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EX-21 - REGISTRANT'S SUBSIDIARIES - PANERA BREAD CO | c96784exv21.htm |
EX-32 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - PANERA BREAD CO | c96784exv32.htm |
EX-31.2 - CERTIFICATION - PANERA BREAD CO | c96784exv31w2.htm |
EX-31.1 - CERTIFICATION - PANERA BREAD CO | c96784exv31w1.htm |
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - PANERA BREAD CO | c96784exv23w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2009
or
o | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OT 1934 |
For the transition period from
to
Commission file number 0-19253
Panera Bread Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
04-2723701 (I.R.S. Employer Identification No.) |
|
6710 Clayton Rd., Richmond Heights, MO (Address of Principal Executive Offices) |
63117 (Zip Code) |
(314) 633-7100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
Class A Common Stock, $.0001 par value per share | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None.
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
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 registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants voting Class A and Class B Common Stock held by
non-affiliates as of June 23, 2009 was $1,048,765,579. There is no public trading market for the
registrants Class B Common Stock.
Number of shares outstanding of each of the registrants classes of common stock as of February 22,
2010: 30,423,118 shares of Class A Common Stock ($.0001 par value) and 1,392,107 shares of Class B
Common Stock ($.0001 par value).
Part III of this Annual Report incorporates by reference certain information from the registrants
definitive proxy statement for the 2010 annual meeting of shareholders, which the registrant will
file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days
after the close of the registrants fiscal year ended December 29, 2009.
TABLE OF CONTENTS
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REGISTRANT'S SUBSIDIARIES | ||||||||
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | ||||||||
CERTIFICATION | ||||||||
CERTIFICATION | ||||||||
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 |
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Forward-Looking Statements
Matters discussed in this report and in our public disclosures, whether written or oral, relating
to future events or our future performance, including any discussion express or implied, of our
anticipated growth, operating results, future earnings per share, plans and objectives, contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, or Exchange Act. These statements are often
identified by the words believe, positioned, estimate, project, target, continue,
intend, expect, future, anticipate, and similar expressions that are not statements of
historical fact. These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing
of certain events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those set forth under
Risk Factors and elsewhere in this report and in our other public filings with the Securities and
Exchange Commission, or SEC. It is routine for internal projections and expectations to change as
the year or each quarter in the year progresses, and therefore it should be clearly understood that
all forward-looking statements and the internal projections and beliefs upon which we base our
expectations included in this report or other periodic reports are made only as of the date made
and may change. While we may elect to update forward-looking statements at some point in the
future, we do not undertake any obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
PART I
ITEM 1. | BUSINESS |
General
Panera Bread Company and its subsidiaries, referred to as Panera Bread, Panera, the Company,
we, us, and our, is a national bakery-cafe concept with 1,380 Company-owned and
franchise-operated bakery-cafe locations in 40 states and in Ontario, Canada. We have grown from
serving approximately 60 customers a day at our first bakery-cafe to currently serving nearly six
million customers a week system-wide, becoming one of the largest food service companies in the
United States. We believe our success is rooted in our ability to create long-term dining concept
differentiation. We operate under the Panera Bread®, Saint Louis Bread Co.® and Paradise Bakery &
Café® trademark names.
Our bakery-cafes are principally located in suburban, strip mall and regional mall locations. We
feature high quality, reasonably priced food in a warm, inviting, and comfortable environment. With
our identity rooted in handcrafted, fresh-baked, artisan bread, we are committed to providing great
tasting, quality food that people can trust. Nearly all of our bakery-cafes have a menu highlighted
by antibiotic-free chicken, whole grain bread and select organic and all-natural ingredients, with
zero grams of artificial trans fat per serving, which provide flavorful, wholesome offerings. Our
menu includes a wide variety of year-round favorites complemented by new items introduced
seasonally with the goal of creating new standards in everyday food choices. In neighborhoods
across this country and in Ontario, Canada, our customers enjoy our warm and welcoming environment
featuring comfortable gathering areas, relaxing decor, and free internet access. Our bakery-cafes
routinely donate bread and baked goods to community organizations in need.
We operate as three business segments: Company bakery-cafe operations, franchise operations, and
fresh dough operations. As of December 29, 2009, our Company bakery-cafe operations segment
consisted of 585 Company-owned bakery-cafes, all located in the United States, and our franchise
operations segment consisted of 795 franchise-operated bakery-cafes, located throughout the United
States and in Ontario, Canada. As of December 29, 2009, our fresh dough operations segment, which
supplies fresh dough items daily to most Company-owned and franchise-operated bakery-cafes,
consisted of 23 fresh dough facilities (21 Company-owned and two franchise-operated). In fiscal
2009, our revenues were $1,353.5 million, consisting of $1,153.3 million of Company-owned
bakery-cafe sales, $78.4 million of franchise royalties and fees, and $121.9 million of fresh dough
sales to franchisees. Franchise-operated bakery-cafe sales, as reported by franchisees, were
$1,640.3 million in fiscal 2009. See Note 19 to our consolidated financial statements for further
segment information.
Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 29,
2009 and December 25, 2007 had 52 weeks. Our fiscal year ended December 30, 2008 had 53 weeks,
with the fourth quarter comprising 14 weeks.
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Concept and Strategy
Bread is our platform and the entry point to the Panera experience at our bakery-cafes. It is the
symbol of Panera quality and a
reminder of Panera Warmth, the totality of the experience the customer receives and can take home
to share with friends and family. We strive to offer a memorable experience with superior customer
service. Our associates are passionate about sharing their expertise and commitment with our
customers. We strive to achieve what we call Concept Essence, our blueprint for attracting and
retaining our targeted customers that we believe differentiates us from our competitors. Concept
Essence begins with artisan bread, quality products and a warm, friendly and comfortable
environment. It calls for each of our bakery-cafes to be a place customers can trust to serve high
quality food. Bread is our passion, soul, and expertise, and the platform that makes all of our
other food special.
We believe our competitive strengths include more than just great food at the right price. We are
committed to creating an ambiance in our bakery-cafes and a culture within Panera that is warm,
inviting and embracing. We design each bakery-cafe to provide a distinctive environment, in many
cases using fixtures and materials complementary to the neighborhood location of the bakery-cafe,
as a way to engage customers. The distinctive design and environment of our bakery-cafes offer an
oasis from the rush of daily life, where our associates are trained to greet our customers by name
and have the skills, expertise and personalities to make each visit a delight. Many of our
bakery-cafes incorporate the warmth of a fireplace and cozy seating areas or outdoor cafe seating,
which facilitate utilization as a gathering spot. Our bakery-cafes are designed to visually
reinforce the distinctive difference between our bakery-cafes and other bakery-cafes and
restaurants.
Our menu, operating systems, design, and real estate strategy allow us to compete successfully in
several segments of the restaurant business: breakfast, AM chill, lunch, PM chill, dinner, and
take home, through both on-premise sales and Via Panera® catering. We compete with specialty food,
casual dining, and quick-service restaurant retailers, including national, regional and
locally-owned restaurants. Our competitors vary across different dayparts, and we understand people
will choose a restaurant depending on individual food preferences and mood. Our goal is to be the
best competitive alternative for those customers craving soup, salad, or a sandwich.
In addition to the dine-in and take out business, we offer Via Panera, a nation-wide catering
service that provides breakfast assortments, sandwiches, salads or soups using the same
high-quality, fresh ingredients enjoyed in our bakery-cafes. Via Panera is supported by a national
sales infrastructure and we believe it represents a meaningful growth opportunity for our business.
Menu
Our value-oriented menu is designed to provide our target customers with affordably priced products
built on the strength of our bakery expertise. We feature a menu containing proprietary items
prepared with high-quality, fresh ingredients, including our anti-biotic free chicken, as well as
unique recipes and toppings designed to provide appealing, flavorful products we believe our
customers will crave.
Our key menu groups are fresh baked goods, including a variety of freshly baked bagels, breads,
muffins, scones, rolls, and sweet goods, made-to-order sandwiches on freshly baked breads, hearty,
unique soups, freshly prepared and hand-tossed salads, and custom roasted coffees and cafe
beverages such as hot or cold espresso and cappuccino drinks and smoothies.
We regularly review and update our menu offerings to satisfy changing customer preferences. We seek
to continuously improve our products, or develop new ones, such as our heart-of-the-romaine
lettuce, reformulated French baguette, and our new Napa Almond Chicken Salad sandwich.
New product rollouts are integrated into periodic or seasonal menu rotations, referred to as
Celebrations. Examples of products we introduced in fiscal 2009 include the Chopped Cobb Salad
and Barbeque Chicken Chopped Salad, which were introduced during our summer salad celebration. The
Breakfast Power sandwich was also added to complement the breakfast menu and Macaroni & Cheese was
added to complement our kids menu, as well as our lunch and dinner dayparts. We also introduced a
new line of brownies and blondies, along with our Cinnamon Crunch Bogels.
We believe our menu innovation is one reason our value scores with customers remain so strong.
Zagats 2009 consumer-generated National Restaurants Chains Survey for eating on-the-go rates us
number one among chain restaurants with fewer than 5,000 locations in the following categories:
Most Popular, Best Healthy Option, Best Salad and Best Facilities. In 2009, we were also named
number one Healthiest for Eating on the Go by Health magazine.
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Operational Excellence
We believe operational excellence is the most important element of Panera Warmth. We believe
without strong execution and
operational skills, it is difficult to build and maintain a strong relationship with our customers.
To develop a strong connection with our customers, we need energized associates who are skilled at
and love their jobs. Additionally, we believe high-quality restaurant management is critical to our
long-term success and, as such, we provide detailed operations manuals and training to each of our
associates. We train our associates both in small group and individual settings. Our systems have
been created to educate our associates so each one is well prepared to respond to a customers
questions and create a better dining experience. Furthermore, we believe our commitment to
maintaining staffing levels and competitive compensation for our associates is fundamental to our
current and future success.
We believe in providing bakery-cafe operators the opportunity to share in the success of the
bakery-cafe. Through our Joint Venture Program, we provide selected general managers and
multi-unit managers with a multi-year bonus program (subject to annual minimums) based upon a
percentage of the cash flows of the bakery-cafe they operate. The programs five-year period
creates team stability, generally resulting in a higher level of consistency for that bakery-cafe.
It also leads to stronger associate engagement and customer loyalty. Currently, approximately fifty
percent of our Company-owned bakery-cafe operators participate in the Joint Venture Program. We
believe this program is a fundamental underpinning of our low management turnover.
Marketing
We are committed to improving the customer experience in ways we believe few in our industry have
done. We use our scale to execute a broader marketing strategy, not simply to build name
recognition and awareness but also to build deeper relationships with our target customers who we
believe will help promote our brand.
To reach our target customer group, we use a mix of the following mediums: radio, billboards,
social networking, television and in-store sampling days. We expect to continue to increase media
impressions as we strive to build deeper relationships with our customers. We believe marketing
represents an opportunity for us to further leverage our scale with our target customers and create
additional competitive advantage.
Our franchise agreements generally require our franchisees to pay us advertising fees. In fiscal
2009, our franchise-operated bakery-cafes contributed 0.7 percent of their sales to a national
advertising fund, paid us a marketing administration fee of 0.4 percent of their sales, and were
required to spend 2.0 percent of their sales on advertising in their respective local markets. We
contributed the same sales percentages from Company-owned bakery-cafes towards the national
advertising fund and marketing administration fee. For fiscal 2010, we increased the contribution
rate to the national advertising fund to 1.1 percent of sales. Under the terms of our franchise
agreements, we have the ability to increase national advertising fund contributions from current
levels up to a total of 2.6 percent of sales. The national advertising fund and marketing
administration contributions received from our franchise-operated bakery-cafes are consolidated in
our financial statements with amounts contributed by us.
We have established and may in the future establish local and/or regional advertising associations
covering specific geographic regions for the purpose of promoting and advertising the bakery-cafes
located in that geographic market. If we establish an advertising association in a specific market,
the franchise group in that market must participate in the association, including making
contributions in accordance with the advertising association bylaws. Franchise contributions to the
advertising association are credited towards the franchise groups required local advertising
spending.
Capital Resources and Deployment of Capital
Our primary capital resource is cash generated by operations. We also have access to a $250 million
credit facility on which, as of December 29, 2009, we had no borrowings outstanding.
Our on-going capital requirements, which may include maintenance and remodel expenditures,
development costs for opening new bakery-cafes and fresh dough facilities, and the acquisition of
additional bakery-cafes, will continue to be significant. However, we believe our cash flow from
operations and available borrowings under our existing credit facility will be sufficient to fund
our capital requirements for the foreseeable future.
In evaluating potential new locations, we study the surrounding trade area, demographic information
within the most recent year, and publicly available information on competitors. Based on this
analysis, including the utilization of proprietary, predictive modeling, we estimate projected
sales and a targeted return on investment. We also employ a disciplined capital expenditure
process where we focus on occupancy and development costs in relation to the market, designed to
ensure we have the right size bakery-cafe and costs in the right market.
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Our concept has proven successful in a number of different types of locations, such as in-line or
end-cap locations in strip or power centers, regional malls, drive-through and free-standing units.
The average Company-owned bakery-cafe size is approximately 4,600 square feet as of December 29,
2009. We lease all of our bakery-cafe locations and fresh dough facilities. Lease terms for our
bakery-cafes and fresh dough facilities are generally 10 years with renewal options at most
locations, and generally require us to pay a proportionate share of real estate taxes, insurance,
common area, and other operating costs. Many bakery-cafe leases provide for contingent rental
(i.e. percentage rent) payments based on sales in excess of specified amounts. Certain of our lease
agreements provide for scheduled rent increases during the lease term or for rental payments
commencing at a date other than the date of initial occupancy.
The average construction, equipment, furniture and fixtures, and signage cost for the 30
Company-owned bakery-cafes opened in fiscal 2009 was approximately $750,000 per bakery-cafe, net of
landlord allowances and excluding capitalized development overhead.
We believe the best use of our capital is to invest in our core business, either through the
development of new bakery-cafes or through the acquisition of existing bakery-cafes from our
franchisees or other similar restaurant or bakery-cafe concepts, such as our acquisition of
Paradise Bakery & Café, Inc.
We may from time to time return capital to our shareholders. On November 17, 2009, our Board of
Directors approved a three year share repurchase program of up to $600 million of our Class A
common stock. The repurchases will be effected from time to time on the open market or in
privately negotiated transactions and we may make such repurchases under a Rule 10b5-1 Plan. This
repurchase program is reviewed quarterly by our Board of Directors and may be modified, suspended
or discontinued at any time.
Franchise Operations
Our franchisees, which as of December 29, 2009 made up approximately 57.6 percent of our
bakery-cafes, are comprised of 48 franchise groups. We are selective in granting franchises, and
applicants must meet specific criteria in order to gain consideration for a franchise. Generally,
our franchisees must be well-capitalized to open bakery-cafes, meet a negotiated development
schedule, and have a proven track record as multi-unit restaurant operators. Additional
qualifications include minimum net worth and liquidity requirements, infrastructure and resources
to meet our development schedule, and a commitment to the development of our brand. If these
qualifications are not met, we may still consider granting a franchise, depending on the market and
the particular circumstances.
As of December 29, 2009, we had 795 franchise-operated bakery-cafes open throughout the United
States and in Ontario, Canada and we have received commitments to open 240 additional
franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in
the various Area Development Agreements, referred to as ADAs, with franchisees, which provide for
the majority scheduled to open in the next four to five years. The ADAs require an area developer
to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to
develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned
locations or develop locations through new area developers in that market. We may exercise one or
more alternative remedies to address defaults by area developers, including not only development
defaults, but also defaults in complying with our operating and brand standards and other covenants
under the ADAs and franchise agreements. We may waive compliance with certain requirements under
our ADAs and franchise agreements if we determine such action is warranted under the particular
circumstances.
The revenues we receive from a typical ADA include a franchise fee of $35,000 per bakery-cafe (of
which we generally receive $5,000 at the signing of the ADA and $30,000 at or before the
bakery-cafe opening) and continuing royalties generally of 4 percent to 5 percent of sales per
bakery-cafe. Franchise royalties and fees in fiscal 2009 were $78.4 million, or 5.8 percent of our
total revenues. Our franchise-operated bakery-cafes follow the same protocol for in-store
operating standards, product quality, menu, site selection, and bakery-cafe construction as do
Company-owned bakery-cafes. Generally, franchisees are required to purchase all of their dough
products from sources approved by us. Our fresh dough facility system supplies fresh dough products
to substantially all franchise-operated bakery-cafes. We do not generally finance franchisee
construction or ADA payments. However, in fiscal 2008, to facilitate our expansion into Ontario,
Canada, we entered into a credit facility with our initial franchisee in that market. See Note 13
to our consolidated financial statements for further information regarding the credit facility with
the Canadian franchisee. From time to time and on a limited basis, we may provide certain
development or real estate services to franchisees in exchange for a payment equal to the total
costs of the services plus an additional fee. As of December 29, 2009, we did not hold an equity
interest in any of our franchise-operated bakery-cafes.
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Bakery-Cafe Supply Chain
We believe our fresh dough facility system and supply chain function provide us a competitive
advantage. We have a unique supply-chain operation in which dough for our fresh bread is supplied
daily from one of our regional fresh dough facilities to substantially all of our Company-owned and
franchise-operated bakery-cafes. As of December 29, 2009, we had 23 fresh dough facilities, 21 of
which were Company-owned, including a limited production facility that is co-located with one of
our franchised bakery-cafes in Ontario, Canada to support the franchise-operated bakery-cafes
located in that market, and two of which were franchise-operated.
Fresh dough is the key to our high-quality, artisan bread. Distribution is accomplished through a
leased fleet of temperature controlled trucks operated by our associates. As of December 29, 2009,
we leased 184 trucks. The optimal maximum distribution range is approximately 300 miles; however,
when necessary, the distribution ranges may be up to 500 miles. An average distribution route
delivers dough to seven bakery-cafes.
Our bakers work through the night shaping, scoring and glazing the dough by hand to bring our
customers fresh-baked loaves every morning and throughout the day. We believe our fresh dough
facilities have helped us and will continue to help us to ensure consistent quality at our
bakery-cafes.
We focus our growth in areas we believe allow us to continue to gain efficiencies through
leveraging the fixed cost of the fresh dough facility structure. We expect to selectively enter
new markets, which may require the construction of additional fresh dough facilities once a
sufficient number of bakery-cafes are opened to ensure efficient distribution of fresh dough.
