 million.
Liquidity and Capital Resources
Fiscal Year 1998 compared to 1997
- ---------------------------------
Cash and cash equivalents increased to $1.9 million at December 26, 1998
from $853,000 at December 27, 1997. The Company's principal requirements for
cash are capital expenditures for constructing and equipping new bakery cafes
and maintaining or remodeling existing bakery cafes and working capital. To
date, the Company has met its requirements for capital with cash from
operations, proceeds from the sale of equity and debt securities and bank
borrowings.
Excluding the non-recurring charge, net cash provided by net income plus
depreciation and amortization was $13.0 million in 1998 versus $19.0 million
in 1997. A total of $20.5 million was provided by operating activities in 1998
compared to $13.5 million in 1997. In 1998, funds provided by operating
activities were primarily the result of an increase in accounts payable and
accrued expenses. In 1997, funds provided by operating activities were primarily
the result of an increase in accrued expenses, offset by growth in accounts
receivable and a decrease in accounts payable.
The Company utilized $11.2 million and $7.7 million for investing
activities in 1998 and 1997, respectively. The investing activities in 1998
consisted primarily of additions to property and equipment, partially offset by
proceeds from the sale of the Mexico, Missouri manufacturing plant for
approximately $15.0 million in cash and related receivables. The Company used
the proceeds of $15.0 million, including related receivables, to reduce debt
during 1998.
Total capital expenditures in 1998 of $21.8 million were related primarily
to the opening of eleven Saint Louis Bread Co. Division new Company-operated
bakery cafes, to the construction of five new local Saint Louis Bread Co.
Division commissaries and to maintaining or remodeling the existing bakery
cafes. The expenditures were mainly funded by net cash from operating activities
of $20.5 million and cash proceeds from the sale of the Mexico, Mo manufacturing
facility.
On July 24, 1996, the Company issued $15 million senior subordinated
debentures maturing in July, 2000. The debentures accrue interest at varying
fixed rates over the four-year term, ranging between 11.25% and 14.0%. In
connection with the private placement, warrants with an exercise price of $5.62
per share were issued to purchase between 400,000 and 500,000 shares of the
33
Company's Class A common stock, depending on the term during which the
debentures remain outstanding and certain future events. The net proceeds of the
financing were used to reduce the amount outstanding under the Company's bank
revolving line of credit. In the second quarter of 1998, 190,000 warrants were
exercised resulting in the issuance of 65,201 shares of class A common stock.
On March 23, 1998 the Company sold its Mexico, MO production facility and
its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash. The net proceeds of the sale were used to
repay the $7.9 million outstanding for the Industrial Revenue Bond and to reduce
amounts outstanding under the revolving credit line. There were no gains or
losses associated with the early retirement of the Industrial Revenue Bond or
the partial repayment of the revolving credit line.
The Company has a $22.0 million unsecured revolving line of credit which
bears interest at either the commercial bank's prime rate plus .25% or LIBOR
plus 2.75%, at the Company's option. As of December 26, 1998, $17.3 million was
outstanding under the line of credit and an additional $1.1 million of the
remaining availability was utilized by outstanding letters of credit issued by
the bank on behalf of the Company.
The Company intends to repay all of its outstanding debt with the
proceeds from the Sale (see Note 8). The recording of the non-recurring,
non-cash charge during the third quarter of 1998 caused the Company to be in
violation of certain covenants within the Company's revolving line of credit
agreement. The agreement with the bank group was amended in the Company's first
quarter of fiscal 1999 to eliminate such defaults through the end of the
Company's fiscal year 1999 (December 25, 1999). Although most of the conditions
for the Sale have been satisfied, the necessary financing arrangements are not
yet complete and a closing date has not been set. The closing of the transaction
will result in the repayment of the revolving line of credit at that time.
The Company utilized $8.3 million and $7.5 million from financing
activities in 1998 and 1997, respectively. The financing activities in 1998 and
1997 included proceeds from and principal payments on long-term debt, and the
issuance of common stock under the Company's employee stock option and employee
stock purchase plans.
In 1999, the Company currently anticipates spending approximately $15
million related to the Saint Louis Bread Division for capital expenditures,
principally for the opening of new Saint Louis Bread Company bakery cafes and
maintaining or remodeling existing cafes. The Company expects to fund these
expenditures principally through internally generated cash flow.
Should the Sale not occur, then the Company's capital expenditures would
increase to approximately $25 million and these expenditures would also be
funded through internally generated cash flow from both the Saint Louis Bread
and Au Bon Pain Divisions.
34
The unsecured revolving line of credit agreement requires that proceeds
from the sale of assets be used toward a reduction to the revolving credit line.
Upon consummation of the sale of the Au Bon Pain Division, the Company expects
to retire all outstanding debt, including the revolving credit line. In
conjunction with the paydown the Company will record a non-cash write-off of
capitalized deferred financing costs of approximately $700,000. The Company
expects to incur expense associated with the early retirement of the convertible
subordinated notes of approximately $750,000.
If the Sale is completed, the Company anticipates the availability of
sufficient capital in the market place and from ongoing operations, on a going
forward basis. If the Sale of the Au Bon Pain Division is not completed, the
Company believes it has the ability to replace outstanding debt at maturity
through use of existing instruments in the marketplace. The Company cannot,
however, guarantee that said debt can be replaced at terms similar or identical
to terms currently existing.
Certain Factors Affecting Future Operating Results
Matters discussed in this report which relate to events or developments
that are expected to occur in the future, including any discussion of growth,
anticipated operating results or the completion of the sale of the Au Bon Pain
Division are 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
(identified by the words "estimate", "project", "intend", "expect", "future",
"anticipates" and similar expressions). These are statements which express
management's belief, expectations or intentions regarding the Company's future
performance. The described sale of the Au Bon Pain Business Unit is subject to a
variety of conditions. In addition, the purchase and sale agreement allows the
Company to entertain alternative acquisition proposals. No assurances can be
given that the sale will be completed on a timely basis, if at all. Moreover, a
number of factors could cause the Company's actual results to differ materially
from those set forth in the forward-looking statements due to known and unknown
risks and uncertainties. The following are some of the factors: The ability of
the Company to aggressively expand its business going forward is subject to the
availability of sufficient capital to it and the developers party to franchise
development agreements with the Company. Additionally, the Company's operating
results may be affected by many factors, including but not limited to variations
in the number and timing of bakery cafe openings and public acceptance of new
bakery cafes, competition, commodity costs and other factors that may affect
retailers in general. The foregoing list of important factors is not exclusive.
The "Year 2000 Issue" is the result of manufactured equipment and computer
programs using two digits rather than four to define the applicable year. If the
Company's equipment and computer programs with date-sensitive functions are not
Year 2000 compliant, they may recognize a date using "00" as the Year 1900
rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, but not limited
to, a temporary inability to process transactions, generate invoices or engage
in similar normal business practices.
During 1997, the Company formed an ongoing internal review team to address
the Year 2000 issue that encompasses operating and
35
administrative areas of the Company. Internal information technology
professionals are working to identify and resolve all significant Year 2000
issues in a timely and effective manner. The Company's executive management
monitors the status of the Year 2000 remediation plans, including an assessment
of issues and development of said remediation plans, where necessary, as they
relate to internally used software, computer hardware and use of computer
applications. To date, the Company has assigned a full time Year 2000 manager,
completed a comprehensive inventory of all systems in the cafes, commissaries
and corporate offices and has notified critical vendors of the Company's
requirements pertaining to the Year 2000 issue.
The Company has completed its assessment of the Year 2000 impact for both
information technology ("IT") and Non-IT systems. In regards to IT systems, the
Company has identified the following as the main areas of Year 2000 focus:
Payroll systems, financial systems, network/integration systems, register and
store management systems. Network/integration systems are corporate office
electronic systems and tools which link various information subsystems and
databases, encompassing e-mail and all major financial systems, such as general
ledger database systems, and all major operational systems, such as store
operating performance database systems. Register systems are the point-of-sale
systems used within each retail bakery cafe, which are electronically linked
with the personal computer-based store management systems also located within
each retail bakery cafe, providing cafe management tools for the cafe
management.
The cost of addressing the Year 2000 issues has not been finalized.
However, including the cost of a full time Year 2000 manager, the Company has
estimated the cost to be approximately $400,000.