Our supply chain management system is intended to provide bakery-cafes with high quality food from
reliable sources. We have contracted externally for the manufacture of the remaining baked goods in
the bakery-cafes, referred to as sweet goods. Sweet goods products are completed at each
bakery-cafe by professionally trained bakers. Completion includes finishing with fresh toppings and
other ingredients and baking to established artisan standards utilizing unique recipes.
We use independent distributors to distribute sweet goods products, and other materials to
bakery-cafes. With the exception of products supplied directly by the fresh dough facilities,
virtually all other food products and supplies for our bakery-cafes, including paper goods, coffee,
and smallwares, are contracted by us and delivered by vendors to an independent distributor for
delivery to the bakery-cafes. We maintain a list of approved suppliers and distributors from which
we and our franchisees must select. We leverage our size and scale to improve the quality of our
ingredients, effect better purchasing efficiency, and negotiate purchase agreements with most of
our approved suppliers to achieve cost reduction for both us and our customers.
For further information regarding our product supply, see Item 1A. Risk Factors.
Management Information Systems
Each of our Company-owned bakery-cafes have programmed point-of-sale registers which collect
transaction data used to generate pertinent information, including, among other things, transaction
counts, product mix and average check. All Company-owned bakery-cafe product prices are programmed
into the point-of-sale registers from our office headquarters. We allow franchisees access to
certain of our proprietary bakery-cafe systems and systems support. Franchisees are responsible
for providing the appropriate menu prices, discount rates and tax rates for system programming.
We use in-store enterprise application tools to assist in labor scheduling and food cost
management, to provide corporate and retail operations management quick access to retail data, to
allow on-line ordering with distributors, and to reduce managers administrative time. We use
retail data to generate daily and weekly consolidated reports regarding sales and other key
metrics, as well as detailed profit and loss statements for our Company-owned bakery-cafes.
Additionally, we monitor the average check, transaction count, product mix, and other sales trends.
We also use this retail data in our exception-based reporting tools to safeguard our cash,
protect our assets, and train our associates. Our fresh dough facilities have information systems
which accept electronic orders from our bakery-cafes and monitor delivery of the ordered product
back to our bakery-cafes. We also use proprietary on-line tools, such as eLearning, to provide
on-line training for our retail associates and on-line baking instructions for our bakers.
Most bakery-cafes also provide customers free Internet access through a managed WiFi network. As a
result, we host one of the largest free public WiFi networks in the country.
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Competition
We compete with numerous sources in our trade areas. Our bakery-cafes compete with specialty food,
casual dining and quick service cafes, bakeries, and restaurant retailers, including national,
regional and locally-owned cafes, bakeries, and restaurants. Our bakery-cafes compete in several
segments of the restaurant business: breakfast, AM chill, lunch, PM chill, dinner, take home
and catering. Our competitive strengths include location, environment, customer service, price and
product quality. We compete for leased space in desirable locations. Some of our competitors may
have capital resources greater than ours. For further information regarding competition, see Item
1A. Risk Factors.
Employees
As of December 29, 2009, we had approximately 12,100 full-time associates (defined as associates
who average 25 hours or more per week), of whom approximately 600 were employed in general or
administrative functions, principally in our support centers; approximately 1,200 were employed in
our fresh dough facility operations; and approximately 10,300 were employed in our bakery-cafe
operations as bakers, managers, and associates. We also had approximately 13,200 part-time hourly
associates at our bakery-cafes as of December 29, 2009. We do not have any collective bargaining
agreements with our associates and we consider our employee relations to be good. We place a
priority on staffing our bakery-cafes, fresh dough facilities, and support center operations with
skilled associates and invest in training programs to ensure the quality of our operations.
Proprietary Rights
Our brand, intellectual property and our confidential and proprietary information are very
important to our business and competitive position. We protect these assets through a combination
of trademark, copyright, trade secret and unfair competition and contract laws.
The Panera®,
Panera Bread®,
Saint Louis Bread Co.®,
Via Panera®,
You Pick Two®,
Paradise Bakery®,
Paradise Bakery & Café® and Mother Bread design trademarks are some of the trademarks we have
registered with the United States Patent and Trademark Office. In addition, we have filed to
register other marks with the United States Patent and Trademark Office. We have also registered
some of our marks in a number of foreign countries.
Corporate History and Additional Information
We are a Delaware corporation. Our principal offices are located at 6710 Clayton Road, Richmond
Heights, Missouri 63117 and our telephone number is (314) 633-7100.
We were originally organized in March 1981 as a Massachusetts corporation under the name Au Bon
Pain Co., Inc. and reincorporated in Delaware in June 1988. In December 1993, we purchased Saint
Louis Bread Company. In August 1998, we sold our Au Bon Pain Division and changed our name to
Panera Bread Company.
We are subject to the informational requirements of the Exchange Act, and, accordingly, we file
reports, proxy statements and other information with the SEC. Such reports, proxy statements and
other information are publicly available and can be read and copied at the reference facilities
maintained by the SEC at the Public Reference Room, 100 F Street, NE, Room 1580, Washington, D.C.
20549. Information regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. The SEC maintains a web site (www.sec.gov) that contains reports, proxy
and information statements and other information regarding issuers that file electronically with
the SEC.
Our Internet address is www.panerabread.com. We make available at this address, free of charge,
nutritional information, press releases, annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically
filing such material with, or furnishing it to, the SEC. In addition, we provide periodic investor
relations updates and our corporate governance materials at our Internet address.
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Government Regulation
Our fresh dough facilities and Company-owned and franchise-operated bakery-cafes are subject to
regulation and licensing by federal, state and local agencies and health, sanitation, safety, fire,
and other governmental departments. Difficulties or failures in obtaining and retaining the
required licensing or approval could result in delays or cancellations in the opening of fresh
dough facilities or
bakery-cafes as well as fines and possible closure of existing fresh dough facilities or
bakery-cafes. In addition, we are subject to federal laws and regulations, such as the Fair Labor
Standards Act and various state laws governing such matters as minimum wages, overtime, and other
working conditions.
We are also subject to federal and state laws regulating the offer and sale of franchises. Such
laws impose registration and disclosure requirements on franchisors in the offer and sale of the
franchises and may also apply substantive standards to the relationship between franchisor and
franchisee.
We are subject to various federal, state, and local environmental regulations. Compliance with
applicable environmental regulations is not believed to have a material effect on capital
expenditures, financial condition, results of operations, or our competitive position.
The Americans with Disabilities Act prohibits discrimination in employment and public
accommodations on the basis of disability. Under the Americans with Disabilities Act, we could be
required to expend funds to modify our Company-owned bakery-cafes to provide service to, or make
reasonable accommodations for the employment of, disabled persons. Compliance with the requirements
of the Americans with Disabilities Act is not believed to have a material effect on our financial
condition or results of operations.
ITEM 1A. | RISK FACTORS |
The following important factors, among others, could cause our actual operating results to differ
materially from those indicated or suggested by forward-looking statements made in this Form 10-K
or presented elsewhere by management from time to time.
Disruptions in our bakery-cafe supply chain could adversely affect our profitability and operating results.
Our Company-owned and franchise-operated bakery-cafes depend on frequent deliveries of ingredients
and other products. One company delivers the majority of our ingredients and other products to our
bakery-cafes on a regular basis (two or three times weekly). In addition, we and our franchisees
rely on a network of local and national suppliers for the delivery of fresh produce (three to six
times per week), which is particularly susceptible to supply volatility as a result of weather
conditions. Our dependence on frequent deliveries to our bakery-cafes by a single distributor could
cause shortages or supply interruptions that could adversely impact our operations.
Although many of our ingredients and products are prepared to our specifications, we believe that a
majority of the ingredients are generally available and could be obtained from alternative sources.
In addition, we frequently enter into annual and multi-year contracts for ingredients in order to
decrease the risks of supply interruptions and cost fluctuation. Antibiotic-free chicken, which is
sold in most Company-owned and franchise-operated bakery-cafes, is currently supplied to us by
three different companies. However, there are few producers of antibiotic-free chicken, which may
make it difficult or more costly for us to find alternative suppliers if necessary.
Generally, we believe that we have adequate sources of supply for our ingredients and products to
support our bakery-cafe operations or, if necessary, we could make menu adjustments to address
material supply issues. However, there are many factors which could cause shortages or
interruptions in the supply of our ingredients and products, including weather, unanticipated
demand, labor, production or distribution problems, quality issues and cost, and the financial
health of our suppliers and distributor, some of which are beyond our control, and which could have
an adverse effect on our business and results of operations.
Changes in food and supply costs could adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and
supply costs. In the past, we have been able to recover inflationary cost and commodity price
increases, including, among other things, fuel, proteins, dairy, wheat, tuna, and cream cheese
costs, through increased menu prices. There have been, and there may be in the future, delays in
implementing such menu price increases, and economic factors and competitive pressures may limit
our ability to recover such cost increases in their entirety. Historically, the effects of
inflation on our net income have not been materially adverse. However, increased volatility in
certain commodity markets, such as those for wheat or proteins such as chicken or turkey could have
an adverse effect on us depending upon whether we are able to increase menu prices to cover such
increases.
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Disruptions or supply issues in our fresh dough facilities could adversely affect our business and results of operations.
We operate 21 fresh dough facilities, which service substantially all of our Company-owned and
franchise-operated bakery-cafes in the United States and Ontario, Canada. Our fresh dough
distribution system delivers fresh dough products daily to the bakery-cafes through a leased fleet
of temperature controlled vehicles. The optimal maximum distribution range is approximately 300
miles; although, when necessary, the distribution range may reach up to 500 miles. As a result, any
prolonged disruption in the operations of or distribution from any of the fresh dough facilities,
whether due to weather conditions, technical or labor difficulties, destruction or damage to the
vehicle fleet or facility or other reasons, could cause a shortage of fresh dough products at our
bakery-cafes. Such a shortage of fresh dough products could, depending on the extent and duration,
have a material adverse effect on our business and results of operations.
Additionally, while fuel costs remained relatively constant in 2009, given the historical
volatility of these costs, increased costs and distribution issues related to fuel and utilities
could also materially impact our business and results of operations, including efficiencies in
distribution from our fresh dough facilities to our bakery-cafes.
Our Franklin, Massachusetts fresh dough facility manufactures and supplies through its distributors
all of the cream cheese and tuna used in most of our Company-owned and franchise-operated
bakery-cafes in the United States. Although we believe we have adopted adequate quality assurance
and other procedures to ensure the production and distribution of quality products and ingredients,
we may be subject to allegations regarding quality, health or other similar concerns that could
have a negative impact on our operations, whether or not the allegations are valid or we are
liable. Additionally, defending against such claims or litigation can be costly and the results
uncertain.
The continuing adverse economic conditions could adversely affect our business and financial
results and have a material adverse effect on our liquidity and capital resources.
As widely reported, the U.S. economy continues to experience adverse economic conditions and
uncertainty about economic stability. While there are signs that conditions may be improving,
there is no certainty that this trend will continue or that credit and financial markets and
confidence in economic conditions will not deteriorate again. Our customers may make fewer
discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to
credit and falling home prices. Because a key point in our business strategy is maintaining our
transaction count and margin growth, any significant decrease in customer traffic or average profit
per transaction will negatively impact our financial performance as reduced revenues create
downward pressure on margins. Financial difficulties experienced by our suppliers could result in
product delays or shortages. Additionally, it is unknown when the broader national economy will
improve. An economy that continues to deteriorate or fails to improve could have a material
adverse effect on our liquidity and capital resources, including our ability to raise additional
capital if needed, the ability of banks to honor draws on our credit facility, or otherwise
negatively impact our business and financial results.
We may not be able to continue to convince our customers of the benefits of paying our prices for
higher-quality food.
Our success depends in large part on our continued ability to convince customers that food made
with higher-quality ingredients, including antibiotic-free chicken and our artisan breads, is worth
the prices at our bakery-cafes relative to lower prices offered by some of our competitors,
particularly those in the quick-service segment. Our inability to educate customers about the
quality of our food or our customers rejection of our pricing approach could require us to change
our pricing, marketing or promotional strategies, which could materially and adversely affect our
results or the brand identity that we have tried to create.
Customer preferences and traffic could be negatively impacted by health concerns about the
consumption of certain products.
Customer preferences and traffic could be impacted by health concerns about the consumption of
particular food products and could cause a decline in our sales. Negative publicity about
ingredients, poor food quality, food-borne illness, injury, health concerns, allergens or
nutritional content could cause customers to shift their preferences. For example, in 2009,
outbreaks of E. coli in certain beef food products caused consumers to avoid certain products. In
addition, outbreaks of salmonella in certain peanuts and peanut butter products, jalapenos and
spinach caused consumers to avoid such products. These problems, other food-borne illnesses (such
as hepatitis A, trichinosis or salmonella) and injuries caused by food tampering have in the past,
and could in the future, adversely affect the price and availability of affected ingredients and
cause customers to shift their preferences, particularly if we choose to pass any higher ingredient
costs along to consumers. Negative publicity concerning particular food products may adversely
affect demand for
our products and could cause an increase in our food costs as a result of potentially irregular
supply of such products and a decrease in customer traffic to our bakery-cafes.
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Our failure or inability to protect our brand, trademarks or other proprietary rights could
adversely affect our business and competitive position.
We believe that our brand, intellectual property and confidential and proprietary information is
very important to our business and competitive position. Our primary trademarks,
Panera®, Panera Bread®, Saint Louis Bread Co.®, Paradise Bakery &
Café®, Via Panera®, and the Mother Bread design, along with other trademarks,
copyrights, service marks, trade secrets, confidential and proprietary information and other
intellectual property rights, are key components of our operating and marketing strategies.
Although we have taken steps to protect our brand, intellectual property and confidential and
proprietary information, these steps may not be adequate. Unauthorized usage or imitation by others
could harm our image, brand or competitive position and, if we commence litigation to enforce our
rights, cause us to incur significant legal fees.
We are not aware of any assertions that our trademarks or menu offerings infringe upon the
proprietary rights of third parties, but third parties may claim infringement by us in the future.
Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation,
cause delays in introducing new menu items in the future or require us to enter into royalty or
licensing agreements. As a result, any such claim could have a material adverse effect on our
business, results of operations and financial condition.
We try to ensure that our franchisees maintain and protect our brand and our confidential and
proprietary information. However, since our franchisees are independent third parties that we do
not control, if they do not operate their bakery-cafes in a manner consistent with their agreements
with us, our brand and reputation or the value of our confidential and proprietary information
could be harmed. If this occurs, our business and operating results could be adversely affected.
Competition may adversely affect our operations and results of operations.
The restaurant industry is highly competitive with respect to location, customer service, price,
quality of products and overall customer experience. We compete with specialty food, casual dining
and quick-service restaurant retailers, including national, regional and locally owned restaurants.
Many of our competitors or potential competitors have substantially greater financial and other
resources than we do, which may allow them to react to changes in pricing, marketing and the
restaurant industry better than we can. Additionally, other companies may develop restaurants that
operate with concepts similar to ours. We also compete with other restaurant chains and other
retail businesses for quality site locations and hourly employees. If we are unable to successfully
compete in our markets, we may be unable to sustain or increase our revenues and profitability.
Additionally, competition could cause us to modify or evolve our products, designs or strategies.
If we do so, we cannot guarantee that we will be successful in implementing the changes or that our
profitability will not be negatively impacted by them.
Loss of senior management or the inability to recruit and retain associates could adversely affect our future success.
Our success depends on the services of our senior management and associates, all of whom are at
will employees. The loss of a member of senior management could have an adverse impact on our
business or the financial markets perception of our ability to continue to grow.
Our success also depends on our continuing ability to hire, train, motivate and retain qualified
associates in our bakery-cafes, fresh dough facilities and support centers. Our failure to do so
could result in higher associate turnover and increased labor costs, and could compromise the
quality of our service, all of which could adversely affect our business.
Our ability to increase our revenue and operating profits could be adversely affected if we are
unable to execute our growth strategy or achieve sufficient returns on invested capital for
bakery-cafe locations.
Our growth strategy primarily consists of new market development and further penetration of
existing markets, both by us and our franchisees, including the selection of sites which will
achieve targeted returns on invested capital. The success of this strategy depends on numerous
factors that are not completely controlled by us or involve risks that may impact the development,
or timing of development, of our bakery-cafes. Our ability to grow the number of bakery-cafes
successfully will depend on a number of factors, including:
| identification and availability of suitable locations for new bakery-cafes on acceptable terms,
including costs and appropriate delivery distances from our fresh dough facilities; |
||
| competition for restaurant sites; |
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| variations in the number and timing of bakery-cafe openings as compared to our construction schedule; |
||
| management of the costs of construction of bakery-cafes, particularly factors outside our control,
such as the timing of delivery of a leased location by the landlord; |
||
| our ability to take advantage of perceived opportunities in a softening commercial real estate market; |
||
| securing required governmental approvals and permits and complying with applicable zoning, land use
and environmental regulations; and |
||
| general economic conditions. |
Our growth strategy in part depends on continued development by our franchisees. If our franchisees
do not continue to successfully finance and open new bakery-cafes, our business could be adversely
affected.
Our growth strategy includes continued development of bakery-cafes through franchising. At December
29, 2009, approximately 57.6 percent of our bakery-cafes were operated by franchisees (795
franchise-operated bakery-cafes out of a total of 1,380 bakery-cafes system-wide). The opening and
success of bakery-cafes by franchisees depends on a number of factors, including those identified
above, as well as the availability of suitable franchise candidates and the financial and other
resources of our franchisees such as our franchisees ability to receive financing from banks and
other financial institutions, which may become more challenging in the current economic
environment.
Additionally, our results of operations include revenues derived from royalties on sales from, and
revenues from sales by our fresh dough facilities to, franchise-operated bakery-cafes. As a result,
our growth expectations and revenue could be negatively impacted by a material downturn in sales at
and to franchise-operated bakery-cafes or if one or more key franchisees becomes insolvent and
unable to pay us our royalties.
Although we have been able to successfully manage our growth to date, we may experience
difficulties doing so in the future.
Our growth strategy includes opening bakery-cafes in new markets where we may have little or no
operating experience. Accordingly, there can be no assurance that a bakery-cafe opened in a new
market will have similar operating results, including average store sales, as our existing
bakery-cafes. Bakery-cafes opened in new markets may not perform as expected or may take longer to
reach planned operating levels, if at all. Operating results or overall bakery-cafe performance
could vary as a result of higher construction, occupancy or general operating costs, a lack of
familiarity with our brand which may require us to build local brand awareness, differing
demographics, consumer tastes and spending patterns, and variable competitive environments.
Additional expenses attributable to costs of delivery from our fresh dough facilities may exceed
our expectations in areas not currently served by those facilities.
Our growth strategy also includes opening bakery-cafes in existing markets to increase the
penetration rate of our bakery-cafes in those markets. There can be no assurance we will be
successful in operating bakery-cafes profitably in new markets or further penetrating existing
markets.
We operate in Canada and may expand into other foreign markets and therefore, we may be exposed to
uncertainties and risks that could negatively impact our results of operations.
We expanded our operations into Canadian markets by opening two franchise-operated bakery-cafes in
the fourth quarter of 2008 and a third franchise-operated bakery-cafe at the beginning of the first
quarter of 2009. Our expansion into Canada has made us subject to Canadian economic conditions,
particularly currency exchange rate fluctuations, and political factors, either of which could have
a material adverse effect on our financial condition and results of operations if our Canadian
operations continue to expand. In addition, if we expand into other foreign markets, we will be
subject to other foreign economic conditions and political factors including, but
not limited to, taxation, inflation, currency fluctuations, increased regulations and quotas,
tariffs and other protectionist measures. Further, we may be exposed to new forms of competition
not present in our domestic markets, as well as subject to potentially different demographic tastes
and preferences for our products.
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If we fail to comply with governmental laws or regulations or if these laws or regulations change,
our business could suffer.
In connection with the operation of our business, we are subject to extensive federal, state, local
and foreign laws and regulations, including those related to:
| franchise relationships; |
||
| building construction and zoning requirements; |
||
| nutritional content labeling and disclosure requirements; |
||
| management and protection of the personal data of our employees and customers; |
||
| environmental matters. |
Our bakery-cafes and fresh dough facilities are licensed and subject to regulation under federal,
state and local laws, including business, health, fire and safety codes.
Various federal and state labor laws govern our operations and our relationship with our
associates, including minimum wage, overtime, accommodation and working conditions, benefits,
citizenship requirements, insurance matters, workers compensation, disability laws such as the
Federal Americans with Disabilities Act, child labor laws and anti-discrimination laws.
While we believe we operate in substantial compliance with these laws, they are complex and vary
from location to location, which complicates monitoring and compliance. As a result, regulatory
risks are inherent in our operation. Although we believe that compliance with these laws has not
had a material effect on our operations to date, we may experience material difficulties or
failures with respect to compliance in the future. Our failure to comply with these laws could
result in required renovations to our facilities, litigation, fines, penalties, judgments or other
sanctions including the temporary suspension of bakery-cafe or fresh dough facility operations or a
delay in construction or opening of a bakery-cafe, any of which could adversely affect our
business, operations and our reputation.
In recent years, there has been an increased legislative, regulatory and consumer focus at the
federal, state and municipal levels on the food industry, including nutrition and advertising
practices. Restaurants operating in the quick-service and fast-casual segments have been a
particular focus. For example, several states and individual municipalities, including King County,
Washington, New York City and the state of California, have adopted regulations requiring that
chain restaurants include caloric or other nutritional information on their menu boards and on
printed menus, which must be plainly visible to consumers at the point of ordering. Likewise,
there have been several similar proposals on the national level. As a result, we may in the future
become subject to other initiatives in the area of nutrition disclosure or advertising, such as
requirements to provide information about the nutritional content of our food, which could increase
our expenses or slow customer flow, decreasing our throughput.
Rising insurance costs could negatively impact our profitability.
We self-insure a significant portion of our expected losses under our workers compensation,
medical, general, auto and property liability programs. The liabilities associated with the risks
that are retained by us are estimated, in part, by considering our historical claims experience and
data from industry and other actuarial sources. The estimated accruals for these liabilities could
be affected if claims differ from these assumptions and historical trends. Unanticipated changes in
the actuarial assumptions and management estimates underlying our reserves of these losses could
result in materially different amounts of expense under these programs, which could have a material
adverse effect on our financial condition and results of operations.
Additionally, the costs of insurance and medical care have risen significantly over the past few
years and are expected to continue to increase. These increases, as well as existing or potential
legislation changes, such as proposals to require employers to provide health insurance to
employees, could negatively impact our operating results.
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We are subject to complaints and litigation that could have an adverse effect on our business.
In the ordinary course of our business we may become subject to complaints and litigation alleging
that we are responsible for a customer illness or injury suffered at or after a visit to one of our
bakery-cafes or to one of our franchise-operated bakery-cafes, including allegations of poor food
quality, food-borne illness, adverse health effects, nutritional content, allergens, personal
injury or other concerns. In addition, we are subject to litigation by employees, investors,
franchisees and others through private actions, class actions or other forums. For example, in
January 2008, a purported class action lawsuit was filed against us and three of our current or
former executive officers by investors alleging violations of the Securities Exchange Act of 1934
and the rules promulgated thereunder. While we believe we have meritorious defenses to each of the
claims in this lawsuit and we are vigorously defending the lawsuit, the outcome of litigation is
difficult to assess and quantify and the defense against such claims or actions can be costly. In
addition to decreasing sales and profitability and diverting financial and management resources, we
may suffer from adverse publicity that could harm our brand, regardless of whether the allegations
are valid or whether we are liable. Moreover, we are subject to the same risks of adverse publicity
resulting from allegations even if the claim involves one of our franchisees. A judgment
significantly in excess of our insurance coverage for any claims could materially and adversely
affect our financial condition or results of operations. Additionally, publicity about these claims
may harm our reputation or prospects and adversely affect our results.
If we are unable to protect our customers credit card data, we could be exposed to data loss,
litigation and liability, and our reputation could be significantly harmed.
In connection with credit card sales, we transmit confidential credit card information by way
of secure private retail networks. Although we use private networks, third parties may have the
technology or know-how to breach the security of the customer information transmitted in connection
with credit card sales, and our security measures and those of our technology vendors may not
effectively prohibit others from obtaining improper access to this information. If a person is able
to circumvent these security measures, he or she could destroy or steal valuable information or
disrupt our operations. Any security breach could expose us to risks of data loss, litigation and
liability and could seriously disrupt our operations and any resulting negative publicity could
significantly harm our reputation.
We periodically acquire existing bakery-cafes from our franchisees or ownership interests in other
restaurant or bakery-cafe concepts, which could adversely affect our results of operations.
We have historically acquired existing bakery-cafes and development rights from our franchisees
either by negotiated agreement or exercise of our rights of first refusal under the franchise and
area development agreements. Additionally, on June 2, 2009, we completed our purchase of Paradise
Bakery & Café, Inc., then owner and operator of 32 bakery-cafes and one commissary, and franchisor
of 37 bakery-cafes and one commissary. Any acquisition that we undertake involves risk, including:
| our ability to successfully achieve anticipated synergies, accurately assess contingent and other
liabilities as well as potential profitability; |
||
| failure to successfully integrate the acquired entitys operational and support activities; |
||
| unanticipated changes in business and economic conditions; |
||
| limited or no operational experience in the acquired bakery-cafe market; |
||
| future impairment charges related to goodwill and other acquired intangible assets; and |
||
| risks of dispute and litigation with the seller, the sellers landlords, and vendors and other parties. |
Any of these factors could strain our financial and management resources as well as negatively
impact our results of operations.
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Our operating results fluctuate due to a number of factors, some of which may be beyond our
control, and any of which may adversely affect our financial condition.
Our operating results may fluctuate significantly from our forecasts, targets or projections
because of a number of factors, including the following:
| changes in average weekly sales and comparable bakery-cafe sales due to: |
| lower customer traffic or average check per transaction, including as a result of the
introduction of new
menu items; |
||
| changes in demographics, consumer preferences and discretionary spending; |
||
| negative publicity about the ingredients we use or the occurrence of food-borne illnesses or
other problems at our bakery-cafes; or |
||
| unfavorable general economic conditions in the markets in which we operate, including, but not
limited to, downturns in the housing market, higher interest rates, higher unemployment,
lower disposable income due to higher energy or other consumer costs, lower consumer confidence
and other events or factors that adversely affect consumer spending. |
||
| seasonality, including as a result of inclement weather. |
| cost increases due to: |
| changes in our operating costs; |
||
| labor availability and increased labor costs, including wages of
management and associates, compensation, insurance and health care; and |
||
| changes in business strategy including concept evolution and new designs. |
| profitability of new bakery-cafes, especially in new markets; |
||
| delays in new bakery-cafe openings; |
||
| fluctuations in supply costs, shortages or interruptions; and |
||
| natural disasters and other calamities. |
Increased advertising and marketing costs could adversely affect our results of operations.
We expect to dedicate greater resources to advertising and marketing than in previous years. If
new advertising and other marketing programs do not drive increased bakery-cafe sales or if the
costs of advertising, media or marketing increase greater than expected, our financial results
could be materially adversely affected.
Our federal, state and local tax returns have been and may in the future be selected for audit by
the taxing authorities, which may result in tax assessments or penalties that could have a material
adverse impact on our results of operations and financial position.
We are subject to federal, state and local taxes in the United States. Significant judgment is
required in determining the provision for taxes. Although we believe our tax estimates are
reasonable, if the IRS or other taxing authority disagrees with the positions we have taken on our
tax returns, we could have additional tax liability, including interest and penalties. If material,
payment of such additional amounts upon final adjudication of any disputes could have a material
impact on our results of operations and financial position.
A regional or global health pandemic could severely affect our business.
A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects
many individuals in an area or population at the same time. If a regional or global health
pandemic occurs, depending upon its duration, location and severity, our business could be severely
affected. Generally, we are viewed by our customers as an everyday oasis, a friendly, all day
destination where people can gather with friends and business colleagues. Customers might avoid
public gathering places in the event of a health pandemic, and local, regional or national
governments might limit or ban public gatherings to halt or delay the spread of disease. A
regional or global health pandemic might also adversely impact our business by disrupting or
delaying production and delivery of ingredients and products in our supply chain and by causing
staffing shortages in our bakery-cafes. The impact of a health pandemic might be disproportionately
greater on us than on other companies that depend less on the gathering of people for the sale of
their products.
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Regional factors could negatively impact our results of operations.
There are several states, particularly in the Midwest region of the United States, in
which Panera, our franchisees, or both own and operate a significant number of bakery-cafes. As a
result, the economic conditions, state and local laws, government regulations and weather
conditions affecting those particular states, or a geographic region generally, may have a material
impact upon our results of operations.
Failure to meet market expectations for our financial performance will likely adversely affect the
market price of our stock.
The public trading of our stock is based in large part on market expectations that our business
will continue to grow and that we will achieve certain levels of financial performance. Should we
fail to meet market expectations going forward, particularly with respect to comparable bakery-cafe
sales, net revenues, operating margins, and earnings per share, the market price of our stock will
likely decline.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
The average size of a Company-owned bakery-cafe is approximately 4,600 square feet. The square
footage of each of our fresh dough facilities is provided below. We lease all of our bakery-cafe
locations and fresh dough facilities. Lease terms for our bakery-cafes and fresh dough facilities
are generally 10 years with renewal options at most locations and our leases generally require us
to pay a proportionate share of real estate taxes, insurance, common area, and other operating
costs. Many bakery-cafe leases provide for contingent rental (i.e. percentage rent) payments based
on sales in excess of specified amounts. Certain of our lease agreements provide for scheduled rent
increases during the lease terms or for rental payments commencing at a date other than the date of
initial occupancy. See Note 2 to the consolidated financial statements for further information on
our accounting for leases.
Information with respect to our Company-owned leased fresh dough facilities as of December 29, 2009
is set forth below:
Facility | Square Footage | |||
Atlanta, GA |
18,000 | |||
Beltsville, MD |
26,800 | |||
Chicago, IL |
30,900 | |||
Cincinnati, OH |
22,300 | |||
Dallas, TX |
12,900 | |||
Denver, CO |
10,000 | |||
Detroit, MI |
19,600 | |||
Fairfield, NJ |
39,900 | |||
Franklin, MA (1) |
40,300 | |||
Greensboro, NC |
19,200 | |||
Kansas City, KS |
17,000 | |||
Minneapolis, MN |
10,300 | |||
Miramar, FL |
15,100 | |||
Ontario, CA |
27,800 | |||
Orlando, FL |
16,500 | |||
Phoenix, AZ |
9,100 | |||
Seattle, WA |
16,600 | |||
St. Louis, MO |
30,000 | |||
Stockton, CA |
14,300 | |||
Warren, OH |
16,300 | |||
Ontario, CAN (2) |
300 |
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(1) | Total square footage includes approximately 20,000 square feet utilized in tuna and cream
cheese production. |
|
(2) | Company-owned limited production facility co-located with one of our franchised bakery-cafes
in Ontario, Canada to support the franchise-operated bakery-cafes located in this market. |
As of December 29, 2009, we operated 1,380 bakery-cafes in the following locations:
Company- | Franchise- | |||||||||||
Owned | Operated | Total | ||||||||||
State | Bakery-Cafes | Bakery-Cafes | Bakery-Cafes | |||||||||
Alabama |
14 | | 14 | |||||||||
Arizona |
30 | 5 | 35 | |||||||||
Arkansas |
| 5 | 5 | |||||||||
California |
39 | 52 | 91 | |||||||||
Colorado |
| 35 | 35 | |||||||||
Connecticut |
11 | 10 | 21 | |||||||||
Delaware |
| 3 | 3 | |||||||||
Florida |
39 | 77 | 116 | |||||||||
Georgia |
14 | 18 | 32 | |||||||||
Illinois |
69 | 34 | 103 | |||||||||
Indiana |
32 | 6 | 38 | |||||||||
Iowa |
2 | 15 | 17 | |||||||||
Kansas |
| 18 | 18 | |||||||||
Kentucky |
15 | 2 | 17 | |||||||||
Maine |
| 4 | 4 | |||||||||
Maryland |
| 42 | 42 | |||||||||
Massachusetts |
8 | 36 | 44 | |||||||||
Michigan |
47 | 15 | 62 | |||||||||
Minnesota |
23 | 3 | 26 | |||||||||
Missouri |
45 | 21 | 66 | |||||||||
Nebraska |
11 | 2 | 13 | |||||||||
Nevada |
| 5 | 5 | |||||||||
New Hampshire |
| 9 | 9 | |||||||||
New Jersey |
| 48 | 48 | |||||||||
New York |
34 | 36 | 70 | |||||||||
North Carolina |
12 | 30 | 42 | |||||||||
Ohio |
9 | 89 | 98 | |||||||||
Oklahoma |
| 17 | 17 | |||||||||
Oregon |
5 | 4 | 9 | |||||||||
Pennsylvania |
23 | 46 | 69 | |||||||||
Rhode Island |
| 6 | 6 | |||||||||
South Carolina |
8 | 6 | 14 | |||||||||
South Dakota |
1 | | 1 | |||||||||
Tennessee |
12 | 16 | 28 | |||||||||
Texas |
18 | 29 | 47 | |||||||||
Utah |
| 6 | 6 | |||||||||
Virginia |
53 | 10 | 63 | |||||||||
Washington |
11 | 1 | 12 | |||||||||
West Virginia |
| 7 | 7 | |||||||||
Wisconsin |
| 24 | 24 | |||||||||
Canada |
| 3 | 3 | |||||||||
Totals |
585 | 795 | 1,380 | |||||||||
17
Table of Contents
ITEM 3. | LEGAL PROCEEDINGS |
On January 25, 2008 and February 26, 2008, purported class action lawsuits were filed against us
and three of our current or former executive officers by the Western Washington Laborers-Employers
Pension Trust and Sue Trachet, respectively, on behalf of investors who purchased our common stock
during the period between November 1, 2005 and July 26, 2006. Both lawsuits were filed in the
United States District Court for the Eastern District of Missouri, St. Louis Division. Each
complaint alleges that we and the other defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 under the Exchange
Act in connection with our disclosure of system-wide sales and earnings guidance during the period
from November 1, 2005 through July 26, 2006. Each complaint seeks, among other relief, class
certification of the lawsuit, unspecified damages, costs and expenses, including attorneys and
experts fees, and such other relief as the Court might find just and proper. On June 23, 2008,
the lawsuits were consolidated and the Western Washington Laborers-Employers Pension Trust was
appointed lead plaintiff. On August 7, 2008, the plaintiff filed an amended complaint, which
extended the class period to November 1, 2005 through July 26, 2007. We believe that we and the
other defendants have meritorious defenses to each of the claims in this lawsuit and we are
vigorously defending the lawsuit. On October 6, 2008, we filed a motion to dismiss all of the
claims in this lawsuit. Following filings by both parties on our motion to dismiss, on June 25,
2009, the Court converted our motion to one for summary judgment and denied it without prejudice.
The Court simultaneously gave us until July 20, 2009 to file a new motion for summary judgment,
which deadline the Court subsequently extended until August 10, 2009. On August 10, 2009, we filed
a motion for summary judgment. On September 9, 2009, the plaintiff filed a request to deny or
continue our motion for summary judgment to allow the plaintiff to conduct discovery. Following a
hearing and subsequent filings by both parties on the plaintiffs request for discovery, on
November 6, 2009, the Court denied the plaintiffs request. The plaintiff filed an opposition to
our motion for summary judgment on December 12, 2009, and we filed our reply in support of our
motion on December 21, 2009. Our motion for summary judgment is pending as of the date of this
filing. There can be no assurance that we will be successful, and an adverse resolution of the
lawsuit could have a material adverse effect on our consolidated financial position and results of
operations in the period in which the lawsuit is resolved. We are not presently able to reasonably
estimate potential losses, if any, related to the lawsuit and as such, have not recorded a
liability in our Consolidated Balance Sheets.
On February 22, 2008, a shareholder derivative lawsuit was filed against us as nominal defendant
and against certain of our current or former officers and certain current directors. The lawsuit
was filed by Paul Pashcetto in the Circuit Court of St. Louis, Missouri. The complaint alleges,
among other things, breach of fiduciary duty, abuse of control, waste of corporate assets and
unjust enrichment between November 5, 2006 and February 22, 2008. The complaint seeks, among other
relief, unspecified damages, costs and expenses, including attorneys fees, an order requiring us
to implement certain corporate governance reforms, restitution from the defendants and such other
relief as the Court might find just and proper. We believe that we and the other defendants have
meritorious defenses to each of the claims in this lawsuit and we are vigorously defending the
lawsuit. On July 18, 2008, we filed a motion to dismiss all of the claims in this lawsuit.
Following filings by both parties on our motion to dismiss, on December 14, 2009, the Court denied
our motion. We filed an answer to the complaint on January 27, 2010. There can be no assurance
that we will be successful, and an adverse resolution of the lawsuit could have a material adverse
effect on our consolidated financial position and results of operations in the period in which the
lawsuit is resolved. We are not presently able to reasonably estimate potential losses, if any,
related to the lawsuit and as such, have not recorded a liability in our Consolidated Balance
Sheets.