In addition to the above IT systems, the Company has identified the
following as the primary Non-IT systems subject to Year 2000 issues: ovens,
alarms, proofers, HVAC-freezers, and safes. The Company is currently in contact
with vendors and/or landlords in order to assess the potential impact. Based on
initial review the Company believes the potential impact of Year 2000 issues
pertaining to Non-IT systems to be minor. Upon full assessment of the impact of
Year 2000 issues, the Company will address, in order of criticality, the
potential issues, and will develop remediation and contingency plans.
While the Company believes it is taking all appropriate steps to assure
Year 2000 compliance, it is dependent on key business partner and/or vendor
compliance to some extent. The Year 2000 issue is pervasive and complex as
virtually every computer operation will be affected in some way. If, due to
unforeseen circumstances, the implementation is not completed on a timely basis,
or key business partners and/or vendors fail to resolve all significant Year
2000 issues in a timely and effective manner, the Year 2000 could have a
material adverse impact on the Company. In
36
addition to the estimated costs outlined above, the Company has estimated the
costs for adopting all "worst case" contingency plans to be approximately
$900,000.
The following chart depicts the phases, status, timetable, estimated cost
of completion, contingency plans and risks, and estimated cost of implementing
contingency plans pertaining to year 2000 Issues associated with IT systems. The
most reasonably likely worst case scenarios are outlined under the columns
"Contingency Plan/Risks" and "Estimated Contingency Cost".
37
Au Bon Pain Co., Inc.
Year 2000 Summary for IT Systems
- -----------------------------------------------------------------------------------------------------------------------
Estimated
Estimated Contingency Contingency
Area/System Phases Status Timetable Cost Plan/Risks Cost
- -----------------------------------------------------------------------------------------------------------------------
Payroll - Software In process 4/99 $0 Outsource $100,000
vendor to payroll
provide processing to
updated Year third party.
2000 compliant This process
version of would begin in
currently used June 1999 and
software constitutes the
worst case
scenario.
- Test upgraded Upon receipt of 5/99 $0
software for upgrade
operational
effectiveness
- Vendor to If necessary 5/99 $0
complete
remediation
- Remediation Upon completion of 6/99 $0
Integration testing
- Implementation Upon completion of 6/99 -
remediation
- -----------------------------------------------------------------------------------------------------------------------
Financial - Software Complete - $0 Outsource
System vendor to services to
provide third party.
updated Year This process
2000 compliant would begin
version of June 1999 and
currently used constitutes the
software worst case
scenario.
- Review Complete - $60,000 $500,000
software code
to identify
non-compliant
components
- Test upgraded Upon completion of 3/99 $0
software for code scan
operational
effectiveness
- Implementation Upon completion 5/99 $65,000
code scan
38
- -----------------------------------------------------------------------------------------------------------------------
Estimated
Estimated Contingency Contingency
Area/System Phases Status Timetable Cost Plan/Risks Cost
- -----------------------------------------------------------------------------------------------------------------------
Network - Evaluate all Complete - $0 Many of the $150,000
Integration individual subsystems are
Systems systems for not critical in
Year 2000 day to day
compliance operations. If
internal
- Remediate remediation is
internally In process 10/99 $100,000 not successful,
the contingency plan
is to replace
subsystems as needed
In the worst case
scenario, those
subsystems which
have not been fully
remediated already
could be replaced or
reverted to more
manual processes.
- -----------------------------------------------------------------------------------------------------------------------
Register - Upgrade Existing software - $0 As a remediate $0
Systems currently used found to be Y2K software
(Saint software to be compliant. Vendor currently
Louis Year 2000 testing is complete. exists, a
Bread compliant contingency
Co. plan is not
Division) necessary at
this time
- -----------------------------------------------------------------------------------------------------------------------
Store - Upgrade In progress 5/99 $0 This is an $150,000
Management currently used internally used
Systems software to be reporting
(Saint Year 2000 software that
Louis compliant is considered
Bread non-critical to
Co. - Test upgraded day to day
Division) software for operations.
operational Upon completion of 6/99 $60,000 Year 2000
effectiveness remediation compliant
replacement
software is
known to be
available and
could be rolled
out.
- -----------------------------------------------------------------------------------------------------------------------
Register - Selection of Complete - $0 As compliant $0
and Replacement hardware/software
Store Hardware/software currently
Management exists, a
Systems contingency
(Au Bon plan is not
Pain necessary at
Division) this time.
- Pilot test of In progress 3/99 The new
new systems
hardware/software are
expected
to be
leased at
the same
annual
cost as
the
current
leased
systems.
- Complete Upon completion of 8/99
rollout Pilot Test Program
- -----------------------------------------------------------------------------------------------------------------------
39
Recent Accounting Pronouncements
Not applicable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following described consolidated financial statements of the Company
are included in response to this item:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 27, 1997 and December 26, 1998.
Consolidated Statements of Operations for the fiscal years ended December
28, 1996, December 27, 1997 and December 26, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended December
28, 1996, December 27, 1997 and December 26, 1998.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 26, 1996, December 27, 1997 and December 26, 1998.
Notes to Consolidated Financial Statements.
Valuations and Qualifying Accounts.
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Au Bon Pain Co., Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Au Bon Pain Co., Inc. and its subsidiaries at December 26, 1998 and
December 27, 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 26, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the accompanying index present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
--------------------------------
Boston, Massachusetts
February 17, 1999, except for Note 17,
as to which the date is March 4, 1999 and
Notes 5 and 8, as to which the date is March 25, 1999
41
AU BON PAIN CO., INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
Dec. 27, Dec. 26,
1997 1998
ASSETS -------- --------
- ------
Current assets:
Cash and cash equivalents........................... $ 853 $ 1,860
Accounts receivable, less allowance of $134 and
$208 in 1997 and 1998, respectively................ 8,865 1,302
Inventories (Note 3)................................ 9,117 1,662
Prepaid expenses.................................... 1,337 1,781
Refundable income taxes............................. 596 115
Deferred income taxes (Note 11)..................... 600 1,500
------- --------
Total current assets........................... 21,368 8,220
------- --------
Property and equipment, net (Note 4)................. 112,232 38,856
Other assets:
Assets held for sale, net, non-current (Note 5)..... - 69,395
Notes receivable (Note 6)........................... 4,743 20
Intangible assets, net of accumulated amortization
of $6,121 and $4,944 in 1997 and 1998, respectively 31,361 19,787
Deferred financing costs............................ 953 768
Deposits and other (Note 12)........................ 9,097 4,138
Deferred income taxes (Note 11)..................... 6,762 12,434
-------- --------
Total other assets............................. 52,916 106,542
-------- --------
Total assets................................... $186,516 $153,618
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Accounts payable.................................... $ 7,071 $ 4,020
Liabilities held for sale, net (Note 5)............. - 6,469
Accrued expenses (Note 7)........................... 13,917 5,929
Current maturities of long-term debt (Note 8)....... 438 41
-------- --------
Total current liabilities...................... 21,426 16,459
Long-term debt (Note 8) ............................. 42,527 34,089
Convertible subordinated notes (Note 9).............. 30,000 30,000
-------- --------
Total liabilities.............................. 93,953 80,548
Commitments and contingencies (Notes 8 and 10)....... - -
Minority interest.................................... 289 (257)
Stockholders' equity (Note 13):
Common stock, $.0001 par value:
Class A, shares authorized 50,000,000; issued
and outstanding 10,187,042 and 10,518,213 in 1997
and 1998, respectively............................ 1 1