On February 22, 2008, a purported class action lawsuit was filed against us and one of our
subsidiaries by Pati Johns, a former employee of ours, in the United States District Court for the
District of Northern California. The complaint alleged, among other things, violations of the Fair
Labor Standards Act and the California Labor Code for failure to pay overtime and termination
compensation. Although we believe that our policies and practices were lawful and that we had
meritorious defenses to each of the claims in this case, following mediation with the plaintiff, we
entered into a Court-approved settlement agreement in late fiscal 2008. As a result, we accrued
approximately $0.5 million in legal settlement costs for the fiscal year ended December 30, 2008,
which we paid in fiscal 2009.
On December 9, 2009, a purported class action lawsuit was filed against us and one of our
subsidiaries by Nick Sotoudeh, a former employee of ours. The lawsuit was filed in the California
Superior Court, County of Contra Costa. The complaint alleges, among other things, violations of
the California Labor Code, failure to pay overtime, failure to provide meal and rest periods and
termination compensation and violations of Californias Unfair Competition Law. The complaint
seeks, among other relief, collective and class certification of the lawsuit, unspecified damages,
costs and expenses, including attorneys fees, and such other relief as the Court might find just
and proper. We believe we and the other defendant have meritorious defenses to each of the claims
in this lawsuit and we are prepared to vigorously defend the lawsuit. There can be no assurance,
however, that we will be successful, and an adverse resolution of the lawsuit could have a material
adverse effect on our consolidated financial position and results of operations in the
period in which the lawsuit is resolved. We are not presently able to reasonably estimate potential
losses, if any, related to the lawsuit and as such, have not recorded a liability in our
Consolidated Balance Sheets.
18
Table of Contents
In addition, we are subject to other routine legal proceedings, claims and litigation in the
ordinary course of its business. Defending lawsuits requires significant management attention and
financial resources and the outcome of any litigation, including the matters described above, is
inherently uncertain. We do not, however, currently expect that the costs to resolve these routine
matters will have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year ended December 29, 2009.
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Class A common stock is listed on The Nasdaq Global Select Market (Nasdaq) under the symbol
PNRA. There is no established public trading market for our Class B common stock. The following
table sets forth the high and low sale prices for our Class A common stock as reported by Nasdaq
for the fiscal periods indicated.
December 29, 2009 | December 30, 2008 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 58.03 | $ | 43.33 | $ | 44.20 | $ | 31.52 | ||||||||
Second Quarter |
$ | 63.75 | $ | 49.62 | $ | 52.30 | $ | 41.02 | ||||||||
Third Quarter |
$ | 58.05 | $ | 48.59 | $ | 58.88 | $ | 43.64 | ||||||||
Fourth Quarter |
$ | 68.63 | $ | 53.24 | $ | 55.91 | $ | 36.36 |
On February 22, 2010, the last sale price for the Class A common stock, as reported on the Nasdaq
Global Select Market, was $72.82. As of February 22, 2010, we had approximately 2,043 holders of
record of our Class A common stock and approximately 39 holders of record of our Class B common
stock.
Dividend Policy
We routinely evaluate various options for the use of our capital, including the potential issuance
of dividends; however, we have never paid cash dividends on our capital stock and do not have
current plans to pay cash dividends in 2010 as we currently intend to re-invest earnings in
continued growth of our operations and our share repurchase program, as discussed below.
Share Repurchase Program
On November 17, 2009, our Board of Directors approved a three year share repurchase program of up
to $600 million. The repurchases will be effected from time to time on the open market or in
privately negotiated transactions and we may make such repurchases under a Rule 10b5-1 Plan. Under
the share repurchase program, we repurchased a total of 27,429 shares of our Class A common stock
at a weighted-average price of $62.98 per share for an aggregate purchase price of $1.7 million in
fiscal 2009. Repurchased shares will be retired immediately and will resume the status of
authorized but unissued shares. The share repurchase program may be modified, suspended, or
discontinued by our Board of Directors at any time.
19
Table of Contents
During the fourth quarter of fiscal 2009, we repurchased Class A common stock as follows:
Total Number of | Approximate Dollar Value of | |||||||||||||||
Shares Purchased as | Shares That May Yet Be | |||||||||||||||
Total Number of | Average Price | Part of Publicly | Purchased Under the | |||||||||||||
Period | Shares Purchased | Paid per Share | Announced Program | Announced Program | ||||||||||||
September 30, 2009
- October 27, 2009 |
22 | (1) | $ | 50.92 | | $ | | |||||||||
October 28, 2009 -
December 1, 2009 |
28,069 | (1)(2) | $ | 63.01 | 27,429 | $ | 598,272,419 | |||||||||
December 2, 2009 -
December 29, 2009 |
46 | (1) | $ | 51.85 | | $ | 598,272,419 | |||||||||
Total |
28,137 | $ | 62.98 | 27,429 | $ | 598,272,419 |
(1) | Represents Class A common stock surrendered by participants under the Panera Bread 1992
Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan as payment of applicable
tax withholding on the vesting of restricted stock. Shares so surrendered by the participants
are repurchased by us pursuant to the terms of those plans and the applicable award agreements
and not pursuant to publicly announced share repurchase programs. |
|
(2) | Includes 27,429 shares of Class A common stock that were repurchased under a Rule 10b5-1
plan, as described above. See Note 12 to our consolidated financial statements for further
information regarding the share repurchase program. |
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data has been derived from our consolidated financial statements.
The data set forth below should be read in conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our consolidated financial statements and
notes thereto.
20
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For the fiscal year ended (1) | ||||||||||||||||||||
December 29, | December 30, | December 25, | December 26, | December 27, | ||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Bakery-cafe sales |
$ | 1,153,255 | $ | 1,106,295 | $ | 894,902 | $ | 666,141 | $ | 499,422 | ||||||||||
Franchise royalties and fees |
78,367 | 74,800 | 67,188 | 61,531 | 54,309 | |||||||||||||||
Fresh dough sales to franchisees |
121,872 | 117,758 | 104,601 | 101,299 | 86,544 | |||||||||||||||
Total revenue |
1,353,494 | 1,298,853 | 1,066,691 | 828,971 | 640,275 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||
Bakery-cafe expenses: |
||||||||||||||||||||
Cost of food and paper products |
$ | 337,599 | $ | 332,697 | $ | 271,442 | $ | 196,849 | $ | 143,057 | ||||||||||
Labor |
370,595 | 352,462 | 286,238 | 204,956 | 151,524 | |||||||||||||||
Occupancy |
95,996 | 90,390 | 70,398 | 48,602 | 35,558 | |||||||||||||||
Other operating expenses |
155,396 | 147,033 | 121,325 | 92,176 | 70,003 | |||||||||||||||
Total bakery-cafe expenses |
959,586 | 922,582 | 749,403 | 542,583 | 400,142 | |||||||||||||||
Fresh dough cost of sales to franchisees |
100,229 | 108,573 | 92,852 | 85,951 | 74,654 | |||||||||||||||
Depreciation and amortization |
67,162 | 67,225 | 57,903 | 44,166 | 33,011 | |||||||||||||||
General and administrative expenses |
83,169 | 84,393 | 68,966 | 59,306 | 46,301 | |||||||||||||||
Pre-opening expenses |
2,451 | 3,374 | 8,289 | 6,173 | 5,072 | |||||||||||||||
Total costs and expenses |
1,212,597 | 1,186,147 | 977,413 | 738,179 | 559,180 | |||||||||||||||
Operating profit |
140,897 | 112,706 | 89,278 | 90,792 | 81,095 | |||||||||||||||
Interest expense |
700 | 1,606 | 483 | 92 | 50 | |||||||||||||||
Other (income) expense, net |
273 | 883 | 333 | (1,976 | ) | (1,133 | ) | |||||||||||||
Income before income taxes |
139,924 | 110,217 | 88,462 | 92,676 | 82,178 | |||||||||||||||
Income taxes |
53,073 | 41,272 | 31,434 | 33,827 | 29,995 | |||||||||||||||
Net income |
86,851 | 68,945 | 57,028 | 58,849 | 52,183 | |||||||||||||||
Less: income (loss) attributable to noncontrolling interest |
801 | 1,509 | (428 | ) | | | ||||||||||||||
Net income attributable to Panera Bread Company |
$ | 86,050 | $ | 67,436 | $ | 57,456 | $ | 58,849 | $ | 52,183 | ||||||||||
Earnings per common share attributable
to Panera Bread Company: |
||||||||||||||||||||
Basic |
$ | 2.81 | $ | 2.24 | $ | 1.81 | $ | 1.88 | $ | 1.69 | ||||||||||
Diluted |
$ | 2.78 | $ | 2.22 | $ | 1.79 | $ | 1.84 | $ | 1.65 | ||||||||||
Weighted average shares of common and common
equivalent shares outstanding: |
||||||||||||||||||||
Basic |
30,667 | 30,059 | 31,708 | 31,313 | 30,871 | |||||||||||||||
Diluted |
30,979 | 30,422 | 32,178 | 32,044 | 31,651 | |||||||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 246,400 | $ | 74,710 | $ | 68,242 | $ | 52,097 | $ | 24,451 | ||||||||||
Short-term investments |
$ | | $ | 2,400 | $ | 23,198 | $ | 20,025 | $ | 46,308 | ||||||||||
Total assets |
$ | 837,165 | $ | 673,917 | $ | 698,752 | $ | 542,609 | $ | 437,667 | ||||||||||
Long-term liabilities |
$ | 97,870 | $ | 61,217 | $ | 122,807 | $ | 35,333 | $ | 33,824 | ||||||||||
Stockholders equity |
$ | 597,036 | $ | 495,162 | $ | 446,164 | $ | 397,666 | $ | 316,978 | ||||||||||
Franchisee revenues (2) |
$ | 1,640,309 | $ | 1,542,791 | $ | 1,376,430 | $ | 1,245,472 | $ | 1,097,191 | ||||||||||
Comparable bakery-cafe sales percentage for (2)(3): |
||||||||||||||||||||
Company-owned bakery-cafes |
0.7 | % | 5.8 | % | 1.9 | % | 3.9 | % | 7.4 | % | ||||||||||
Franchise-operated bakery-cafes |
0.5 | % | 5.3 | % | 1.5 | % | 4.1 | % | 8.0 | % | ||||||||||
Bakery-cafe data: |
||||||||||||||||||||
Company-owned bakery-cafes open |
585 | 562 | 532 | 391 | 311 | |||||||||||||||
Franchise-operated bakery-cafes open |
795 | 763 | 698 | 636 | 566 | |||||||||||||||
Total bakery-cafes open |
1,380 | 1,325 | 1,230 | 1,027 | 877 | |||||||||||||||
21
Table of Contents
(1) | Fiscal 2008 was a 53 week year consisting of 371 days. All other fiscal years presented
contained 52 weeks consisting of 364 days, with the exception of fiscal 2005. In fiscal 2005,
we changed our fiscal week to end on Tuesday rather than Saturday. As a result, our 2005
fiscal year ended on December 27, 2005 instead of December 31, 2005 and, therefore, consisted
of 52 and a half weeks rather than the 53 week year that would have resulted without the
calendar change. |
|
(2) | Comparable bakery-cafe sales percentages are non-GAAP financial measures, which should not be
considered in isolation or as a substitute for other measures of performance prepared in
accordance with generally accepted accounting principles in the U.S., or GAAP, and may not be
equivalent to comparable bakery-cafe sales as defined or used by other companies. We do not
record franchise-operated bakery-cafe sales as revenues. However, royalty revenues are
calculated based on a percentage of franchise-operated bakery-cafe sales, as reported by
franchisees. We use franchise-operated and system-wide sales information internally in
connection with store development decisions, planning, and budgeting analyses. We believe
franchise-operated and system-wide sales information is useful in assessing consumer
acceptance of our brand, facilitates an understanding of financial performance and the overall
direction and trends of sales and operating income, helps us appreciate the effectiveness of
our advertising and marketing initiatives to which our franchisees also contribute based on a
percentage of their sales, and provides information that is relevant for comparison within the
industry. |
|
(3) | Comparable bakery-cafe sales for fiscal 2009 and fiscal 2007 contained 52 weeks of sales
while fiscal 2008 contained 53 weeks of sales, with an impact of approximately $14.4 million
and $21.4 million of sales in the additional week for Company-owned and franchise-operated
bakery-cafes, respectively. Adjusted to reflect a comparative 52 week period in fiscal 2008
(the first 52 weeks in fiscal 2008), Company-owned and franchise-operated comparable
bakery-cafe sales for fiscal 2009 would have been
approximately 2.3 percent and 2.2 percent, respectively. Adjusted to reflect a comparative 53
week period in fiscal 2007 (52 weeks in fiscal 2007 plus week one of fiscal 2008), Company-owned
and franchise-operated comparable bakery-cafe sales for fiscal 2008 would have been
approximately 3.6 percent and 3.4 percent, respectively. Adjusted on a calendar basis to match
the specific weeks in fiscal 2009 to the same specific weeks in fiscal 2008, Company-owned and
franchise-operated comparable bakery-cafe sales for fiscal 2009 would have been 2.6 percent and
2.3 percent, respectively. For further information regarding comparable bakery-cafe sales, see
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. |
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
Our revenues are derived from Company-owned bakery-cafe sales, fresh dough sales to franchisees,
and franchise royalties and fees. Fresh dough sales to franchisees are primarily the sales of fresh
dough products, tuna and cream cheese to certain of our franchisees. The cost of food and paper
products, labor, occupancy, and other operating expenses relate primarily to Company-owned
bakery-cafe sales. The cost of fresh dough sales to franchisees relates primarily to the sale of
fresh dough products, tuna and cream cheese to franchisees. General and administrative,
depreciation and amortization, and pre-opening expenses relate to all areas of revenue generation.
Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 29,
2009 and December 25, 2007 had 52 weeks. Our fiscal year ended December 30, 2008 had 53 weeks,
with the fourth quarter comprising 14 weeks.
Use of Non-GAAP Measurements
We include in this report information on Company-owned, franchise-operated and system-wide
comparable bakery-cafe sales percentages. Company-owned comparable bakery-cafe sales percentages
are based on sales from bakery-cafes that have been in operation and Company-owned for at least 18
months. Franchise-operated comparable bakery-cafe sales percentages are based on sales from
franchised bakery-cafes, as reported by franchisees, that have been in operation and
franchise-operated for at least 18 months. System-wide comparable bakery-cafe sales percentages are
based on sales at both Company-owned and franchise-operated bakery-cafes that have been in
operation and Company-owned or franchise-operated for at least 18 months. Acquired Company-owned
and franchise-operated bakery-cafe locations and other restaurant or bakery-cafe concepts are
excluded from comparable bakery-cafe sales until we have held a 100 percent ownership interest
therein for at least 18 months. Comparable bakery-cafe sales exclude closed locations and
currently, Paradise Bakery & Café, Inc., or Paradise, locations.
Comparable bakery-cafe sales percentages are non-GAAP financial measures, which should not be
considered in isolation or as a substitute for other measures of performance prepared in accordance
with generally accepted accounting principles in the U.S., or GAAP, and may not be equivalent to
comparable bakery-cafe sales as defined or used by other companies. We do not record
franchise-operated bakery-cafe sales as revenues. However, royalty revenues are calculated based
on a percentage of franchise-operated bakery-cafe sales, as reported by franchisees. We use
franchise-operated and system-wide sales information internally in connection with store
development decisions, planning, and budgeting analyses. We believe franchise-operated and
system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates
an understanding of financial performance and the overall direction and trends of sales and
operating income, helps us appreciate the effectiveness of our advertising and marketing
initiatives to which our franchisees also contribute based on a percentage of their sales, and
provides information that is relevant for comparison within the industry.
22
Table of Contents
We also include in this report information on Company-owned, franchise-operated and system-wide
average weekly sales. Average weekly sales are calculated by dividing total net sales by operating
weeks. Accordingly, year-over-year results reflect sales for all locations, whereas comparable
bakery-cafe sales exclude closed locations and Paradise and are based on sales for bakery-cafes
that have been in operation and owned for at least 18 months. New stores typically experience an
opening honeymoon period during which they generate higher average weekly sales in the first 12
to 16 weeks they are open as customers settle-in to normal usage patterns from initial trial of
the location. On average, the settle-in experienced is 5 percent to 10 percent less than the
average weekly sales during the honeymoon period. As a result, year-over-year results of average
weekly sales are generally lower than the results in comparable bakery-cafe sales. This results
from the relationship of the number of bakery-cafes in the honeymoon phase, the number of
bakery-cafes in the settle-in phase, and the number of bakery-cafes in the comparable bakery-cafe
base.
Executive Summary of Results
In fiscal 2009, we earned $2.78 per diluted share with the following performance on key metrics:
system-wide comparable bakery-cafe sales growth of 0.5 percent (0.7 percent for Company-owned
bakery-cafes and 0.5 percent for franchise-operated bakery-cafes), which included the impact of the
additional week in fiscal 2008, a 53 week year; system-wide average weekly sales increased 1.8
percent to $39,926 ($39,050 for Company-owned bakery-cafes and $40,566 for franchise-operated
bakery-cafes); 69 new bakery-cafes opened system-wide (30 Company-owned bakery-cafes and 39
franchise-operated bakery-cafes); and 14 bakery-cafes closed system-wide (seven Company-owned
bakery-cafes and seven franchise-operated bakery-cafes). Our fiscal 2009 results of $2.78 per
diluted share included $0.13 per diluted share of net charges, including a $0.07 per diluted share
charge to increase reserves for certain state sales tax audit exposures, a charge of $0.04 per
diluted share to write-off smallwares and equipment related to the rollout of new china and panini
grills, a charge of $0.04 per diluted share related to the closure of bakery-cafes, and a charge of
$0.01 per diluted share related to the impairment of one bakery-cafe, partially offset by a $0.03
per diluted share gain recorded on both, the redemptions received during year on our investment in
the Columbia Strategic Cash Portfolio and the change in the recorded fair value of the units held
during the year.
In fiscal 2008, we earned $2.22 per diluted share with the following performance on key metrics:
system-wide comparable bakery-cafe sales growth of 5.5 percent (5.8 percent for Company-owned
bakery-cafes and 5.3 percent for franchise-operated bakery-cafes), which included the impact of the
additional week in fiscal 2008, a 53 week year; system-wide average weekly sales increased 1.5
percent to $39,239 ($38,066 for Company-owned bakery-cafes and $40,126 for franchise-operated
bakery-cafes); 102 new bakery-cafes opened system-wide (35 Company-owned bakery-cafes and 67
franchise-operated bakery-cafes); and seven bakery-cafes closed system-wide (five Company-owned
bakery-cafes and two franchise-operated bakery-cafes). In addition, beginning in the first quarter
of fiscal 2008, we adjusted our 2008 development plans and made a determination to raise our sales
hurdles for new bakery-cafe development and to no longer develop specific sites. As a result of
this determination, we established a reserve and recorded a charge of $2.8 million, or $0.06 per
diluted share, to general and administrative expenses related to severance, the write-off of
capitalized assets and overhead costs and the termination of leases for specific sites that we
decided to no longer develop. Our fiscal 2008 results of $2.22 per diluted share also
included additional charges totaling $0.08 per diluted share, including a write-down of our
investment in the Columbia Strategic Cash Portfolio of $0.04 per diluted share, a $0.01 per diluted
share impact with respect to on-going legal settlements, a $0.02 per diluted share impact
of an unfavorable tax adjustment, and a charge of $0.01 per diluted share for asset write-offs
related to our new coffee program.
In fiscal 2007, we earned $1.79 per diluted share with the following performance on key metrics:
system-wide comparable bakery-cafe sales growth of 1.6 percent (1.9 percent for Company-owned
bakery-cafes and 1.5 percent for franchise-operated bakery-cafes); system-wide average weekly sales
declined 1.2 percent to $38,668 ($37,548 for Company-owned bakery-cafes and $39,433 for
franchise-operated bakery-cafes); and 169 new bakery-cafes opened system-wide, including 89
Company-owned bakery-cafes and 80 franchise-operated bakery-cafes. Additionally, we acquired 36
bakery-cafes from franchisees, we sold one bakery-cafe to a franchisee, and 10 bakery-cafes were
closed system-wide, including five Company-owned bakery-cafes and five franchise-operated
bakery-cafes. Further, on February 1, 2007, we purchased 51 percent of the outstanding stock of
Paradise Bakery & Café, Inc., referred to as Paradise, then owner and operator of 22 bakery-cafes
and one commissary and franchisor of 22 bakery-cafes and one commissary. Our fiscal 2007 results
of $1.79 per diluted share also included charges totaling $0.03 per diluted share, which is
comprised of a write-down of our investment in the Columbia Strategic Cash Portfolio of $0.02 per
diluted share and a charge of $0.01 per diluted share related to the discontinuation of our
Crispani® product line.
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Consolidated Statements of Operations Margin Analysis
The following table sets forth the percentage relationship to total revenues, except where
otherwise indicated, of certain items included in our Consolidated Statements of Operations for the
periods indicated. Percentages may not add due to rounding:
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Revenues: |
||||||||||||
Bakery-cafe sales |
85.2 | % | 85.2 | % | 83.9 | % | ||||||
Franchise royalties and fees |
5.8 | 5.8 | 6.3 | |||||||||
Fresh dough sales to franchisees |
9.0 | 9.1 | 9.8 | |||||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Costs and expenses: |
||||||||||||
Bakery-cafe expenses (1): |
||||||||||||
Cost of food and paper products |
29.3 | % | 30.1 | % | 30.3 | % | ||||||
Labor |
32.1 | 31.9 | 32.0 | |||||||||
Occupancy |
8.3 | 8.2 | 7.9 | |||||||||
Other operating expenses |
13.5 | 13.3 | 13.6 | |||||||||
Total bakery-cafe expenses |
83.2 | 83.4 | 83.7 | |||||||||
Fresh dough cost of sales to franchisees (2) |
82.2 | 92.2 | 88.8 | |||||||||
Depreciation and amortization |
5.0 | 5.2 | 5.4 | |||||||||
General and administrative expenses |
6.1 | 6.5 | 6.5 | |||||||||
Pre-opening expenses |
0.2 | 0.3 | 0.8 | |||||||||
Total costs and expenses |
89.6 | 91.3 | 91.6 | |||||||||
Operating profit |
10.4 | 8.7 | 8.4 | |||||||||
Interest expense |
0.1 | 0.1 | 0.1 | |||||||||
Other (income) expense, net |
| 0.1 | | |||||||||
Income before income taxes |
10.3 | 8.5 | 8.3 | |||||||||
Income taxes |
3.9 | 3.2 | 2.9 | |||||||||
Net income |
6.4 | 5.3 | 5.4 | |||||||||
Less: net income attributable to noncontrolling interest |
0.1 | 0.1 | | |||||||||
Net income attributable to Panera Bread Company |
6.4 | % | 5.2 | % | 5.4 | % | ||||||
(1) | As a percentage of bakery-cafe sales. |
|
(2) | As a percentage of fresh dough facility sales to franchisees. |
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Bakery-cafe Composition
The following table sets forth certain bakery-cafe data relating to Company-owned and
franchise-operated bakery-cafes for the periods indicated:
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Number of bakery-cafes: |
||||||||||||
Company-owned: |
||||||||||||
Beginning of period |
562 | 532 | 391 | |||||||||
Bakery-cafes opened |
30 | 35 | 89 | |||||||||
Bakery-cafes closed |
(7 | ) | (5 | ) | (5 | ) | ||||||
Bakery-cafes acquired from franchisees (1) |
| | 36 | |||||||||
Bakery-cafes acquired (2) |
| | 22 | |||||||||
Bakery-cafe sold to a franchisee (3) |
| | (1 | ) | ||||||||
End of period |
585 | 562 | 532 | |||||||||
Franchise-operated: |
||||||||||||
Beginning of period |
763 | 698 | 636 | |||||||||
Bakery-cafes opened |
39 | 67 | 80 | |||||||||
Bakery-cafes closed |
(7 | ) | (2 | ) | (5 | ) | ||||||
Bakery-cafes sold to Company (1) |
| | (36 | ) | ||||||||
Bakery-cafes acquired (2) |
| | 22 | |||||||||
Bakery-cafe purchased from Company (3) |
| | 1 | |||||||||
End of period |
795 | 763 | 698 | |||||||||
System-wide: |
||||||||||||
Beginning of period |
1,325 | 1,230 | 1,027 | |||||||||
Bakery-cafes opened |
69 | 102 | 169 | |||||||||
Bakery-cafes closed |
(14 | ) | (7 | ) | (10 | ) | ||||||
Bakery-cafes acquired (2) |
| | 44 | |||||||||
End of period |
1,380 | 1,325 | 1,230 | |||||||||
(1) | In June 2007, we acquired 32 bakery-cafes and the area development rights from franchisees
in certain markets in Illinois and Minnesota. In February 2007, we acquired four
bakery-cafes, as well as two bakery-cafes still under construction, and the area development
rights from a franchisee in certain markets in California. |
|
(2) | In February 2007, we acquired 51 percent of the outstanding capital stock of Paradise Bakery
& Café, Inc., which then owned and operated 22 bakery-cafes and franchised 22 bakery-cafes,
principally in certain markets in Arizona and Colorado. |
|
(3) | In June 2007, we sold one bakery-cafe and the area development rights for certain markets in
Southern California to a new area developer. |
Comparable Bakery-Cafe Sales
Fiscal 2009 and fiscal 2007 each contained 52 weeks of sales while fiscal 2008 contained 53 weeks
of sales, with an impact of $14.4 million and $21.4 million, respectively, of sales in the
additional week of fiscal 2008 for Company-owned and franchise-operated bakery-cafes. Accordingly,
we believe it is appropriate to provide the following three separate measures of comparable
bakery-cafe sales for fiscal 2009: calendar basis, adjusted fiscal basis, and fiscal basis.
Calendar Basis
We believe that comparable bakery-cafe sales percentages presented on a calendar basis, which match
the specific weeks in a fiscal year to the same specific weeks in another, are useful in
understanding our sales results because such comparisons are generally not impacted by the shifting
of seasonal holidays between fiscal periods from one year to another or by additional weeks of
sales in a particular fiscal period. Comparable bakery-cafe sales growth on a calendar basis for
the fiscal year ended December 29, 2009 was 2.6 percent, 2.3 percent and 2.4 percent for
Company-owned, franchise-operated, and system-wide bakery-cafes, respectively. The comparable
Company-owned bakery-cafe sales growth on a calendar basis was driven by approximately 0.3 percent
transaction growth and approximately 2.3 percent average check growth. Average check growth, in
turn, was comprised of retail price increases of approximately 2.8 percent and negative mix impact
of approximately 0.5 percent in comparison to the prior fiscal year.
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Adjusted Fiscal Basis
We believe that presenting a comparison of adjusted fiscal 2008 sales results, which include only a
52 week period (the first 52 weeks in fiscal 2008), to fiscal 2009 sales results provides a more
meaningful explanation of comparable bakery-cafe sales over those periods. Similarly, we believe
that presenting a comparison of adjusted fiscal 2007 sales results, which include a 53 week period
(52 weeks in fiscal 2007 plus week one of fiscal 2008), to fiscal 2008 sales results provides a
more meaningful explanation of comparable bakery-cafe sales over those periods. Comparable
bakery-cafe sales growth on an adjusted fiscal basis for fiscal 2009 was 2.3 percent, 2.2 percent
and 2.2 percent for Company-owned, franchise-operated, and system-wide bakery-cafes, respectively.
Comparable bakery-cafe sales growth on an adjusted fiscal basis for fiscal 2008 was 3.6 percent,
3.4 percent and 3.4 percent for Company-owned, franchise-operated, and system-wide bakery-cafes,
respectively. The fiscal 2009 comparable Company-owned bakery-cafe sales growth on an adjusted
fiscal basis was driven by approximately 2.3 percent average check growth. Average check growth,
in turn, was comprised of retail price increases of approximately 2.8 percent and negative mix
impact of approximately 0.5 percent in comparison to the prior fiscal year.
Fiscal Basis
Comparable bakery-cafe sales growth for the fiscal periods indicated were as follows:
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
(52 weeks) | (53 weeks) | (52 weeks) | ||||||||||
Company-owned |
0.7 | % | 5.8 | % | 1.9 | % | ||||||
Franchise-operated |
0.5 | % | 5.3 | % | 1.5 | % | ||||||
System-wide |
0.5 | % | 5.5 | % | 1.6 | % |
The 0.7 percent growth in fiscal 2009 comparable Company-owned bakery-cafe sales was driven by
approximately 1.9 percent of transaction decline and 2.6 percent average check growth. Average
check growth, in turn, was comprised of retail price increases of 2.8 percent and negative mix
impact of 0.2 percent in comparison to the prior fiscal year.
Results of Operations
Fiscal 2009 Compared to Fiscal 2008
Revenues
Total revenues in fiscal 2009 increased 4.2 percent to $1,353.5 million compared to $1,298.9
million in fiscal 2008, which included the impact from the additional week of total revenues of
approximately $21.2 million in fiscal 2008, a 53 week year. The growth in total revenue in fiscal
2009 compared to the prior year was primarily due to the opening of 69 new bakery-cafes system-wide
in fiscal 2009 and, to a lesser extent, the 0.5 percent increase in system-wide comparable
bakery-cafe sales in fiscal 2009, which included the impact of the additional week of sales in
fiscal 2008, partially offset by the closure of 14 bakery-cafes system-wide in fiscal 2009.
The system-wide average weekly sales per bakery-cafe for the periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 29, 2009 | December 30, 2008 | Change | ||||||||||
System-wide average weekly sales |
$ | 39,926 | $ | 39,239 | 1.8 | % |
Bakery-cafe sales in fiscal 2009 increased 4.2 percent to $1,153.3 million compared to
$1,106.3 million in fiscal 2008, which included the impact from the additional week of bakery-cafe
sales of approximately $17.5 million in fiscal 2008. The increase in bakery-cafe sales in fiscal
2009 compared to the prior fiscal year was primarily due to the opening of 30 new Company-owned
bakery-cafes and, to a lesser extent, the previously described 0.7 percent increase in comparable
Company-owned bakery-cafe sales in fiscal 2009, which included the impact of the additional week of
sales in fiscal 2008, partially offset by the closure of seven Company-owned bakery-cafes. In
total, Company-owned bakery-cafe sales as a percentage of total revenue remained
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consistent at 85.2
percent in both fiscal 2009 and fiscal 2008. In addition, the increase in average weekly sales for
Company-owned bakery-cafes in fiscal 2009 compared to the prior fiscal year was primarily due to
the previously described average check growth that resulted from our initiative
to drive add-on sales and our category management initiative. The average weekly sales per
Company-owned bakery-cafe and the related number of operating weeks for the periods indicated are
as follows:
For the fiscal year ended | Percentage | |||||||||||
December 29, 2009 | December 30, 2008 | Change | ||||||||||
Company-owned average weekly sales |
$ | 39,050 | $ | 38,066 | 2.6 | % | ||||||
Company-owned number of operating weeks |
29,533 | 29,062 | 1.6 | % |
Franchise royalties and fees in fiscal 2009 increased 4.8 percent to $78.4 million compared to
$74.8 million in fiscal 2008, which included the impact from the additional week of franchise
royalties and fees of approximately $1.5 million in fiscal 2008. The components of franchise
royalties and fees for the periods indicated are as follows (in thousands):
For the fiscal year ended | ||||||||
December 29, 2009 | December 30, 2008 | |||||||
Franchise royalties |
$ | 77,119 | $ | 72,565 | ||||
Franchise fees |
1,248 | 2,235 | ||||||
Total |
$ | 78,367 | $ | 74,800 | ||||
The increase in franchise royalty and fee revenue in fiscal 2009 compared to the prior fiscal
year was attributed to the opening of 39 new franchise-operated bakery-cafes and, to a lesser
extent, the 0.5 percent increase in comparable franchise-operated bakery-cafe sales in fiscal 2009,
which included the additional week of sales in fiscal 2008, partially offset by the closure of
seven franchise-operated bakery-cafes. The average weekly sales per franchise-operated bakery-cafe
and the related number of operating weeks for the periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 29, 2009 | December 30, 2008 | Change | ||||||||||
Franchise average weekly sales |
$ | 40,566 | $ | 40,126 | 1.1 | % | ||||||
Franchise number of operating weeks |
40,436 | 38,449 | 5.2 | % |
As of December 29, 2009, there were 795 franchise-operated bakery-cafes open and commitments
to open 240 additional franchise-operated bakery-cafes. The timetables for opening these
bakery-cafes are established in the various Area Development Agreements, referred to as ADAs, with
franchisees, which provide for the majority to open in the next four to five years. An ADA requires
a franchisee to develop a specified number of bakery-cafes on or before specific dates. If a
franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and
develop Company-owned locations or develop locations through new area developers in that market. We
may exercise one or more alternative remedies to address defaults by area developers, including not
only development defaults, but also defaults in complying with our operating and brand standards
and other covenants under the ADAs and franchise agreements. We may waive compliance with certain
requirements under its ADAs and franchise agreements if we determine that such action is warranted
under the particular circumstances.
Fresh dough sales to franchisees in fiscal 2009 increased 3.5 percent to $121.9 million compared to
$117.8 million in fiscal 2008, which included the impact from the additional week of fresh dough
sales to franchisees of approximately $2.2 million in fiscal 2008. The increase in fresh dough
sales to franchisees was primarily driven by the previously described increased number of
franchise-operated bakery-cafes opened since the prior fiscal year and due to the year-over-year
roll in of increases in our sales prices of dough products to franchisees taken in the second half
of fiscal 2008, partially offset by the closure of seven franchise-operated bakery-cafes.
Costs and Expenses
The cost of food and paper products includes the costs associated with the fresh dough operations
that sell fresh dough products to Company-owned bakery-cafes, as well as the cost of food and paper
products supplied by third-party vendors and distributors. The costs associated with the fresh
dough operations that sell fresh dough products to franchise-operated bakery-cafes are excluded and
are shown separately as fresh dough cost of sales to franchisees in the Consolidated Statements of
Operations.
The cost of food and paper products was $337.6 million, or 29.3 percent of bakery-cafe sales in
fiscal 2009 compared to $332.7 million, or 30.1 percent of bakery-cafe sales, in fiscal 2008. This
decrease in the cost of food and paper products as a percentage of bakery-cafe sales was
principally due to decreases in certain commodity costs, including wheat and fuel; category
management initiatives such as product mix management and pricing strategy; cost savings in
procurement; and improved leverage of our fresh dough manufacturing costs due to additional
bakery-cafe openings. In fiscal 2009, there was an average of 62.5 bakery-cafes per fresh dough
facility compared to an average of 62.0 in fiscal 2008.
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Labor expense was $370.6 million, or 32.1 percent of bakery-cafe sales, in fiscal 2009 compared to
$352.5 million, or 31.9 percent of bakery-cafe sales, in fiscal 2008. The increase in labor expense
as a percentage of bakery-cafe sales was primarily due to increasing medical costs and our
investment in staffing for certain sampling events.
Occupancy cost was $96.0 million, or 8.3 percent of bakery-cafe sales, in fiscal 2009 compared to
$90.4 million, or 8.2 percent of bakery-cafe sales, in fiscal 2008. The modest increase in
occupancy cost as a percentage of bakery-cafe sales was primarily due to increases in real estate
taxes and common area maintenance costs and a $0.3 million charge in fiscal 2009 related to the
closure of two bakery-cafes.
Other operating expenses were $155.4 million, or 13.5 percent of bakery-cafe sales, in fiscal 2009
compared to $147.0 million, or 13.3 percent of bakery-cafe sales, in fiscal 2008. The increase in
other operating expenses as a percentage of bakery-cafe sales was primarily due to a charge for the
write-off of smallwares and equipment related to the rollout of new china and panini grills of
approximately $1.2 million, a charge of $1.1 million related to the write-off of assets as a result
of the closure of three bakery-cafes, and a charge of $0.6 million related to the impairment of one
bakery-cafe. Fiscal 2008 results included a charge of $0.4 million related to asset write-offs
involving our new coffee program.
Fresh dough cost of sales to franchisees was $100.2 million, or 82.2 percent of fresh dough sales
to franchisees, in fiscal 2009 compared to $108.6 million, or 92.2 percent of fresh dough sales to
franchisees, in fiscal 2008. The decrease in the fresh dough cost of sales to franchisees as a
percentage of fresh dough sales to franchisees was primarily the result of the aforementioned
decrease in wheat costs, as well as the year-over-year roll-in of dough pricing taken in the first
half of 2008, partially offset by lower sales of our fresh dough units per bakery-cafe.
General and administrative expenses were $83.2 million, or 6.1 percent of total revenue, in fiscal
2009 compared to $84.4 million, or 6.5 percent of total revenue, in fiscal 2008. The
year-over-year decrease in general and administrative expenses as a percent of total revenues was
primarily due to a charge of $2.8 million included in the fiscal 2008 results for severance, a
write-off of capitalized assets and overhead costs and the termination of leases for specific sites
that we decided to no longer develop in connection with the adjustment of our 2008 development
plans, a charge of $0.6 million included in the fiscal 2008 results related to legal settlements,
and due to disciplined expense management in fiscal 2009, partially offset by higher incentive
based compensation in fiscal 2009 driven by the Companys strong operating performance.