Class B, shares authorized 2,000,000; issued and
outstanding 1,610,038 and 1,557,658 convertible
to Class A, in 1997 and 1998, respectively........ - -
Additional paid-in capital.......................... 68,486 70,033
Retained earnings................................... 23,787 3,293
-------- --------
Total stockholders' equity..................... 92,274 73,327
-------- --------
Total liabilities and stockholders' equity..... $186,516 $153,618
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
42
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
for the fiscal years ended
----------------------------------
Dec. 28, Dec. 27, Dec. 26,
1996 1997 1998
-------- -------- --------
Revenues:
Restaurant sales................ $225,625 $233,212 $237,102
Franchise sales and other
revenues...................... 11,309 17,678 12,558
-------- -------- --------
236,934 250,890 249,660
Costs and expenses:
Cost of food and paper products. 85,631 90,385 87,240
Restaurant operating expenses:
Labor......................... 60,266 63,593 67,218
Occupancy..................... 28,529 28,514 28,016
Other......................... 26,569 27,430 27,826
-------- -------- --------
115,364 119,537 123,060
Depreciation and amortization... 16,195 16,861 12,667
General and administrative...... 14,979 16,418 18,769
Non-recurring charges (Note 5).. 4,435 - 26,236
-------- -------- --------
236,604 243,201 267,972
-------- -------- --------
Operating profit (loss)........... 330 7,689 (18,312)
Interest expense, net............. 5,140 7,204 6,396
Other expense, net................ 2,513 212 1,445
Minority interest (income)........ (40) (42) (127)
-------- -------- --------
Income (loss) before benefit
from income taxes............... (7,283) 315 (26,026)
Benefit from income
taxes (Note 11)................. (2,918) (1,492) (5,532)
-------- -------- --------
Net income (loss) ................ $ (4,365) $ 1,807 $(20,494)
======== ======== ========
Net income (loss) per common share
- basic $ (.37) $ .15 $ (1.72)
======== ======== ========
Net income (loss) per common share
- diluted $ (.37) $ .15 $ (1.72)
======== ======== ========
Weighted average number of shares
outstanding - basic.............. 11,705 11,766 11,943
======== ======== ========
Weighted average number of shares
outstanding - diluted............ 11,705 11,913 11,943
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
43
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
for the fiscal years ended
----------------------------------
Dec. 28, Dec. 27, Dec. 26,
1996 1997 1998
--------- --------- -------
Cash flows from operations:
Net income (loss)................... $ (4,365) $ 1,807 $(20,494)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 16,195 16,861 12,667
Amortization of deferred
financing costs................. 308 619 683
Provision for losses on
accounts receivable............. 44 49 56
Minority interest................. (40) (42) (127)
Deferred income taxes............. (430) (1,883) (6,589)
Non-recurring charge.............. 4,435 - 26,236
Gain on sale of assets............ - (986) -
Gain on sale of investment........ - (930) -
Loss on disposal of property and
equipment....................... - 308 735
Changes in operating assets and
liabilities:
Accounts receivable............... (1,178 (1,185) 15
Inventories....................... (1,221) (294) 212
Prepaid expenses.................. 343 952 (535)
Refundable income taxes........... (1,423) 1,521 480
Accounts payable.................. 820 (4,070) 4,069
Accrued expenses.................. 1,287 769 3,104
-------- -------- --------
Net cash provided by operating
activities.................... 14,775 13,496 20,512
-------- -------- --------
Cash flows from investing activities:
Additions to property and
equipment....................... (17,062) (14,681) (21,706)
Proceeds from sale of property
and equipment................... - 6,044 12,694
Proceeds from sale of investment.. - 2,000 -
Cash included in net current
liabilities held for sale....... - - (1,305)
Payments received on notes
receivable...................... 82 139 240
Increase in intangible assets..... (73) (122) (139)
Increase in deposits
and other....................... (4,321) (1,058) (956)
Increase in notes receivable...... (475) - (45)
-------- -------- -------
Net cash used in investing
activities.................... (21,849) (7,678) (11,217)
-------- -------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
44
for the fiscal years ended
--------------------------------
Dec. 28, Dec. 27, Dec. 26,
1996 1997 1998
--------- --------- ------
Cash flows from financing activities:
Exercise of employee stock
options..................... 184 168 1,203
Issuance of warrants.......... 679 -
Proceeds from long-term debt
issuance.................... 87,561 57,530 75,418
Principal payments on
long-term debt.............. (83,958) (65,003) (84,253)
Proceeds from issuance of
common stock................ 320 243 268
Increase in deferred
financing costs............. (1,211) (189) (506)
Decrease in minority interest. (342) (293) (418)
-------- -------- -------
Net cash provided by (used
in) financing activities.. 3,233 (7,544) (8,288)
Net increase (decrease) in cash
and cash equivalents............ (3,841) (1,726) 1,007
Cash and cash equivalents, at
beginning of period............. 6,420 2,579 853
-------- ---------- -------
Cash and cash equivalents, at
end of period................... $ 2,579 $ 853 $ 1,860
======== ======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest..................... $ 4,637 $ 6,602 $5,544
Income taxes................. $ 370 $ 700 $ 268
Satisfaction of Notes Receivable
in exchange for PP&E......... $ 356 $ - $ -
Note received from sale of
property and equipment...... $ - $ 2,591 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
45
AU BON PAIN CO., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the fiscal years ended
December 28, 1996, December 27, 1997 and December 26, 1998
(in thousands)
Common Stock Preferred Stock
$.0001 Par Value $.0001 Par Value
Class A Class B Class B Additional Total
------- ------- ------- Paid-In Retained Stockholders'
Shares Amount Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------ ------ ------- -------- -------------
Balance, Dec.
30, 1995 9,929 $1 1,707 $- 20 $- $66,892 $26,345 $93,238
Exercise of
employee
stock options 30 147 147
Income tax
benefit related
to stock option
plan 37 37
Issuance of
common stock 48 320 320
Warrants Issued
for debt
financing 679 679
Conversions of
Class B to
Class A 60 (60)
Net loss (4,365) (4,365)
------ -- ----- -- -- -- ------- ------- -------
Balance, Dec.
28, 1996 10,067 $1 1,647 $- 20 $- $68,075 $21,980 $90,056
------ -- ----- -- -- -- ------- ------- -------
Exercise of
employee
stock options 23 152 152
Income tax
benefit related
to stock option
plan 16 16
Issuance of
common stock 40 243 243
Conversions of
Class B to
Class A 37 (37)
Conversions of
preferred stock
to Class A
common stock 20 (20)
Net income 1,807 1,807
------ -- ----- -- -- -- ------- ------- -------
Balance, Dec.
27, 1997 10,187 $1 1,610 $- 0 $- $68,486 $23,787 $92,274
====== == ===== == == == ======= ======= =======
Exercise of
employee
stock options 178 1,204 1,204
Income tax
benefit related
to stock option
plan 75 75
Exercise of
Warrants (323) (323)
Issuance of
common stock 101 591 591
Conversions of
Class B to
Class A 52 (52)
Conversions of
preferred stock
to Class A
common stock
Net income (20,494) (20,494)
------ -- ----- -- -- -- ------- ------- -------
Balance, Dec.
26, 1998 10,518 $1 1,558 $- - $- $70,033 $ 3,293 $73,327
====== == ===== == == == ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
46
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Au Bon Pain Co., Inc. and its subsidiaries operate two retail bakery cafe
businesses and two franchising businesses under the concept names "Au Bon Pain"
and "Saint Louis Bread Company". Certain Saint Louis Bread Company stores began
operating under the name "Panera Bread" during 1997. Included in franchise sales
and other revenues are sales of product to franchisees and others of $8.3
million, $11.7 million and $6.4 million for the fiscal years ended December 28,
1996, December 27, 1997 and December 26,1998, respectively.
2. Summary of Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated statements include the accounts of Au Bon Pain Co., Inc.,
ABP Holdings, Inc., a wholly owned subsidiary, Saint Louis Bread Company, Inc.
("Saint Louis Bread"), a wholly owned subsidiary, ABP Midwest Manufacturing Co.,
Inc., a wholly owned subsidiary, and investments in joint ventures in which a
majority interest is held (the "Company"). All intercompany balances and
transactions have been eliminated. Due to the pending sale of the Au Bon Pain
Division (see Note 5), the assets and liabilities of that business have been
presented on a net current and non-current basis in the December 26, 1998
balance sheet. The Company operates in one material business segment, the retail
bakery cafe business.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain items in the prior year financial statements have been
reclassified to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity at the
time of purchase of three months or less to be cash equivalents.