Interest Expense
Interest expense was $0.7 million, or 0.1 percent of total revenues, in fiscal 2009 compared to
$1.6 million, or 0.1 percent of total revenues, in fiscal 2008. The year-over-year decrease in
interest expense was primarily a result of debt outstanding during fiscal 2008 while there was
no debt outstanding in fiscal 2009.
Other Income and Expense
Other income and expense in fiscal 2009 decreased to $0.3 million of expense, or less than 0.1
percent of total revenue, from $0.9 million of expense, or 0.1 percent of total revenue, in fiscal
2008. Other income and expense, net for fiscal 2009 was comprised of a $3.5 million charge for a
potential state sales tax audit exposure, partially offset by a net gain of $1.3 million related to
the Columbia Portfolio, a net gain of $1.0 million on the company-owned life insurance program, and
$0.9 million related to interest income and other factors. Other income
and expense, net for fiscal 2008 was comprised of a net $1.9 million loss attributable to the
Columbia Portfolio, partially offset by $1.0 million related to interest income and other factors.
Income Taxes
The provision for income taxes increased to $53.1 million in fiscal 2009 compared to $41.3 million
in fiscal 2008. The tax provision
for fiscal 2009 and fiscal 2008 reflects a combined federal, state, and local effective tax rate of
38.1 percent and 38.0 percent, respectively. Variances in the effective tax rate between fiscal
2009 and fiscal 2008 were primarily a result of the impact of certain changes in state tax laws
resulting in an increase in the year-over-year effective tax rate for fiscal 2009. The tax
provision in fiscal 2009 also included a $0.3 million increase in our reserves for potential audit
exposures. The tax provision in fiscal 2008 included a $1.0 million increase in our reserves for
potential exposures relating to various ongoing tax audits and legal and legislative developments
in certain jurisdictions not yet under audit, offset by a $0.5 million favorable adjustment to
recognize the benefit of tax credits not previously recognized.
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Fiscal 2008 Compared to Fiscal 2007
Revenues
Including the impact from the additional week of total revenues of approximately $21.2 million in
fiscal 2008, a 53 week year, total revenues in fiscal 2008 increased 21.8 percent to $1,298.9
million compared to $1,066.7 million in fiscal 2007. The growth in total revenue in fiscal 2008
compared to the prior year was primarily due to the opening of 102 new bakery-cafes system-wide in
fiscal 2008, a full fiscal year of revenue from 44 system-wide bakery-cafes, which we acquired on
February 1, 2007 in connection with our purchase of 51 percent of the outstanding stock of
Paradise, the impact of the extra week of total revenues in fiscal 2008, and the increase in
system-wide comparable bakery-cafe sales in fiscal 2008 of 5.5 percent, which included the impact
of the additional week of sales in fiscal 2008.
The system-wide average weekly sales per bakery-cafe for the periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 30, 2008 | December 25, 2007 | Change | ||||||||||
System-wide average weekly sales |
$ | 39,239 | $ | 38,668 | 1.5 | % |
Including the impact from the additional week of bakery-cafe sales of approximately $17.5
million in fiscal 2008, bakery-cafe sales for fiscal 2008 increased 23.6 percent to $1,106.3
million compared to $894.9 million for fiscal 2007. The increase in bakery-cafe sales for fiscal
2008 compared to the prior fiscal year was primarily due to the opening of 35 new Company-owned
bakery-cafes, the impact from a full fiscal year of revenue from the 36 bakery-cafes acquired from
franchisees in 2007, the impact of the extra week of bakery-cafe sales in fiscal 2008, and the 5.8
percent increase in comparable Company-owned bakery-cafe sales for fiscal 2008, which included the
impact of the additional week of sales. This 5.8 percent increase in comparable bakery-cafe sales
was driven by approximately 5.1 percent in average sales price increases and by approximately 0.7
percent from net increases in transaction/mix in comparison to the same period in the prior year.
Bakery-cafe sales were also positively impacted by revenues from the 22 Paradise company-owned
bakery-cafes acquired on February 1, 2007 and consolidated into our results prospectively from the
acquisition date. In total, Company-owned bakery-cafe sales as a percentage of total revenue
increased by 1.3 percentage points to 85.2 percent for fiscal 2008, which included the additional
week of sales, as compared to 83.9 percent in the prior fiscal year. Bakery-cafes included in
comparable sales increases and not included in comparable sales increases consisted of 20.4 percent
and 79.6 percent, respectively, of the $211.4 million increase in sales from the prior fiscal year,
which included the additional week of sales in fiscal 2008. In addition, average weekly sales for
Company-owned bakery-cafes for fiscal 2008 increased as compared to the prior year primarily due to
price increases and operational initiatives focused on speed and accuracy to improve average weekly
sales for new bakery-cafe openings, partially offset by a decrease in transactions. The average
weekly sales per Company-owned bakery-cafe and the related number of operating weeks for the
periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 30, 2008 | December 25, 2007 | Change | ||||||||||
Company-owned average weekly sales |
$ | 38,066 | $ | 37,548 | 1.4 | % | ||||||
Company-owned number of operating weeks |
29,062 | 23,834 | 21.9 | % |
Including the impact from the additional week of franchise royalties and fees of approximately
$1.5 million in fiscal 2008, franchise royalties and fees in fiscal 2008 increased 11.3 percent to
$74.8 million compared to $67.2 million in fiscal 2007. The components of franchise royalties and
fees for the periods indicated are as follows (in thousands):
For the fiscal year ended | ||||||||
December 30, 2008 | December 25, 2007 | |||||||
Franchise royalties |
$ | 72,565 | $ | 64,581 | ||||
Franchise fees |
2,235 | 2,607 | ||||||
Total |
$ | 74,800 | $ | 67,188 | ||||
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The increase in royalty revenue in fiscal 2008 compared to the prior fiscal year was
attributed to the opening of 67 new franchise-operated bakery-cafes, the impact of the extra week
of revenue in fiscal 2008, and the 5.3 percent increase in comparable franchise-operated
bakery-cafe sales in fiscal 2008, which included the additional week of sales. Franchise royalties
and fees were also positively impacted by the consolidation of royalties and fees from the 22
Paradise franchise-operated bakery-cafes acquired on February 1, 2007 and included in our results
prospectively from the acquisition date, partially offset by the sale of 36 bakery-cafes by
franchisees to us in fiscal 2007. Franchise-operated bakery-cafes included in comparable sales
increases and not included in comparable sales increases contributed 38.7 percent and 61.3 percent,
respectively, of the $166.4 million increase in sales from the prior fiscal year, which included
the additional week of sales in fiscal 2008. The average weekly sales per franchise-operated
bakery-cafe and the related number of operating weeks for the periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 30, 2008 | December 25, 2007 | Change | ||||||||||
Franchise average weekly sales |
$ | 40,126 | $ | 39,433 | 1.8 | % | ||||||
Franchise number of operating weeks |
38,449 | 34,905 | 10.2 | % |
As of December 30, 2008, there were 763 franchise-operated bakery-cafes open and commitments
to open 265 additional franchise-operated bakery-cafes. The timetables for opening these
bakery-cafes were established in the various Area Development Agreements, referred to as ADAs with
franchisees, which provide for the majority to open in the next four to five years. In fiscal 2009,
we expected our area developers to open approximately 48 to 54 new franchise-operated bakery-cafes.
An ADA requires a franchisee to develop a specified number of bakery-cafes on or before specific
dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate
the ADA and develop Company-owned locations or develop locations through new area developers in
that market. We may exercise one or more alternative remedies to address defaults by area
developers, including not only development defaults, but also defaults in complying with our
operating and brand standards and other covenants under the ADAs and franchise agreements. We may
waive compliance with certain requirements under its ADAs and franchise agreements when it
determines that such action is warranted under the particular circumstances.
Including the impact from the additional week of fresh dough sales to franchisees of approximately
$2.2 million in fiscal 2008, fresh dough sales to franchisees in fiscal 2008 increased 12.6 percent
to $117.8 million compared to $104.6 million in fiscal 2007. The increase in fresh dough sales to
franchisees was primarily driven by the previously described increased number of franchise-operated
bakery-cafes opened since the prior fiscal year, higher overall franchise-operated
bakery-cafe sales demonstrated by the 5.3 percent increase in comparable franchise-operated
bakery-cafe sales percentages in fiscal 2008, which included the additional week of sales,
increases in our sales prices of dough products to franchisees compared to the same periods in the
prior year, and the impact of the extra week of sales in fiscal 2008.
Costs and Expenses
The cost of food and paper products includes the costs associated with the fresh dough operations
that sell fresh dough products to Company-owned bakery-cafes, as well as the cost of food and paper
products supplied by third-party vendors and distributors. The costs associated with the fresh
dough operations that sell fresh dough products to franchise-operated bakery-cafes are excluded and
are shown separately as fresh dough cost of sales to franchisees in the Consolidated Statements of
Operations.
The cost of food and paper products was $332.7 million, or 30.1 percent of bakery-cafe sales in
fiscal 2008 compared to $271.4 million or 30.3 percent of bakery-cafe sales in fiscal 2007.
Despite significant increases in input costs, we slightly decreased the cost of food and paper
products percent of bakery-cafe sales rate through several means, including category management
initiatives, leverage from higher sales prices, and improved leverage of our fresh dough
manufacturing costs due to additional bakery-cafe openings. In fiscal 2008, there was an average
of 62.0 bakery-cafes per fresh dough facility compared to an average of 55.8 for the
same fiscal period in 2007. Partially offsetting these decreases were significant commodity cost
increases on primarily wheat and diesel, coupled with general inflationary cost increases.
Labor expense was $352.5 million, or 31.9 percent of bakery-cafe sales in fiscal 2008 compared to
$286.2 million, or 32.0 percent of bakery-cafe sales, in fiscal 2007. The labor expense as a
percentage of bakery-cafe sales remained fairly consistent between the 2008 and 2007 fiscal years
primarily as a result of the reduction in fixed labor costs from the removal of Crispani® from the
bakery-cafes in the first quarter of 2008 and leverage from higher sales prices, offset partially
by labor inefficiencies resulting from lower transaction levels and a modest effect from higher
self-insured benefits expense and normalized incentive compensation levels in fiscal 2008 as
compared to fiscal 2007.
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Occupancy cost was $90.4 million, or 8.2 percent of bakery-cafe sales, in fiscal 2008 compared to
$70.4 million, or 7.9 percent of bakery-cafe sales, in fiscal 2007. The increase in occupancy cost
as a percentage of bakery-cafe sales between the 2008 and 2007 fiscal years was primarily due to
rising average per square foot costs driven by our expansion into newer, higher cost markets, such
as those on the West Coast, and, less significantly, due to the increasing numbers of urban,
free-standing and drive-thru bakery-cafe locations.
Other operating expenses were $147.0 million, or 13.3 percent of bakery-cafe sales, in fiscal 2008
compared to $121.3 million, or 13.6 percent of bakery-cafe sales, in fiscal 2007. The decrease in
other operating expenses rate between the 2008 and 2007 fiscal years was primarily due to improved
leverage of our expenses due to higher sales coupled with disciplined management of controllable
expenses, partially offset by a charge of $0.4 million related to asset write-offs involving our
new coffee program.
Fresh dough cost of sales to franchisees was $108.6 million, or 92.2 percent of fresh dough sales
to franchisees, in fiscal 2008, compared to $92.9 million, or 88.8 percent of fresh dough sales to
franchisees, in fiscal 2007. The increase in the fresh dough cost of sales to franchisees rate in
fiscal 2008 compared to the prior fiscal year was primarily the result of the year-over-year
significant increase in wheat costs and diesel costs per gallon previously described, which were
only partially offset by our ability to increase prices and our improved leverage of our fresh
dough manufacturing costs due to additional bakery-cafe openings.
General and administrative expenses were $84.4 million, or 6.5 percent of total revenue, in fiscal
2008 compared to $69.0 million, or 6.5 percent of total revenue, in fiscal 2007. This consistency
in general and administrative expenses as a percentage of total revenue was primarily due to
disciplined expense management and improved leverage of our expenses due to higher sales, which was
partially offset by normalized incentive compensation expense and higher self-insured benefits
expense compared to the prior year, a charge of $2.8 million related to severance, the write-off of
capitalized assets and overhead costs and the termination of leases for specific sites that we
decided in the first quarter of 2008 to no longer develop in connection with the adjustment of our
2008 development plans, and a charge of $0.6 million related to on-going legal settlements.
Other Income and Expense
Other income and expense in fiscal 2008 increased to $0.9 million of expense, or 0.1 percent of
total revenue, from $0.3 million of expense, or less than 0.1 percent of total revenue, in fiscal
2007. The year-over-year change in other income and expense between the 2008 and 2007 fiscal years
was primarily from a net charge of $1.9 million in fiscal 2008 to recognize realized and unrealized
gains and losses on the changes in fair value of its investment in the Columbia Portfolio and
related redemptions received; a $0.5 million gain from the sale of a bakery-cafe to a franchisee in
fiscal 2007; and lower interest income in fiscal 2008 resulting from lower interest rates on cash
and investments on-hand. Partially offsetting these items was a charge of approximately $0.2
million in fiscal 2007 stemming from the Paradise acquisition and a charge of approximately $1.1
million in fiscal 2007 relating to the termination of franchise agreements for certain acquired
franchise-operated bakery-cafes that operated at a royalty rate lower than the current market
royalty rates.
Income Taxes
The provision for income taxes increased to $41.3 million in fiscal 2008 compared to $31.4 million
in fiscal 2007. The tax provision for the 2008 and 2007 fiscal years reflects an effective tax
rate of 38.0 percent and 35.4 percent, respectively. The tax provision in fiscal 2008 includes a
$0.5 million favorable adjustment to recognize the benefit of tax credits not previously recognized
and a $1.0 million increase in our reserves for potential exposures relating to various ongoing tax
audits and legal and legislative developments in certain jurisdictions not yet under audit. The
tax provision in fiscal 2007 included $0.9 million of charges to increase our reserves for
unrecognized tax benefits primarily related to certain state tax law changes; a $1.5 million tax
benefit reflecting the expiration of the statute of limitations on the recovery of certain
previously deducted expenses; and a $0.8 million favorable provision to return
adjustment to fully recognize the benefit of deductions not previously recognized.
Liquidity and Capital Resources
Cash and cash equivalents were $246.4 million at December 29, 2009 compared to $74.7 million at
December 30, 2008. This $171.7 million increase was primarily a result of $214.9 million of cash
generated from operations, $22.8 million received from the exercise of employee stock options, and
$5.5 million received in investment maturity proceeds, partially offset by $54.7 million used for
capital expenditures and $20.1 million used to repurchase the remaining 49 percent of Paradise in
fiscal 2009. Our primary source of liquidity was cash provided by operations, although in prior
years we have also borrowed under a credit facility principally to finance repurchases of our
common stock. Historically, our principal requirements for cash have resulted from our capital
expenditures for the development of new Company-owned bakery-cafes, for maintaining or remodeling
existing Company-owned bakery-cafes, for purchasing existing franchise-operated bakery-cafes or
ownership interests in other restaurant or bakery-cafe concepts, for developing, maintaining or
remodeling fresh dough facilities, and for other capital needs such as enhancements to information
systems and other infrastructure.
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We had working capital of $179.8 million at December 29, 2009 compared to $24.4 million at December
30, 2008. The increase in working capital resulted primarily from the previously described increase
in cash and cash equivalents of $171.7 million, a $8.7 million increase in deferred income taxes
and a $3.4 million increase in trade and other accounts receivable, partially offset by an increase
in accrued expenses of $25.9 million. We believe that our cash flow from operations and available
borrowings under our existing credit facility will be sufficient to fund our cash requirements for
the foreseeable future.
A summary of our cash flows, for the periods indicated, are as follows (in thousands):
For the fiscal year ended | ||||||||||||
Cash provided by (used in): | December 29, 2009 | December 30, 2008 | December 25, 2007 | |||||||||
Operating activities |
$ | 214,904 | $ | 157,324 | $ | 154,245 | ||||||
Investing activities |
$ | (49,219 | ) | $ | (48,705 | ) | $ | (197,493 | ) | |||
Financing activities |
$ | 6,005 | $ | (102,151 | ) | $ | 59,393 | |||||
Net increase in cash and cash equivalents |
$ | 171,690 | $ | 6,468 | $ | 16,145 |
Operating Activities
Cash flows provided by operating activities in fiscal 2009 primarily resulted from net income,
adjusted for non-cash items such as depreciation and amortization, stock-based compensation
expense, deferred income taxes, and the tax benefit from exercise of stock options, an increase in
non-acquisition accrued expenses, accounts payable and deferred rent, partially offset by an
increase in non-acquisition prepaid expenses. Cash flows provided by operating activities in fiscal
2008 primarily resulted from net income, adjusted for non-cash items such as depreciation and
amortization, stock-based compensation expense, deferred taxes, and the tax benefit from exercise
of stock options, a decrease in trade and other accounts receivable, an increase in deferred rent,
an increase in other long-term liabilities and non-acquisition accrued expenses, partially offset
by an increase in prepaid expenses. Cash flows provided by operating activities in fiscal 2007
primarily resulted from net income, adjusted for non-cash items such as depreciation and
amortization, stock-based compensation expense, deferred taxes, and the tax benefit from exercise
of stock options, a decrease in prepaid expenses and deferred rent and non-acquisition accrued
expenses, partially offset by an increase in trade and other receivables.
Investing Activities
Capital Expenditures
Capital expenditures are the largest ongoing component of our investing activities and include
expenditures for new Company-owned bakery-cafes and fresh dough facilities, improvements to
existing Company-owned bakery-cafes and fresh dough facilities, and other capital needs. A summary
of capital expenditures for the periods indicated consisted of the following (in thousands):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
New bakery-cafe and fresh dough facilities |
$ | 28,036 | $ | 39,122 | $ | 92,864 | ||||||
Bakery-cafe and fresh dough facility improvements |
21,695 | 20,665 | 27,617 | |||||||||
Other capital needs |
4,953 | 3,376 | 3,652 | |||||||||
Total |
$ | 54,684 | $ | 63,163 | $ | 124,133 | ||||||
Our capital requirements, including development costs related to the opening or acquisition of
additional bakery-cafes and fresh dough facilities and maintenance and remodel expenditures, have
and will continue to be significant. Our future capital requirements and the adequacy of available
funds will depend on many factors, including the pace of expansion, real estate markets, site
locations, and the nature of the arrangements negotiated with landlords. We believe that our cash
flows from operations and available borrowings under our existing credit facility will be
sufficient to fund our capital requirements in both our short-term and long-term future. We
currently anticipate 80 to 90 system-wide bakery-cafe openings in fiscal 2010. We expect future
bakery-cafes will require, on average, an investment per bakery-cafe (excluding pre-opening
expenses which are expensed as incurred) of approximately $850,000, which is net of landlord
allowances and excludes capitalized development overhead.
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Business Combinations
We used $2.7 million and $71.0 million of cash flows for acquisitions, net of cash acquired as
applicable, in fiscal 2008 and fiscal 2007, respectively. In fiscal 2008, we made required payments
of the remaining acquisition purchase price of $2.5 million, including accrued interest, for
certain acquisitions completed in the first half of fiscal 2007 and we paid additional purchase
price of $0.2 million related to the settlement of certain purchase price adjustments for the
fiscal first quarter 2007 Paradise acquisition. As of December 30, 2008, we had no contingent or
accrued purchase price remaining from previously completed acquisitions. In fiscal 2007, we made
required payments of the remaining acquisition purchase price of $9.6 million, including accrued
interest, for certain acquisitions completed in late fiscal 2006 and the first half of fiscal 2007.
Additionally, we paid $61.4 million for the acquisitions of 51 percent of the outstanding stock of
Paradise, then owner and operator of 22 bakery-cafes and one commissary, and franchisor of 22
bakery-cafes and one commissary, and 36 bakery-cafes, as well as two bakery-cafes then under
construction, from franchisees. As of December 25, 2007, we had a total of $2.5 million of accrued
purchase price affiliated with acquisitions completed in fiscal 2007, which was paid in fiscal
2008. See Note 3 to the consolidated financial statements for further information with respect to
our acquisition activity in fiscal 2008 and 2007.
Investments
Historically, we invested a portion of our cash balances on hand in a private placement of units of
beneficial interest in the Columbia Strategic Cash Portfolio, or Columbia Portfolio, which was an
enhanced cash fund previously sold as an alternative to traditional money-market funds. The
Columbia Portfolio included investments in certain asset-backed securities and structured
investment vehicles that were collateralized by sub-prime mortgage securities or related to
mortgage securities, among other assets. As a result of adverse market conditions that unfavorably
affected the fair value and liquidity of collateral underlying the Columbia Portfolio, it was
overwhelmed with withdrawal requests from investors and was closed, with a restriction placed upon
the cash redemption ability of its holders in the fourth quarter of fiscal 2007.
During fiscal 2009, we received $5.5 million of cash redemptions at an average net asset value of
$0.861 per unit, which fully redeemed our remaining units in the Columbia Portfolio, and we
classified the redemptions as investment maturity proceeds provided by investing activities. In
total, we recognized a net realized and unrealized gain on the Columbia Portfolio units of $1.3
million in fiscal 2009 related to the fair value measurements and redemptions received and included
the net gain in net cash provided by operating activities. As the Columbia Portfolio units were no
longer trading and, therefore, had little or no price transparency, we assessed the fair value of
the underlying collateral for the Columbia Portfolio through review of current investment ratings,
as available, coupled with the evaluation of the liquidation value of assets held by each
investment and their subsequent distribution of cash. We then utilized this assessment of the
underlying collateral from multiple indicators of fair value, which were then adjusted to reflect
the expected timing of disposition and market risks to arrive at an estimated fair value of the
Columbia Portfolio units of $0.650 per unit, or $4.1 million, as of December 30, 2008, and $0.960
per unit, or $23.2 million, as of December 25, 2007. During fiscal 2008, we received $17.2 million
of cash redemptions at an average net asset value of $0.963 per unit, which we classified as
investment maturity proceeds provided by investing activities. In total, we recognized a net
realized and unrealized loss on the Columbia Portfolio units of $1.9 million in fiscal 2008 related
to the fair value measurements and redemptions received and included the net loss in net cash
provided by operating activities. During fiscal 2007, we received $2.4 million of cash redemptions
at an average net asset value of $0.988 subsequent to the withdrawal restriction, which we
classified as investment maturity proceeds provided by investing activities. In total, we
recognized a net realized and unrealized loss on the Columbia Portfolio units of $1.0 million in
fiscal 2007 related to the fair value measurements and redemptions received and included the net
loss in net cash provided by operating activities.
During fiscal 2009 and fiscal 2008, we had no investments in U.S. treasury notes and government
agency securities, and we made no additional purchases of investments. During fiscal 2007, the
remaining $20.0 million of investments in government securities outstanding matured or were called
by the issuer and we did not purchase any additional investments in government securities. We
recognized interest income on the investments in government securities of $0.2 million during
fiscal 2007. This interest income included premium amortization of $0.03 million and is classified
in other (income) expense, net in our consolidated financial statements.
Financing Activities
Financing activities in fiscal 2009 included $22.8 million received from the exercise of employee
stock options, $5.1 million received from the tax benefit from exercise of stock options, and $1.6
million received from the issuance of common stock under employee benefit plans, partially offset
by $20.1 million used to purchase the remaining interest of Paradise and $3.5 million to repurchase
our Class A common stock. Financing activities in fiscal 2008 included $75.0 million used in net
repayments under our credit facility, $48.9 million used to repurchase our Class A common stock,
$17.6 million received from the exercise of stock options, $3.4 million received from the tax
benefit from the exercise of stock options, $1.9 million received from the issuance of common stock
under employee benefit plans, and $1.2 million used for debt issuance costs. Financing activities
in fiscal 2007 included $75.0 million from borrowings under a credit facility, $6.6 million from
the exercise of stock options, $3.7 million from the tax benefit from exercise of stock options,
$1.8 million from the issuance of common stock under employee benefit plans, $27.5 million used to
repurchase common stock and $0.2 million used for debt issuance costs.
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Purchase of Noncontrolling Interest
On June 2, 2009, we exercised our right to purchase the remaining 49 percent of the outstanding
stock of Paradise, excluding certain agreed upon assets totaling $0.7 million, for a purchase price
of $22.3 million, $0.1 million in transaction costs, and settlement of $3.4 million of debt owed to
us by the shareholders of the remaining 49 percent of Paradise. Approximately $20.0 million of the
purchase price, as well as the transaction costs, were paid on June 2, 2009, with $2.3 million
retained by us for certain holdbacks. The holdbacks are primarily for certain indemnifications and
expire on the second anniversary of the transaction closing date, with any remaining holdback
amounts reverting to the prior shareholders of the remaining 49 percent of Paradise. The
transaction was accounted for as an equity transaction, by adjusting the carrying amount of the
noncontrolling interest balance to reflect the change in our ownership interest in Paradise, with
the difference between fair value of the consideration paid and the amount by which the
noncontrolling interest was adjusted recognized in equity attributable to us.
Share Repurchases
On November 17, 2009, our Board of Directors approved a three year share repurchase program of up
to $600 million of our Class A common stock. The share repurchases will be effected from time to
time on the open market or in privately negotiated transactions and we may make such repurchases
under a Rule 10b5-1 Plan. Repurchased shares will be retired immediately and will resume the
status of authorized but unissued shares. The repurchase program may be modified, suspended, or
discontinued by our Board of Directors at any time. Under the share repurchase program, we
repurchased a total of 27,429 shares of our Class A common stock at a weighted-average price of
$62.98 per share for an aggregate purchase price of $1.7 million in fiscal 2009.
On November 27, 2007, in connection with a share repurchase program approved by our Board of
Directors on November 20, 2007, we entered into a written trading plan in compliance with Rule
10b5-1 under the Securities Exchange Act of 1934, as amended, to purchase up to an aggregate of
$75.0 million of our Class A common stock, subject to maximum per share purchase price. Under the
share repurchase program, we repurchased a total of 752,930 shares of our Class A common stock at a
weighted-average price of $36.02 per share for an aggregate purchase price of $27.1 million during
fiscal 2007. During fiscal 2008, we repurchased a total of 1,413,358 shares of our Class A common
stock at a weighted-average price of $33.87 per share for an aggregate purchase price of $47.9
million, which completed this share repurchase program. Repurchased shares were retired
immediately and resumed the status of authorized but unissued shares.
We have historically repurchased shares of our Class A common stock through a share repurchase
program approved by our Board of Directors from participants of the Panera Bread 1992 Stock
Incentive Plan and the Panera Bread 2006 Stock Incentive Plan, or collectively, the Plans, which
are netted and surrendered as payment for applicable tax withholding on the vesting of their
restricted stock. During fiscal 2009, we repurchased 32,135 shares of Class A common stock
surrendered by participants of the Plans at a weighted-average price of $53.66 per share for an
aggregate purchase price of $1.7 million pursuant to the terms of the Plans and the applicable
award agreements. During fiscal 2008, we repurchased 20,378 shares of Class A common stock
surrendered by participants in the Plans at a weighted-average price of $49.87 per share for an
aggregate purchase price of $1.0 million pursuant to the terms of the Plans and the applicable
award agreements. During fiscal 2007, we repurchased 6,594 shares of Class A common stock
surrendered by participants in the Plans at a weighted-average price of $43.62 per share for an
aggregate purchase price of $0.3 million pursuant to the terms of the Plans and the applicable
award agreements. These share repurchases were not made pursuant to publicly announced share
repurchase programs.
Credit Facility
On March 7, 2008, we, and certain of our direct and indirect subsidiaries, as guarantors, entered
into an amended and restated credit agreement, referred to as the Amended and Restated Credit
Agreement, with Bank of America, N.A., and other lenders party thereto to amend and restate in its
entirety our Credit Agreement, dated as of November 27, 2007, by and among us, Bank of America,
N.A., and the lenders party thereto, referred to as the Original Credit Agreement. Pursuant to our
request under the terms of the Original Credit Agreement, the Amended and Restated Credit Agreement
increased the size of our secured revolving credit facility from $75.0 million to $250.0 million.
We may select interest rates equal to (a) the Base Rate (which is defined as the higher of Bank of
America prime rate and the Federal Funds Rate plus 0.50 percent), or (b) LIBOR plus an Applicable
Rate, ranging from 0.75 percent to 1.50 percent, based on our Consolidated Leverage Ratio, as each
term is defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit
Agreement allows us from time to time to request that the credit facility be further increased by
an amount not to exceed, in the aggregate, $150.0 million, subject to receipt of lender commitments
and other conditions precedent. The Amended and Restated Credit Agreement contains financial
covenants that, among other things, require the maintenance of certain leverage and fixed charges
coverage ratios. The credit facility, which is secured by the capital stock of our present and
future material subsidiaries, will become due on March 7, 2013, subject to acceleration upon
certain specified events of defaults, including breaches of representations or covenants, failure
to pay other material indebtedness or a change of control of our Company, as defined in the Amended
and Restated Credit Agreement. The proceeds from the credit facility will be used for general
corporate purposes, including working capital, capital expenditures, and permitted acquisitions and
share repurchases. As of December 29, 2009 and December 30, 2008, we had no balance outstanding
under the Amended and Restated Credit Agreement.
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Critical Accounting Policies & Estimates
Our discussion and analysis of our financial condition and results of operations is based upon the
consolidated financial statements and notes to the consolidated financial statements, which have
been prepared in accordance with generally accepted accounting principles in the United States. The
preparation of the consolidated financial statements requires us to make estimates, judgments and
assumptions, which we believe to be reasonable, based on the information available. These estimates
and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions
used could yield materially different accounting results. On an ongoing basis, we evaluate the
continued appropriateness of our accounting policies and resulting estimates to make adjustments we
consider appropriate under the facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our
operating results and financial position, and we apply those accounting policies in a consistent
manner. We consider our policies on accounting for revenue recognition, valuation of goodwill,
self-insurance, income taxes, lease obligations, and stock-based compensation to be the most
critical in the preparation of the consolidated financial statements because they involve the most
difficult, subjective, or complex judgments about the effect of matters that are inherently
uncertain. There have been no material changes to our application of critical accounting policies
and significant judgments and estimates since December 30, 2008.
Revenue Recognition
We recognize revenue from bakery-cafe sales upon delivery of the related food and other products to
the customer. Revenue from fresh dough sales to franchisees is recorded upon delivery of fresh
dough to franchisees. Also, a liability is recorded in the period in which a gift card is issued
and proceeds are received. As gift cards are redeemed, this liability is reduced and revenue is
recognized as a sale. Further, franchise fees are the result of the sale of area development rights
and the sale of individual franchise locations to third parties. The initial franchise fee is
generally $35,000 per bakery-cafe to be developed under the Area Development Agreement, or ADA. Of
this fee, $5,000 is generally paid at the time of signing of the ADA and is recognized as revenue
when it is received as it is non-refundable and we have to perform no other service to earn this
fee. The remainder of the fee is paid at the time an individual franchise agreement is signed and
is recognized as revenue upon the opening of the bakery-cafe. Royalties are generally paid weekly
based on a percentage of sales specified in each ADA (generally 4 percent to 5 percent of sales).
Royalties are recognized as revenue when they are earned.
Valuation of Goodwill
We record goodwill related to the excess of the purchase price over the fair value of net assets
acquired. At December 29, 2009 and December 30, 2008, our goodwill balance was $87.5 million and
$87.3 million, respectively. Goodwill is subject to periodic evaluation for impairment when
circumstances warrant, or at least once per year. We perform our annual impairment assessment as of
the first day of the fourth quarter of each year. Impairment is tested in accordance with the
accounting standard for goodwill, by
comparing the carrying value of the reporting unit to its estimated fair value. As quoted market
prices for our reporting units are not available, fair value is estimated based on the present
value of expected future cash flows, with forecasted average growth rates of approximately four
percent and average discount rates of 10 percent used in the fiscal 2009 analysis for the reporting
units, which are commensurate with the risks involved in the reporting units. We use current
results, trends, future prospects, and other economic factors as the basis for expected future cash
flows.
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Assumptions in estimating future cash flows are subject to a high degree of judgment and
complexity. We make every effort to forecast these future cash flows as accurately as possible with
the information available at the time the forecast is developed. However, changes in the
assumptions and estimates may affect the carrying value of goodwill, and could result in impairment
charges in future periods. Factors that have the potential to create variances between forecasted
cash flows and actual results include but are not limited to (i) fluctuations in sales volumes;
(ii) commodity costs, such as wheat and fuel; and (iii) acceptance of our pricing actions
undertaken in response to rapidly changing commodity prices and other product costs. Refer to
Forward-Looking Statements included in the beginning of our fiscal 2009 Form 10-K for further
information regarding the impact of estimates of future cash flows.
The calculation of fair value could increase or decrease depending on changes in the inputs and
assumptions used, such as changes in the financial performance of the reporting units, future
growth rate, and discount rate. In order to evaluate the sensitivity of the fair value calculations
on the goodwill impairment test, we applied a hypothetical decrease in cash flows, and made changes
to our projected growth rate and discount rate which we believe are considered appropriate. Based
on the goodwill analysis performed as of September 30, 2009, the first day of our fiscal fourth
quarter, the outlined changes in our assumptions would not affect the results of the impairment
test, as all reporting units still have an excess of fair value over the carrying value.
As of December 29, 2009, we determined there was no impairment of goodwill. While the fair value
of our reporting units exceeded carrying value under the present value of expected future cash flows
model by more than 100 percent for all of our reporting units, there can be no assurance future
goodwill impairment tests will not result in a charge to earnings.
Self-Insurance
We are self-insured for a significant portion of our workers compensation, group health, and
general, auto, and property liability insurance with varying levels of deductibles of as much as
$0.5 million of individual claims, depending on the type of claim. We also purchase aggregate
stop-loss and/or layers of loss insurance in many categories of loss. We utilize third party
actuarial experts estimates of expected losses based on statistical analyses of historical
industry data, as well as our own estimates based on our actual historical data to determine
required self-insurance reserves. The assumptions are closely reviewed, monitored, and adjusted
when warranted by changing circumstances. The estimated accruals for these liabilities could be
affected if actual experience related to the number of claims and cost per claim differs from these
assumptions and historical trends. Based on information known at December 29, 2009, we believe we
have provided adequate reserves for our self-insurance exposure. As of December 29, 2009 and
December 30, 2008, self-insurance reserves were $15.9 million and $12.1 million, respectively, and
were included in accrued expenses in the Consolidated Balance Sheets.
Income Taxes
We are subject to income taxes in the U.S. and Canada. Significant judgment is required in
evaluating our uncertain tax positions and determining our provision for income taxes. The
accounting standard on income taxes contains a two-step approach to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more
than 50 percent likely of being realized upon settlement.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can
be given that the final tax outcome of these matters will not be different. We adjust these
reserves in light of changing facts and circumstances, such as the closing of a tax audit, the
refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact our provision for
income taxes in the period in which such determination is made. Our provision for income taxes
includes the impact of reserve provisions and changes to reserves that are considered appropriate,
as well as the related net interest.
Our provision for income taxes is determined in accordance with the accounting guidance for income
taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Our effective tax rates have differed from the statutory tax rate primarily due to the impact of
state taxes. Our future effective tax rates could be adversely affected by changes in the valuation
of our deferred tax assets or liabilities, or changes in tax laws, regulations, accounting
principles, or interpretations thereof. In addition, we are subject to the continuous examination
of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes.
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Lease Obligations
We lease our bakery-cafes, fresh dough facilities and trucks and support centers. Each lease is
evaluated to determine whether the lease will be accounted for as an operating or
capital lease. The term used for this evaluation includes renewal option periods only in instances
in which the exercise of the renewal option can be reasonably assured and failure to exercise such
option would result in an economic penalty.
For leases that contain rent escalations, we record the total rent payable during the lease term,
as determined above, on a straight-line basis over the term of the lease, and record the difference
between the minimum rent paid and the straight-line rent as a lease obligation. Many of our leases
contain provisions that require additional rental payments based upon bakery-cafe sales volume
(contingent rent). Contingent rent is accrued each period as the liability is incurred, in
addition to the straight-line rent expense noted above. This results in variability in occupancy
expense as a percentage of revenues over the term of the lease in bakery-cafes where we pay
contingent rent.
In addition, we record landlord allowances for non-structural tenant improvements as deferred rent,
which is included in accrued expenses or deferred rent in the Consolidated Balance Sheets based on
their short-term or long-term nature. These landlord allowances are amortized over the reasonably
assured lease term as a reduction of rent expense. Also, leasehold improvements are amortized using
the straight-line method over the shorter of their estimated useful lives or the related reasonably
assured lease term.