Accounts and Notes Receivable
Concentration of credit risk within accounts receivable is limited because
a relatively large number of customers make up the Company's Customer base, thus
spreading out risk associated with trade credit. In addition, the Company
closely monitors its accounts receivable. The Company generally does not require
collateral and maintains reserves for potential uncollectable accounts, which in
the aggregate have not exceeded management's expectation.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Upon retirement or sale, the
cost of assets disposed of and their related accumulated depreciation are
removed from the accounts. Any resulting gain or loss
47
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is credited or charged to operations. Maintenance and repairs are charged to
expense when incurred, while betterments are capitalized. Depreciation is
computed over the estimated useful lives of the assets using the straight-line
method. Leasehold improvements are amortized over the terms of the leases
(including available option periods) or over their useful lives, whichever is
shorter. The estimated useful lives used for financial statement purposes are:
Machinery and equipment................. 3-10 years
Furniture and fixtures.................. 3-10 years
Leasehold improvements.................. 10-23 years
Signs................................... 10 years
Interest is capitalized in connection with the construction of new
locations or facilities. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest amounted to $581,000, $70,780 and $114,928 in 1996,
1997 and 1998, respectively.
Intangible Assets
Intangible assets consist of goodwill arising from the excess cost over
the value of net assets of joint ventures, businesses and stores acquired, as
well as the original acquisition of the Company. Goodwill is amortized on a
straight-line basis over periods ranging from twenty-five to forty years.
Periodically management assesses, based on undiscounted cash flows, if there has
been a permanent impairment in the carrying value of its intangible assets and,
if so, the amount of any such impairment, by comparing anticipated discounted
future operating income from acquired businesses with the carrying value of the
related intangibles. In performing this analysis, management considers such
factors as current results, trends, future prospects and other economic factors.
Notes Receivable
Notes receivable relate to the sale of certain retail locations and to the
funding for the opening of new locations of a franchisee.
Income Taxes
The provision for income taxes is determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred taxes are determined based on the
difference between the financial statements and the tax bases of assets and
liabilities using enacted income tax rates in effect in the years in which the
differences are expected to reverse. The Company's temporary differences consist
primarily of depreciation and amortization and reserves.
Deferred Financing Costs
Costs incurred in connection with obtaining debt financing are amortized
over the terms of the related debt.
48
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Franchise and Development Fees
Franchise fees are the result of sales of area development rights and the
sale of individual franchise locations to third parties, both domestically and
internationally. Fees from the sale of area development rights are 100%
recognized as revenue upon completion of all commitments related to the
agreements. Fees from the sale of individual franchise locations are 100%
recognized as revenue upon the commencement of franchise operations.
Capitalization of Certain Development Costs
The Company capitalizes certain expenses associated with the development
and construction of new store locations. Capitalized costs of $2.7 million and
$2.2 million as of December 27, 1997 and December 26, 1998, respectively, are
recorded as part of the asset to which they relate and are amortized over the
asset's useful life.
Advertising Costs
Advertising costs are expensed when incurred.
Pre-Opening Costs
All pre-opening costs associated with the opening of new retail locations
are expensed when incurred.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December. Fiscal
years for the consolidated financial statements included herein include 52 weeks
for the fiscal years ended December 28, 1996, December 27, 1997 and December 26,
1998.
Income Per Share Data
Earnings per share is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect, if
any, for common stock equivalents, including stock options, warrants and
preferred stock. Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", requires dual presentation of basic and diluted EPS. SFAS 128 has
been adopted in the Company's 1998 financial statements with comparable
disclosures for the prior year.
Fair Value of Financial Instruments
The carrying amount of the Company's long term debt, including current
maturities, approximates fair value because the interest rates on these
instruments change with market interest rates. The carrying amounts for accounts
receivable and accounts payable approximate their fair values due to the short
maturity of these instruments.
49
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
None.
3. Inventories
Inventories consist of the following (in thousands):
December 27, December 26,
1997 1998
----------- ------------
Production....................... $ 3,389 $ 131
Retail stores.................... 1,680 590
Paper goods...................... 392 113
Smallwares....................... 3,008 767
Other............................ 648 61
-------- --------
$ 9,117 $ 1,662
======== ========
4. Property and Equipment
Major classes of property and equipment consist of the following
(in thousands):
December 27, December 26,
1997 1998
------------ --------
Leasehold improvements........... $101,619 $ 25,621
Machinery and equipment.......... 63,319 15,366
Furniture and fixtures........... 18,603 5,345
Construction in progress......... 1,083 3,603
Signage.......................... 3,515 968
-------- --------
188,139 50,903
Less accumulated depreciation and
amortization................... 75,907 12,047
-------- --------
Property and equipment, net...... $112,232 $ 38,856
======== ========
The Company recorded depreciation expense related to these assets of $14.7
million and $15.4 million and $5.0 million in 1996, 1997 and 1998, respectively.
On March 23, 1998 the Company sold its Mexico, MO production facility and
its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for
approximately $13 million in cash.
In the fourth quarter of 1997, the Company sold its Woburn, MA office
building for $4.9 million in cash, resulting in a gain of $660,000. The gain was
recognized as a component of other expense, net.
In the third quarter of 1997, the Company sold a Saint Louis Bread Cafe
for $1.1 million in cash in conjunction with the execution of a franchise area
development agreement, resulting in a pre-tax gain of $325,000. The gain was
recognized as a component of other expense, net.
50
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Sale of Au Bon Pain Division and Non-recurring Charges
The Company, together with its wholly-owned subsidiary ABP Holdings, Inc.
("ABPH") has entered into a Stock Purchase Agreement dated August 12, 1998 and
amended on October 28, 1998 with ABP Corporation (the "Buyer"), an affiliate of
Bruckmann, Rosser, Sherrill & Co., L.P. for the transfer of substantially all of
the assets and liabilities of the Au Bon Pain Division business (the "Au Bon
Pain Division") and to sell all of the outstanding capital stock of ABPH to the
Buyer, whereby the Buyer will become the owner of the Au Bon Pain Division (the
"Sale"). Although most of the conditions for the Sale have been satisfied, the
necessary financing arrangements are not yet complete and a closing date has not
been set.
During the third quarter of 1998, the Company recorded a non-recurring,
non-cash charge of $24.2 million in connection with the Sale, principally to
reflect a write-down under Statement of Financial Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be
Disposed of" ("SFAS 121"). The charge is included as a separate component of
operating expense and includes a $10.1 million goodwill write-down and a $14.1
million write-down to property, plant and equipment. The non-cash charge was
taken to record an impairment for long lived assets to be disposed of as a
result of the agreement entered into for the sale of the Au Bon Pain Division.
As a result of this charge, operating income for fiscal 1998 was favorably
impacted by $4.5 million due to the suspension of depreciation and amortization
associated with the Au Bon Pain Division assets held for sale after August 12,
1998. In addition, a tax benefit of $5.4 million was recorded related to this
charge. The benefit is less than the benefit obtained by applying the statutory
tax rate to the pretax loss due to the fact that some potentially non-deductible
capital losses may arise from the sale and certain deferred state tax assets
will no longer be realizable following the Sale.
The Company intends to repay all of its outstanding debt with the proceeds
from the Sale. The recording of the non-recurring, non-cash charge during the
third quarter of 1998 caused the Company to be in violation of certain covenants
within the Company's revolving line of credit agreement. The agreement with the
bank group was amended in the Company's first quarter of fiscal 1999 to
eliminate such defaults through the end of the Company's fiscal year 1999
(December 25, 1999).
The Company anticipates costs of approximately $1.6 million associated
with the early retirement of outstanding debt at the time of the Sale.
The assets and liabilities of the Au Bon Pain Division are depicted in the
balance sheet as of December 26, 1998 as assets held for sale, non-current,
net, and as current liabilities, net, and include the following.
51
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 26,
1998(000's)
------------
Current Assets:
Cash and cash equivalents............ $ 1,305
Accounts Receivable.................. 5,584
Inventories.......................... 5,011
Other current assets................. (98)
--------
Total current assets.................. 11,802
Current liabilities:
Accounts payable..................... 7,120
Accrued expenses..................... 11,151
------
Total liabilities..................... 18,271
Net current liabilities............... $ 6,469
========
Non-current Assets:
Property and equipment
Leasehold improvements............... $ 71,679
Machinery and equipment.............. 53,920
Furniture and fixtures............... 13,717
Other................................ 3,506
Accumulated depreciation and
amortization......................... (83,281)
--------
Property and equipment, net........... 59,541
Other assets:
Notes receivable..................... 4,097
Deposits and other................... 5,757
--------
Total other assets.................... 9,854
Total non-current assets.............. $ 69,395
========
Restaurant sales and net operating loss (before non-recurring charges and
the suspension of depreciation and amortization) in the Au Bon Pain Division
held for sale as of December 26, 1998 were $159.6 million and $3.0 million,
respectively.
During 1998, the Company recorded $2.0 million in non-recurring, non-cash
charges in accordance with SFAS 121, to write-down the book value of eight
underperforming Au Bon Pain stores whose leases expired in 1998 and were not
renewed, and to record the closing of one Panera Bread location. The charge is
included as a separate component of operating expenses and includes a $1.6
million fixed asset write-down and a $0.4 million other asset write-down.
In the first quarter of 1998 the Company sold the Mexico, MO production
facility and its wholesale frozen dough business to Bunge Foods Corporation
("Bunge") for approximately $13 million in cash. The Company recognized a
pre-tax loss on the sale of the facility of approximately $735,000 in the
Company's results of operations.
52
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the third quarter of fiscal 1996, the Company recorded a
non-recurring charge of $4.4 million in accordance with SFAS 121. The charge was
taken as a result of continued less than expected performance results at certain
Au Bon Pain restaurants. The $4.4 million non-cash charge included a $1.4
million goodwill write-down, a $0.6 million fixed asset write-down and a $1.4
million write-down of an office building held for sale. The charge represented a
reduction of the carrying amounts of the assets to their estimated fair values
as determined by using discounted estimated future cash flows. In addition, the
$4.4 million charge included a $1.0 million charge to write-down the book value
of six restaurants whose leases expired in 1997 and which were not renewed. For
the fifty-two weeks ended December 28, 1996 and December 27, 1997 the
restaurants included in the reserve had sales of $3,096,000 and $1,559,000,
respectively and a pre-tax loss of $578,000 and $313,000, respectively.
6. Notes Receivable
Notes receivable relate to the sale of certain retail locations and to the
funding for the opening of new locations of a franchisee. The Company's notes
receivable balance was $20,000 as of December 26, 1998.
In the third quarter of fiscal 1997 the Company franchised 11 of its
existing ABP stores in the Philadelphia market to ABP Delaware Valley LLC. As
part of the sale the Company received a note receivable in the amount of $2.6
million which bears interest at the rate of 8.25% per annum. There was no gain
or loss recognized on the transaction. The note requires monthly principal and
interest payments of $28,765 commencing in November 1997 which reflect an
interest rate of 6.00%. The difference of 2.25% interest shall accrue with
respect to the outstanding principal amount of this note. Commencing November 4,
1999, ABP Delaware Valley LLC will make the scheduled payment plus any accrued
interest until it is paid in full. The note matures August 11, 2007.
In addition, the Company holds five additional notes receivable related to
the Au Bon Pain Division, with two other franchisees with an outstanding
principal balance of $2.2 million at December 27, 1997. These notes bear
interest at between 8.00% and 9.25%. Two of these notes require monthly payments
while the remaining three notes require payments of interest with a balloon
payment of $1.4 million due in 2004. The notes mature between 2003 and 2004.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 27, December 26,
1997 1998
----------- ------------
Accrued insurance.................... $ 1,384 $ 501
Rent................................. 3,799 751
Payroll and related taxes............ 2,182 851
Interest............................. 1,390 1,505
Other................................ 5,162 2,321
------- -------
$13,917 $ 5,929
======= =======
53
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-term Debt
Long-term debt consists of the following (in thousands):
December 27, December 26,
1997 1998
------------ -------------
Revolving credit line at prime + .25%
(8.00% at December 26, 1998)......... $18,326 $17,260
Industrial development bond for
Mexico, Missouri plant............... 7,900 -
Loan with Cigna Insurance at prime less
.75% (7.00% at December 26, 1998)..... 2,000 2,000
Term loan at 7.0% payable in
annual installments of $50,000
including interest, due January
2001................................. 169 131
Senior Subordinated Debenture (14.00%
at December 26, 1998)................ 14,570 14,739
------- -------
Total debt............................. 42,965 34,130
Less current maturities................ 438 41
------- -------
Total long-term debt................... $42,527 $34,089
======= =======
The Company intends to repay all of its outstanding debt with the
proceeds from the Sale. The recording of the non-recurring, non-cash charge
during the third quarter of 1998 caused the Company to be in violation of
certain covenants within the Company's revolving line of credit agreement. The
agreement with the bank group was amended in the Company's first quarter of
fiscal 1999 to eliminate such defaults through the end of the Company's fiscal
year 1999 (December 25, 1999). Although most of the conditions for the
transaction have been satisfied, the necessary financing arrangements are not
yet complete and a closing date has not been set. The closing of the transaction
will result in the repayment of the revolving line of credit at that time.
As of December 26, 1998, the Company had a $22.0 million unsecured
revolving line of credit. The revolving credit agreement contains restrictions
relating to future indebtedness, liens, investments, distributions, the merger,
acquisition or sale of assets and certain leasing transactions. The agreement
also requires the maintenance of certain financial ratios and covenants, the
most restrictive being a debt to net worth ratio. There is a fee of 3/8% of the
unused portion of the revolving line of credit. Available unused borrowings
totaled approximately $8.5 million at December 27, 1997 and $3.6 million at
December 26, 1998. At December 26, 1998 and December 27, 1997 the Company had
outstanding letters of credit against the revolving line of credit aggregating
$1.1 million and $1.2 million, respectively. Interest is calculated on the $3.5
million term loan at the lower of prime plus .25% or LIBOR + 2.75%.
Interest-only payments are due under the revolving credit line monthly, in
arrears, with principal balance payable at maturity on December 31, 1999.
54
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July, 1995 the Company obtained an industrial development bond issued
by the City of Mexico, Missouri, secured by a $8.7 million letter of credit with
a commercial bank. The Bond was retired in full in March 1998 subsequent to the
sale of the Mexico, Missouri manufacturing facility.
On July 24, 1996, the Company issued $15 million senior subordinated
debentures maturing in July, 2000. The debentures accrue interest at varying
fixed rates over the four year term, ranging from 11.25% to 14.0%. In connection
with the private placement, warrants with an exercise price of $5.62 per share
were issued to purchase between 400,000 and 580,000 shares of the Company's
Class A Common Stock, depending on the term which the debentures remain
outstanding and certain future events. At December 26, 1998, 210,000 warrants
were issued and outstanding, all of which were vested.
The Company has recognized interest expense of $5.1 million, $7.2 million
and $6.4 million as of December 28, 1996, December 27, 1997, and December 26,
1998, respectively.
Maturities of debt outstanding at December 26, 1998 are as follows (in
thousands):
Company's Fiscal Year
- ---------------------
1999.......................... $ 41
2000.......................... 34,043
2001.......................... 46
Thereafter.................... -
-------
$34,130
=======
9. Convertible Subordinated Notes
In December 1993, the Company issued $30.0 million of its unsecured 4.75%
Convertible Subordinated Notes due 2001 ("1993 Notes"). The 1993 Notes are
convertible at the holders' option into shares of the Company's Class A Common
Stock at $25.50 per share. In December 1997, the Company could have, at its
option, redeemed all or a part of the outstanding 1993 Notes upon payment of a
premium. The Company did not redeem all or part of the outstanding notes. The
note agreement requires the Company to maintain minimum permanent capital, as
therein defined.
10. Commitments
The Company is obligated under noncancelable operating leases for a
production facility, commissaries and retail stores. Lease terms are generally
for ten years with renewal options at certain locations and generally require
the Company to pay a proportionate share of real estate taxes, insurance, common
area and other operating costs. Substantially all store leases provide for
contingent rental payments based on sales in excess of specified amounts.
55
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate minimum requirements under these leases are, as of December 26,
1998, approximately as follows (in thousands):
Saint Louis
Bread Au Bon Pain Total
----------- ----------- -----
1999....................... $ 5,500 $15,327 $ 20,827
2000....................... 5,201 16,396 21,597
2001....................... 4,097 14,379 18,476
2002....................... 3,802 12,264 16,066
2003....................... 3,541 9,849 13,390
Thereafter................. 10,615 29,861 40,476
-------- ------- --------
$ 32,756 $98,076 $130,832
======== ======= =========
Rental expense under long-term leases was approximately $29.3 million,
$24.5 million and $19.7 million in 1996, 1997 and 1998, respectively, which
included contingent rentals of approximately $3.0 million, $3.0 million and $3.1
million, respectively.
11. Income Taxes Payable
The benefit from income taxes in the consolidated statements of operations
is comprised of the following (in thousands):
December 28, December 27, December 26,
1996 1997 1998
------------ ----------- ------------
Current:
Federal............... $(1,650) $ 259 $ -
State................. (838) 132 1,057
------- ------- --------
(2,488) 391 1,057
------- ------- --------
Deferred:
Federal............... (365) (1,433) (8,220)
State................. (65) (450) 1,631
------- ------- --------
(430) (1,883) (6,589)
------- ------- --------
Total benefit from
income taxes.......... $(2,918) $(1,492) $ (5,532)
======= ======= ========
A reconciliation of the statutory federal income tax rate and the
effective tax rate as a percentage of pretax income is as follows:
1996 1997 1998
-------- -------- ------
Statutory rate (benefit)........... (34.0)% 34.0% (34.0)%
State income taxes, net of
federal tax benefit.............. 2.2 (432.8) 1.7
Charitable contributions........... (3.7) (89.9) (0.7)
Company-owned Life Insurance
(See Note 12)...................... (15.4) (451.0) (4.4)
Non-deductible goodwill and meals
and entertainment................ 9.1 51.0 0.8
Other, net......................... 1.8 (.4) 2.1
Change in valuation allowance...... - 415.4 13.2
----- ------- ------
(40.0)% (473.7)% (21.3)%
===== ====== ======
56
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of the significant temporary differences which comprise
the deferred tax assets are as follows (in thousands):
1997 1998
------ ------
Current assets:
Receivables reserve..................... $ 56 $ -
Accrued expenses........................ 544 -
Net operating loss carry forward........ - 1,500
------ ------
600 1,500
Non-current assets/liabilities:
Property, plant and equipment........... 443 (190)
Accrued expenses........................ 1,135 9,215
Goodwill................................ (1,648) (1,868)
Tax credit carried forward.............. 3,368 4,941
Net operating loss carried forward...... 4,484 4,485
Charitable contribution carried forward. 296 141
Other reserves.......................... (8) 452
------ -------
8,070 17,176
Total deferred tax asset.............. 8,670 18,676
Valuation allowance................... (1,308) (4,742)
------ -------
Total net deferred tax asset.............. $7,362 $13,934
====== =======
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The valuation allowance is
primarily attributable to the potential for the non-deductibility of capital
losses related to the taxable loss on sale of the Au Bon Pain Division and the
expectation that all deferred state tax assets will be unrealizable following
the sale. The Company estimates that after filing its federal income tax returns
for the year ended December 26, 1998, it will have net operating losses of
$8,500,000 which can be carried forward twenty years to offset Federal taxable
income. The Company has Federal jobs tax credit carryforwards of approximately
$1,200,000 which expire in the years 2009-2010. In addition, the Company has
Federal alternative minimum tax credit carryforwards of approximately $3,500,000
which are available to reduce future regular Federal income taxes over an
indefinite period. The Company reevaluates the positive and negative evidence
impacting the realizability of its deferred income tax assets on an annual
basis.
12. Deposits and Other
During fiscal 1997, the Company established a $4.3 million deposit with
its distributor. This financial arrangement allows the Company to receive lower
distribution costs. The savings exceed the carrying value of the deposit. The
deposit is flexible and the Company may at times decrease the amount on deposit,
at its discretion.
During fiscal year 1994, the Company established a company-owned life
insurance program ("COLI") covering a substantial portion of its employees. At
December 26, 1998, the cash surrender value of $75.4 million and the insurance
policy loans of $73.2 million were netted and included in other assets on the
consolidated balance sheet. The loans
57
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are collateralized by the cash values of the underlying life insurance policies
and require interest payments at a rate of 9.9%. Tax law changes adopted as part
of the Health Insurance Portability and Accountability Act significantly reduced
the level of tax benefits recognized under the Company's COLI program in the
third quarter of 1996. The Company included $0.3 million of expenses in other
(income) expense, net, relating to COLI in 1998.
In the third quarter of 1997, the Company sold its interest in Peet's
Coffee and Teas, Incorporated back to Peet's for $2 million in cash, resulting
in a pre-tax gain of $930,000. The gain was recognized as a component of other
expense, net.
13. Stockholders' Equity
Class B Preferred Stock
In April 1994, the Company issued 20,000 shares of Class B Preferred Stock
(Series 1) as part of the ABP Midwest acquisition. In 1997 these shares were
converted to Class A Common Stock.
Common Stock
Each share of Class B Common Stock has the same dividend and liquidation
rights as each share of Class A Common Stock. The holders of Class B Common
Stock are entitled to three votes for each share owned. The holders of Class A
Common Stock are entitled to one vote for each share owned. Each share of Class
B Common Stock is convertible, at the shareholder's option, into Class A Common
Stock on a one-for-one basis. The Company had reserved at December 26, 1998,
7,589,719 shares of its Class A Common Stock for issuance upon conversion of
Class B Common Stock and exercise of awards granted under the Company's 1992
Equity Incentive Plan, Formula Stock Option Plan for Independent Directors and
conversion of the 1993 Notes (see Note 9).
Registration Rights
Certain holders of Class A and Class B Common Stock, pursuant to stock
subscription agreements, can require the Company, under certain circumstances,
to register their shares under the Securities Act of 1933 or have included in
certain registrations all or part of such shares, at the Company's expense.
1992 Equity Incentive Plan
In May 1992, the Company adopted its Equity Incentive Plan ("Equity Plan")
to replace its Non-Qualified Incentive Stock Option Plan. Under the Equity Plan,
a total of 950,000 shares of Class A Common Stock was initially reserved for
awards under the Equity Plan. The Equity Plan was amended by the Board of
Directors and the stockholders in May 1994 and June 1997 to increase the number
of shares available thereunder from 950,000 to 2,500,000, and from 2,500,000 to
4,300,000 respectively. Awards under the Equity Plan can be in the form of stock
options (both qualified and non-qualified), stock appreciation rights,
performance shares, restricted stock or stock units.
58
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the Equity Plan and its predecessor is summarized below:
Weighted Average
Shares Exercise Price
----------- ----------------
Outstanding at December 30, 1995 1,431,437 $ 7.32
Granted....................... 742,345 $ 7.67
Exercised..................... (30,200) $ 4.87
Canceled...................... (211,548) $ 7.92
---------- ------
Outstanding at December 28, 1996 1,932,034 $ 7.42
Granted....................... 1,226,169 $ 7.49
Exercised..................... (23,148) $ 6.56
Canceled...................... (143,537) $ 8.05
---------- ------
Outstanding at December 27, 1997 2,991,518 $ 7.44
========== ======
Granted....................... 841,583 $ 8.84
Exercised..................... (151,060) $ 6.69
Canceled...................... (376,710) $ 9.17
---------- ------
Outstanding at December 26, 1998 3,305,331 $ 8.18
========== ======
Formula Stock Option Plan for Independent Directors
On January 27, 1994, the Company's Board of Directors authorized the
Formula Stock Option Plan for Independent Directors, as defined in the
agreement. This plan authorized a one-time grant of an option to purchase 10,000
shares of the Company's Class A Common Stock at its closing price on January 26,
1994. The plan also allows for independent directors elected after that time to
receive a similar option at the closing price for the day immediately preceding
the individual's election to the board.
Each independent director who is first elected as such after the effective
date of the Directors' Plan shall receive, as of the date he or she is so
elected, a one-time grant of an option to purchase 5,000 shares of Class A
Common Stock at a price per share equal to the closing price of the Class A
Common Stock as reported by the NASDAQ/National Market System for the trading
day immediately preceding the date of the person's election to the board.
In addition, all independent directors serving in such capacity as of the
last day of each fiscal year commencing with the fiscal year ending December 31,
1994 receive an option to purchase 5,000 shares of Class A Common Stock at the
closing price for the prior day.
Each option granted is fully vested at the grant date, and is exercisable,
either in whole or in part, for 10 years following the grant date. The Company
has granted 113,248 options under this plan as of December 26, 1998.
59
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", which is effective for the Company's financial
statements for fiscal years beginning after December 15, 1995. SFAS 123 allows
companies to either account for stock-based compensation under the new
provisions of SFAS 123 or under the provisions of Accounting Principles Board
Opinion No. 25 ("APB25"), "Accounting for Stock Issued to Employees", but
requires pro-forma disclosure in the footnotes to the financial statements as if
the measurement provisions of SFAS 123 had been adopted. The Company has elected
the disclosure-only alternative and, accordingly, no compensation costs have
been recognized for the stock option plans. Had compensation costs for the
Company's stock option plans been determined based on the fair value at the
grant date for awards since 1995 consistent with the provisions of SFAS 123, the
Company's net income (loss) for the years ended December 28, 1996 and December
27, 1997 and December 26, 1998 would have been as follows:
1996 1997 1998
------------------------- ------------------------- -----------------------
Net Loss Net Loss Net Income Net Income Net Loss Net Loss
(in thousands) Per Share (in thousands) Per Share (in thousands) Per Share
As
Reported $(4,365) $(.37) $ 1,807 $ .15 $(20,494) $(1.72)
Pro
Forma $(4,965) $(.42) $ 953 $ .08 $(21,642) $(1.81)
The effects of applying SFAS 123 in this pro-forma disclosure are not
likely to be representative of the effects on reported net income for future
years. SFAS 123 does not apply to awards prior to 1995 and additional awards in
future years are anticipated.
The fair value of the options granted during 1996, 1997 and 1998 is $3.46
per share, $3.69 per share and $4.12 per share, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 35% in 1996, 40% in 1997 and 40%
in 1998, risk-free interest rate of 5.99% in 1996, 6.38% in 1997 and 5.14% in
1998, and an expected life of 6 years.
60
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning currently
outstanding and exercisable options:
Options Options
Outstanding Exercisable
--------------------------------- -----------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Price Outstanding Life Price Exercisable Price
- ----------- ------------ ----------- -------- ----------- ---------
$ 4.50- 6.75 555,860 5.17 $ 6.35 121,047 $ 6.26
$ 6.75-10.13 2,468,726 6.70 $ 7.50 1,289,086 $ 7.40
$10.13-15.19 279,569 9.39 $11.05 7,685 $13.01
$15.19-21.25 1,176 4.92 $21.25 1,176 $21.45
--------- ---- ------ --------- ------
3,305,331 7.59 $ 7.61 1,418,994 $ 7.34
Options vest over a five year period and must be exercised within ten
years from the date of the grant. Of the options at December 28, 1996, December
27, 1997 and December 26, 1998, 927,325, 1,168,134 and 1,418,994, respectively,
were vested and exercisable with a weighted average exercise price at December
28, 1996, December 27, 1997 and December 26, 1998 of $7.04, $7.20 and $7.34,
respectively.
1992 Employee Stock Purchase Plan
In May 1992, the Company adopted its 1992 Employee Stock Purchase Plan
("1992 Purchase Plan") to replace its Employee Stock Purchase Plan. The 1992
Purchase Plan was amended in June 1997 by the Board of Directors and
Stockholders to increase the number of shares of Class A Common Stock reserved
for issuance from 150,000 to 350,000. The 1992 Purchase Plan gives eligible
employees the option to purchase Class A Common Stock (total purchases in a year
may not exceed 10% of an employee's prior year compensation) at 85% of the fair
market value of the Class A Common Stock at the date of purchase. There were
39,838 and 36,474 shares purchased with a weighted average fair value of
Purchase Rights of $1.16 and $1.25 as of December 27, 1997 and December 26,
1998, respectively.
14. Employee Benefit Plans
Employee Savings Plan
The Au Bon Pain Employee 401(k) Plan ("Savings Plan") was adopted by the
Company in 1991 under Section 401(k) of the Internal Revenue Code of 1986, as
amended. All employees of the Company, including executive officers, are
eligible to participate in the Savings Plan. A participating employee may elect
to defer on a pre-tax basis up to 15% of his or her salary. This amount is
contributed to the Savings Plan. All amounts vest immediately and are invested
in various funds as directed by the participant. The full amount in a
participant's account will be distributed to a participant upon termination of
employment, retirement, disability or death. The Company does not currently
contribute to the Savings Plan.
The Saint Louis Bread Company Employee 401(k) Plan ("Saint Louis Bread
Savings Plan") adopted by the former Saint Louis Bread Company in 1993 under
Section 401(k) of the Internal Revenue Code of 1986, as amended. In 1997 the
"Saint Louis Bread Savings Plan" was merged into the Au Bon Pain "Savings Plan".
Plan participants of the "Saint Louis Bread Savings Plan" retained the matching
contributions made through 1996 with a vesting schedule of seven years. There
has been no further matching in 1997 and 1998.
61
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Legal Proceedings
During the third quarter of 1997, the Company entered into a definitive
agreement to settle a lawsuit filed by a former vendor of the Company. The
Company recognized a charge of $675,000 in the third quarter of 1997 as a
component of other expense (income), net, to cover the settlement and other
expenses incurred in connection therewith.
16. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
For the fiscal years ended
------------------------------
Dec. 28, Dec. 27, Dec. 26,
1996 1997 1998
-------- -------- ------
Net income (loss) used in net
income (loss) per common
share - basic................... $(4,365) $ 1,807 $(20,494)
Net income (loss) used in net
income (loss) per common
share - diluted................. $(4,365) $ 1,807 $(20,494)
Weighted average number of
shares outstanding - basic...... 11,705 11,766 11,943
Effect of dilutive securities:
Employee stock options...... - 42 -
Stock warrants.............. - 105 -
------- ------- --------
Weighted average number of
shares outstanding - diluted.... 11,705 11,913 11,943
Net income (loss) per common
share - basic................... $ (0.37) $ 0.15 $ (1.72)
Net income (loss) per common
share - diluted................. $ (0.37) $ 0.15 $ (1.72)
During 1996, 1997 and 1998, options to purchase 1,176,000 shares of common
stock at $25.50 per share were outstanding in conjunction with the issuance of
$30 million of convertible subordinated notes (see Note 9). These shares were
not included in the computation of diluted earnings per share for the fiscal
years ended December 28, 1996, December 27, 1997 or December 26, 1998 because
the addition of interest expense, after the effect of income taxes, of $855,000
to net income (loss) would have been antidilutive.
During 1996 and 1998, options to purchase 422,080 and 248,450 shares of
common stock at an average price of $6.69 and $5.77 per share, respectively, and
warrants to purchase 0 and 96,000 shares of common stock at $5.62 per share were
outstanding but were not included in the computation of diluted earnings per
share for the fiscal years ended December 28, 1996 or December 26, 1998 because
the effect would have been antidilutive.
17. Subsequent Event
The Company submitted the matter of the Sale of the Au Bon Pain Division
to a vote of security holders on March 4, 1999. The security holders voted in
favor of the Sale.
62
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Information required by Part III (items 10 through 13) is incorporated by
reference to the Company's definitive proxy statement for its 1999 annual
meeting of stockholders which is expected to be filed with the Securities and
Exchange Commission on or before April 25, 1999. If for any reason such a
statement is not filed within such period, this report will be appropriately
amended.
PART IV
ITEM 14. EXIHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following described consolidated financial statements of the Company
are included in this report:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 27, 1997 and December 26, 1998.
Consolidated Statements of Operations for the fiscal years ended December
28, 1996, December 27, 1997 and December 26, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended December
28, 1996, December 27, 1997 and December 26, 1998.
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 26, 1996, December 27, 1997 and December 26, 1998.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule for the Company is filed
herewith:
SCHEDULE II - Valuations and Qualifying Accounts.
AU BON PAIN COMPANY., INC.
63
AU BON PAIN CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VALUATION AND QUALIFYING ACCOUNTS.
(in thousands)
Balance at Balance
beginning at end
Description of period Additions Deductions of period
--------- --------- ---------- ---------
Allowance for Doubtful accounts
Fiscal Year Ended Dec 28, 1996 $ 60 $ 69 $25 $ 104
Fiscal Year Ended Dec 27, 1997 $ 104 $ 49 $19 $ 134
Fiscal Year Ended Dec 26, 1998 $ 134 $ 96 $22 $ 208
Valuation Allowance
Fiscal Year Ended Dec 27, 1997 $ - $1,308 $ - $1,308
Fiscal Year Ended Dec 26, 1998 $1,308 $3,434 $ - $4,742
64
All other schedules are omitted because not applicable or not required
by Regulation S-X.
3. EXHIBITS.
--------
Exhibit
NUMBER DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement by and among Au Bon Pain Co., Inc., ABP
Midwest Manufacturing Co., Inc. and Bunge Foods Corporation dated
as of February 11, 1998; Amendment to Asset Purchase Agreement,
dated as of March 23, 1998. Incorporated by reference to Exhibit
2.1 to the Company's Annual Report on Form 10-K for the year
ended December 27, 1997.
2.2.1 Stock Purchase Agreement dated August 12, 1998 by and between the
Company, ABP Holdings, Inc. ("ABPH") and ABP Corporation.
Incorporated by reference to the Company's Report on Form 8-K filed
August 21, 1998.
2.2.2 Amendment to Stock Purchase Agreement dated October 28, 1998 by and
among the Company, ABPH and ABP Corporation. Incorporated by
reference to the Company's Report on Form 8-K filed November 6,
1998.
3.1 Certificate of Incorporation of Registrant, as amended to June 2,
1991. Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.1 Certificate of Amendment to Certificate of Incorporation, dated and
filed June 3, 1991. Incorporated by reference to Exhibit 3.1.1 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
3.1.2 Certificate of Amendment to the Certificate of Incorporation filed
on June 2, 1994. Incorporated by reference to Exhibit 3.1.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
3.1.3 Certificate of Designations, Preferences and Rights of the Class B
Preferred Stock (Series 1), filed November 30, 1994. Incorporated
by reference to Exhibit 3.1.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
3.2 Bylaws of Registrant, as amended to date. Incorporated by reference
to Registrant's registration statement on Form S-1 (File No.
33-40153), Exhibit 3.2.
4.1.1 Amended and Restated Revolving Credit Agreement dated as of
February 13, 1998 among the Issuer, Saint Louis Bread Company,
Inc., ABP Midwest Manufacturing Co., Inc., BankBoston, N.A.,
USTrust and BankBoston N.A. as Agent. Incorporated by reference to
Exhibit 4.1.1 to the Company's Annual Report on Form 10-K for the
year ended December 27, 1997.
4.1.2 Amended and Restated Revolving Credit Note dated as of February 13,
1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest
Manufacturing Co., Inc. in favor of BankBoston, N.A. Incorporated
by reference to Exhibit 4.1.2 to the Company's Annual Report on
Form 10-K for the year ended December 27, 1997.
4.1.3 Amended and Restated Revolving Credit Note dated as of February 13,
1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest
Manufacturing Co., Inc. in favor of USTrust. Incorporated by
reference to Exhibit 4.1.3 to the Company's Annual Report on Form
10-K for the year ended December 27, 1997.
4.1.4 First Amendment to Amended and Restated Revolving Credit Agreement
dated as of June 30, 1998.*
4.1.5 Second Amendment and Waiver to Amended and Restated Revolving
Credit Agreement dated as of October 14, 1998.*
4.1.6 Third Amendment and Waiver to Amended and Restated Revolving Credit
Agreement dated as of January 20, 1999.*
4.1.7 Fourth Amendment to Amended and Restated Revolving Credit Agreement
dated as of March 25, 1999.*
4.2 Form of 4.75% Convertible Subordinated Note due 2001. Incorporated
by reference to Registrant's Form 8-K filed December 22, 1993,
Exhibit 4.
65
10.3.3 Registrant's 1992 Employee Stock Purchase Plan. Incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended December 30, 1995.
10.3.4 Registrant's Formula Stock Option Plan for Independent Directors
and form of option agreement thereunder, as amended. Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the
year ended December 30, 1995.
10.4 Amended and Restated Coffee Supply Agreement by and among
Registrant and Peet's Companies, Inc., Peet's Coffee and Tea, Inc.,
and Peet's Trademark Company, dated as of the 26th day of October,
1994. Incorporated by reference to Exhibit 10.8 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.5 Indenture of Trust dated as of July 1, 1995 by and between the
Industrial Development Authority of the City of Mexico, Missouri
and Mark Twain Bank, as Trustee. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December
30, 1995.
10.5.1 Loan Agreement dated as of July 1, 1995 by and between the
Industrial Development Authority of the City of Mexico, Missouri
and ABP Midwest Manufacturing Co., Inc. Incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended
December 30, 1995.
10.5.2 Promissory Note issued by ABP Midwest Manufacturing Co., Inc. in
the face amount of $8,741,370. Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended December
30, 1995.
10.6.1 Employment Agreement between the Registrant and Richard Postle.
Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 30, 1995.+
10.6.2 Employment Agreement between the Registrant and Robert Taft.
Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 28, 1996.+
10.6.3 Employment Agreement between the Registrant and Maxwell Abbott.
Incorporated by reference to Exhibit 10.6.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 28, 1996.+
10.6.4 Employment Letter between the Registrant and Samuel Yong.
Incorporated by reference to Exhibit 10.6.4 of the Registrant's
Annual Report on Form 10-K for the year ended December 28, 1996.+
10.7.1 Form of Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied
Capital Corporation, Allied Capital Corporation II, and Capital
Trust Investments, Ltd. Incorporated by reference to Exhibit 10.7.1
of the Registrant's Annual Report on Form 10-K for the year ended
December 28, 1996.
10.7.2 Form of Contingent Stock Purchase Warrant from Au Bon Pain Co.,
Inc. to Allied Capital Corporation, Allied Capital Corporation II
and Capital Trust Investments, Ltd. Incorporated by reference to
Exhibit 10.7.2 of the Registrant's Annual Report on Form 10-K for
the year ended December 28, 1996.
10.7.3 Form of Stock Purchase Warrant from Au Bon Pain Co, Inc. to Princes
Gate Investors, L.P., Acorn Partnership I L.P., PG Investments
Limited, PGI Sweden AB and Gregor Von Open. Incorporated by
reference to Exhibit 10.7.3 of the Registrant's Annual Report on
Form 10-K for the year ended December 28, 1996.
66
10.7.4 Registration Rights Agreement dated as of July 24, 1996 among
Allied Capital Corporation, Allied Capital Corporation II, Capital
Trust Investments, Ltd., Princes Gate Investors, L.P., Acorn
Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, Gregor
Von Open and Au Bon Pain Co., Inc., Incorporated by reference to
Exhibit 10.7.4 of the Registrant's Annual Report on Form 10-K for
the year ended December 28, 1996.
10.8.4 Form of Rights Agreement, dated as of October 21, 1996 between the
Registrant and State Street Bank and Trust Company. Incorporated by
reference to the Registrant's Registration Statement on Form 8-A
(File No. 000-19253).
10.9 Bakery Product Supply Agreement by and between Bunge Foods
Corporation and Saint Louis Bread Company, Inc. dated as of March
23, 1998. Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 27, 1997.
10.10 Bakery Product Supply Agreement by and between Bunge Foods
Corporation and Au Bon Pain Co., Inc. dated as of March 23, 1998.
Incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 27, 1997.
10.11 Executive Employment Agreement between the Company and Sam Yong
dated June 16, 1998. Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the period ended July 11, 1998.+
21 Registrant's Subsidiaries.*
67
23.1 Consent of PricewaterhouseCoopers L.L.P.*
27 Financial Data Schedule.*
- --------------------------
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit to
this Form 10-K pursuant to Item 14(c).
(b) Reports on Form 8-K.
During the last quarter of the fiscal year covered by this report, the
Company filed a report on Form 8-K on November 6, 1998 relative to Item 2.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AU BON PAIN CO., INC.
By: /S/ LOUIS I. KANE
----------------------------------
Louis I. Kane
Co-Chairman
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the date indicated:
Signature Title Date
- --------- ----- ----
/S/ LOUIS I. KANE Co-Chairman March 25, 1998
- --------------------------
Louis I. Kane
/S/ RONALD M. SHAICH Co-Chairman and March 25, 1998
- -------------------------- Principal Executive
Ronald M. Shaich Officer
/S/ FRANCIS W. HATCH Director March 25, 1998
- --------------------------
Francis W. Hatch
/S/ GEORGE E. KANE Director March 25, 1998
- --------------------------
George E. Kane
/S/ JAMES R. MCMANUS Director March 25, 1998
- --------------------------
James R. McManus
/S/ HENRY J. NASELLA Director March 25, 1998
- --------------------------
Henry J. Nasella
/S/ ANTHONY J. CARROLL Senior Vice President, March 25, 1998
- -------------------------- Treasurer and Principal
Anthony J. Carroll Accounting Officer