Management makes judgments regarding the probable term for each lease, which can impact the
classification and accounting for a lease as capital or operating, the rent holiday and/or
escalations in payments that are taken into consideration when calculating straight-line rent and
the term over which leasehold improvements for each bakery-cafe and fresh dough facility is
amortized. These judgments may produce materially different amounts of depreciation, amortization
and rent expense than would be reported if different assumed lease terms were used.
Stock-Based Compensation
We account for stock-based compensation in accordance with the accounting standard for share based
payment, which requires us to measure and record compensation expense in our consolidated financial
statements for all stock-based compensation awards using a fair value method. We maintain several
stock-based incentive plans under which we may grant incentive stock options, non-statutory stock
options and stock settled appreciation rights, referred to collectively as option awards, to
certain directors, officers, employees and consultants. We also may grant restricted stock and
restricted stock units and we offer a stock purchase plan through which employees may purchase our
Class A common stock each calendar quarter through payroll deductions at 85 percent of market value
on the purchase date and we recognize compensation expense on the 15 percent discount.
For option awards, fair value is determined using the Black-Scholes option pricing model, while
restricted stock is valued using the closing stock price on the date of grant. The Black-Scholes
option pricing model requires the input of subjective assumptions including the estimate of the
following:
| Expected term The expected term of the option awards represents the period of time
between the grant date of the option awards and the date the option awards are either
exercised or canceled, including an estimate for those option awards still outstanding, and is
derived from historical terms and other factors. |
| Expected volatility The expected volatility is based on an average of the historical
volatility of our stock price, for a period approximating the expected term, and the implied
volatility of externally traded options of our stock that were entered into during the period. |
| Risk-free interest rate The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant and with a maturity that approximates the option awards
expected term. |
| Dividend yield The dividend yield is based on our anticipated dividend payout over the
expected term of the option awards. |
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Additionally, we use historical experience to estimate the expected forfeiture rate in determining
the stock-based compensation expense for these awards. Changes in these assumptions could produce
significantly different estimates of the fair value of stock-based compensation and consequently,
the related amount of stock-based compensation expense recognized in the Consolidated Statements of
Operations. The fair value of the awards is amortized over the vesting period. Option awards and
restricted stock generally vest ratably over a four-year period beginning two years from the date
of grant and option awards generally have a six-year term.
Contractual Obligations and Other Commitments
We currently anticipate 80 to 90 system-wide bakery-cafe openings in fiscal 2010. We expect to
fund our capital expenditures principally through internally generated cash flow and available
borrowings under our existing credit facility, if needed.
In addition to our planned capital expenditure requirements, we have certain other contractual and
committed cash obligations. Our contractual cash obligations consist of noncancelable operating
leases for our bakery-cafes, fresh dough facilities and trucks, and support centers; purchase
obligations primarily for certain commodities; and uncertain tax positions. Lease terms for our
trucks are generally for six to eight years. Lease terms for our bakery-cafes, fresh dough
facilities, and support centers are generally for ten years with renewal options at most locations
and generally require us to pay a proportionate share of real estate taxes, insurance, common area,
and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e. percentage
rent) payments based on sales in excess of specified amounts. Certain of our lease agreements
provide for scheduled rent increases during the lease terms or for rental payments commencing at a
date other than the date of initial occupancy. As of December 29, 2009, we expect cash
expenditures under these lease obligations, purchase obligations, and uncertain tax positions to be
as follows for the fiscal periods indicated (in thousands):
Total | In 2010 | 2011-2012 | 2013-2014 | After 2014 | ||||||||||||||||
Operating Leases (1) |
$ | 888,821 | $ | 82,017 | $ | 164,163 | $ | 160,832 | $ | 481,809 | ||||||||||
Purchase Obligations (2) |
$ | 52,940 | 43,350 | 8,590 | 1,000 | | ||||||||||||||
Uncertain Tax Positions (3) |
$ | 4,355 | 2,947 | 1,065 | 343 | | ||||||||||||||
Total |
$ | 946,116 | $ | 128,314 | $ | 173,818 | $ | 162,175 | $ | 481,809 | ||||||||||
(1) | See Note 13 to the consolidated financial statements for further information with respect
to our operating leases. |
|
(2) | Relates to certain commodity and service agreements where we are committed as of December 29,
2009 to purchase a fixed quantity over a contracted time period. |
|
(3) | See Note 14 to the consolidated financial statements for further information with respect to
our uncertain tax positions. |
Off-Balance Sheet Arrangements
As of December 29, 2009, we guaranteed operating leases of 27 franchisee bakery-cafes and four
locations of our former Au Bon Pain division, or its franchisees, which we account for in
accordance with the accounting guidance for guarantees. These leases have terms expiring on various
dates from January 31, 2010 to December 31, 2018 and have a potential amount of future rental
payments of approximately $30.0 million as of December 29, 2009. The obligation from these leases
will generally continue to decrease over time as these operating leases expire. We have not
recorded a liability for certain of these guarantees as they arose prior to the implementation of
the accounting requirements for guarantees and, unless modified, are exempt from its requirements.
We have not recorded a liability for those guarantees issued after the effective date of the
accounting requirements because the fair value of each such lease guarantee was determined by us to
be insignificant based on analysis of the facts and circumstances of each such lease and each such
franchisees performance, and we did not believe it was probable we would be required to perform
under any guarantees at the time the guarantees were issued. We have not had to make any payments
related to any of these guaranteed leases. Au Bon Pain or the applicable franchisees continue to
have primary liability for these operating leases. As of December 29, 2009, future commitments
under these leases were as follows (in thousands):
Total | In 2010 | 2011-2012 | 2013-2014 | After 2014 | ||||||||||||||||
Subleases and Lease Guarantees (1) |
$ | 30,040 | $ | 3,975 | $ | 6,246 | $ | 5,910 | $ | 13,909 |
(1) | Represents aggregate minimum requirement see Note 13 to the consolidated financial
statements for further information with respect to our operating leases. |
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Employee Commitments
We have Confidential and Proprietary Information and Non-Competition Agreements, referred to as
Non-Compete Agreements, with certain employees. These Non-Compete Agreements contain a provision
whereby employees would be due a certain number of weeks of their salary if their employment was
terminated by us as specified in the Non-Compete Agreement. We have not recorded a liability for
these amounts potentially due employees. Rather, we will record a liability for these amounts when
an amount becomes due to an employee in accordance with the appropriate authoritative literature.
As of December 29, 2009, the total amount potentially owed employees under these Non-Compete
Agreements was $12.0 million.
Related Party Credit Agreement
In order to facilitate the opening of the first Panera Bread bakery-cafes in Canada, on September
10, 2008, our Canadian subsidiary, Panera Bread ULC, as lender, entered into a Cdn. $3.5 million
secured revolving credit facility agreement with Millennium Bread Inc., or Millennium, as borrower,
and certain of Millenniums present and future subsidiaries, which we refer to as Franchisee
Guarantors, who have entered into franchise agreements with Panera Bread ULC to operate three
Panera Bread bakery-cafes in Canada. Covenants under the credit agreement require Millennium to
maintain a certain level of cash equity contributions or subordinated loans from its shareholders
in relation to the principal outstanding under the credit agreement. The borrowings under the
credit agreement bear interest at the per annum rate of 7.58 percent, calculated daily and payable
monthly in arrears on the last business day of each of Panera Bread ULCs fiscal month. The credit
facility, which is collateralized by present and future property and assets of Millennium and the
Franchisee Guarantors, as well as the personal guarantees of certain individuals, became due on
September 9, 2009. On September 9, 2009 the maturity date was extended to December 9, 2009, on
December 10, 2009 the maturity date was extended to February 19, 2010, and on February 22, 2010 the
maturity date was extended to March 30, 2010. The credit facility is subject to acceleration upon
certain specified events of default, including breaches of representations or covenants, failure to
pay other material indebtedness or a change of control of Millennium, as defined in the credit
agreement. The proceeds from the credit facility may be used by Millennium to pay costs and
expenses to develop and construct the Franchisee Guarantors bakery-cafes and for their day-to-day
operating requirements.
As part of the franchise agreement between Millennium and Panera Bread ULC, Panera Bread ULC
developed and equipped three bakery-cafes as typical Panera Bread bakery-cafes in accordance with
our then current design and construction standards and specifications as applied by Panera Bread
ULC, in its sole discretion. Millennium was required to pay Panera Bread ULC an amount equal to
the total cost of development of the bakery-cafes, which included any and all costs and expenses
incurred by Panera Bread ULC in connection with selection and development of the bakery-cafes,
excluding overhead expenses of Panera Bread ULC. On September 15, 2008, October 27, 2008, and
December 16, 2008, Panera Bread ULC delivered possession of the three bakery-cafes in Canada to
Millennium, which bakery-cafes subsequently opened on October 6, 2008, November 10, 2008, and
January 26, 2009, respectively. The total development cost billed to Millennium for these three
bakery-cafes was approximately Cdn. $3.7 million. On April 7, 2009, Millennium requested a Cdn.
$3.5 million advance under the Credit Agreement, which was applied against the outstanding
receivable as previously described. The remaining Cdn. $0.2 million receivable was resolved during
fiscal 2009. The Cdn. $3.5 million note receivable from Millennium is included in other accounts
receivable in the Consolidated Balance Sheets as of December 29, 2009.
Impact of Inflation
Our profitability depends in part on our ability to anticipate and react to changes in food,
supply, labor, occupancy and other costs. In the past, we have been able to recover a significant
portion of inflationary costs and commodity price increases, including, among other things, fuel,
proteins, dairy, wheat, tuna, and cream cheese costs, through increased menu prices. There have
been, and there may be in the future, delays in implementing such menu price increases, and
competitive pressures may limit our ability to recover such cost increases in their entirety.
Historically, the effects of inflation on our net income have not been materially adverse.
However, the volatility recently experienced in fiscal 2008 in certain commodity markets, such as
those for wheat, fuel, and proteins, such as chicken or turkey, may have an adverse effect on us in
the future. The extent of the impact will depend on our ability and timing to increase food prices.
A majority of our associates are paid hourly rates related to federal and state minimum wage laws.
Although we have and will continue to attempt to pass along any increased labor costs through food
price increases, there can be no assurance that all such increased labor costs can be reflected in
our prices or that increased prices will be absorbed by consumers without diminishing to some
degree consumer spending at the bakery-cafes. However, we have not experienced to date a
significant reduction in bakery-cafe profit margins as a result of changes in such laws, and
management does not anticipate any related future significant reductions in gross profit margins.
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Accounting Standards Issued Not Yet Adopted
In June 2009, the Financial Accounting Standard Board, or FASB, issued authoritative guidance on
accounting for transfers of financial assets, which is effective for reporting periods beginning
after November 15, 2009. This new guidance limits the circumstances in which a financial asset may
be de-recognized when the transferor has not transferred the entire financial asset or has
continuing involvement with the transferred asset. The concept of a qualifying special-purpose
entity, which had previously facilitated sale accounting for certain asset transfers, is removed by
this new guidance. We expect that the adoption of this new guidance will not have a material effect
on our financial position or results of operations.
In June 2009, the FASB issued authoritative guidance on accounting for variable interest entities,
referred to as VIE, which is effective for reporting periods beginning after November 15, 2009 and
changes the process for how an enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary beneficiary) is defined as
the party with (1) the power to direct activities of the VIE that most significantly affect the
VIEs economic performance and (2) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE. Upon adoption, reporting enterprises must reconsider their
conclusions on whether an entity should be consolidated and should a change result, the effect on
net assets will be recorded as a cumulative effect adjustment to retained earnings. We expect that
the adoption of this new guidance will not have a material effect on our financial position or
results of operations.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Commodity Risk
We manage our commodity risk in several ways. On occasion, we have entered into swap agreements to
manage our fluctuating butter prices. All derivative instruments are entered into for other than
trading purposes. In fiscal 2009 and 2008, we did not have any derivative instruments. In
addition, we purchase certain commodities, such as flour, coffee and proteins, for use in our
business. These commodities are sometimes purchased under agreements of one month to one year time
frames usually at a fixed price. As a result, we are subject to market risk that current market
prices may be above or below our contractual price.
Interest Rate Sensitivity
We are also exposed to market risk primarily from fluctuations in interest rates on our revolving
credit facility. Our revolving credit facility provides for a $250.0 million secured facility
under which we may select interest rates equal to (1) the Base Rate (which is defined as the higher
of the Bank of America prime rate and the Federal funds rate plus 0.50 percent) or (2) LIBOR plus
an applicable rate ranging from 0.75 percent to 1.50 percent as set forth in the Amended and
Restated Credit Agreement. We did not have an outstanding balance on our borrowings at December
29, 2009. We may have future borrowings under our credit facility, which could result in an
interest rate change that may have an impact on our results of operations.
Foreign Currency Exchange Risk
In the fourth quarter of fiscal 2008, we expanded our operations into Canadian markets by opening
two franchise-operated bakery-cafes. We opened one additional bakery-cafe in Canada in the first
quarter of fiscal 2009. Our operating expenses and cash flows are subject to fluctuations due to
changes in the exchange rate of the Canadian Dollar, in which our operating obligations in Canada
are paid. To date, we have not entered into any hedging contracts, although we may do so in the
future. Fluctuations in currency exchange rates could affect our business in the future.
40
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following consolidated financial statements are included in response to this item:
42 | ||
43 | ||
44 | ||
45 | ||
46 | ||
47 | ||
Schedule II Valuation and Qualifying Accounts is included in Item 15(a)(2). All other
schedules are omitted because they are not applicable or the required information is shown in the
financial statements or notes thereto. |
||
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Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders of Panera Bread Company:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of stockholders equity and of cash flows present fairly, in all material
respects, the financial position of Panera Bread Company and its subsidiaries at December 29, 2009
and December 30, 2008, and the results of their operations and their cash flows for each of the
three years in the period ended December 29, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 29, 2009, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on Internal Control over
Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
|
||
St. Louis, MO |
||
February 26, 2010 |
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PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
December 29, 2009 | December 30, 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 246,400 | $ | 74,710 | ||||
Short-term investments |
| 2,400 | ||||||
Trade accounts receivable, net |
17,317 | 15,198 | ||||||
Other accounts receivable |
11,176 | 9,944 | ||||||
Inventories |
12,295 | 11,959 | ||||||
Prepaid expenses |
16,211 | 14,265 | ||||||
Deferred income taxes |
18,685 | 9,937 | ||||||
Total current assets |
322,084 | 138,413 | ||||||
Property and equipment, net |
403,784 | 417,006 | ||||||
Other assets: |
||||||||
Goodwill |
87,481 | 87,334 | ||||||
Other intangible assets, net |
19,195 | 20,475 | ||||||
Long-term investments |
| 1,726 | ||||||
Deposits and other |
4,621 | 8,963 | ||||||
Total other assets |
111,297 | 118,498 | ||||||
Total assets |
$ | 837,165 | $ | 673,917 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,417 | $ | 4,036 | ||||
Accrued expenses |
135,842 | 109,978 | ||||||
Total current liabilities |
142,259 | 114,014 | ||||||
Deferred rent |
43,371 | 39,780 | ||||||
Deferred income taxes |
28,813 | | ||||||
Other long-term liabilities |
25,686 | 21,437 | ||||||
Total liabilities |
240,129 | 175,231 | ||||||
Commitments and contingencies (Note 13) |
||||||||
EQUITY |
||||||||
Panera Bread Company stockholders equity: |
||||||||
Common stock, $.0001 par value: |
||||||||
Class A, 75,000,000 shares authorized; 30,364,915 issued and 30,196,808
outstanding in 2009 and 29,557,849 issued and 29,421,877 outstanding in 2008 |
3 | 3 | ||||||
Class B, 10,000,000 shares authorized; 1,392,107 issued and outstanding in 2009 and
1,398,242 in 2008 |
| | ||||||
Treasury stock, carried at cost; 168,107 shares in 2009 and 135,972 shares in 2008 |
(3,928 | ) | (2,204 | ) | ||||
Additional paid-in capital |
168,288 | 151,358 | ||||||
Accumulated other comprehensive income (loss) |
224 | (394 | ) | |||||
Retained earnings |
432,449 | 346,399 | ||||||
Total Panera Bread Company stockholders equity |
597,036 | 495,162 | ||||||
Noncontrolling interest |
| 3,524 | ||||||
Total Equity |
$ | 597,036 | $ | 498,686 | ||||
Total Equity and Liabilities |
$ | 837,165 | $ | 673,917 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Revenues: |
||||||||||||
Bakery-cafe sales |
$ | 1,153,255 | $ | 1,106,295 | $ | 894,902 | ||||||
Franchise royalties and fees |
78,367 | 74,800 | 67,188 | |||||||||
Fresh dough sales to franchisees |
121,872 | 117,758 | 104,601 | |||||||||
Total revenue |
1,353,494 | 1,298,853 | 1,066,691 | |||||||||
Costs and expenses: |
||||||||||||
Bakery-cafe expenses: |
||||||||||||
Cost of food and paper products |
$ | 337,599 | $ | 332,697 | $ | 271,442 | ||||||
Labor |
370,595 | 352,462 | 286,238 | |||||||||
Occupancy |
95,996 | 90,390 | 70,398 | |||||||||
Other operating expenses |
155,396 | 147,033 | 121,325 | |||||||||
Total bakery-cafe expenses |
959,586 | 922,582 | 749,403 | |||||||||
Fresh dough cost of sales to franchisees |
100,229 | 108,573 | 92,852 | |||||||||
Depreciation and amortization |
67,162 | 67,225 | 57,903 | |||||||||
General and administrative expenses |
83,169 | 84,393 | 68,966 | |||||||||
Pre-opening expenses |
2,451 | 3,374 | 8,289 | |||||||||
Total costs and expenses |
1,212,597 | 1,186,147 | 977,413 | |||||||||
Operating profit |
140,897 | 112,706 | 89,278 | |||||||||
Interest expense |
700 | 1,606 | 483 | |||||||||
Other (income) expense, net |
273 | 883 | 333 | |||||||||
Income before income taxes |
139,924 | 110,217 | 88,462 | |||||||||
Income taxes |
53,073 | 41,272 | 31,434 | |||||||||
Net income |
86,851 | 68,945 | 57,028 | |||||||||
Less: net income (loss) attributable to noncontrolling interest |
801 | 1,509 | (428 | ) | ||||||||
Net income attributable to Panera Bread Company |
$ | 86,050 | $ | 67,436 | $ | 57,456 | ||||||
Earnings per common share attributable to Panera Bread
Company: |
||||||||||||
Basic |
$ | 2.81 | $ | 2.24 | $ | 1.81 | ||||||
Diluted |
$ | 2.78 | $ | 2.22 | $ | 1.79 | ||||||
Weighted average shares of common and common equivalent shares
outstanding: |
||||||||||||
Basic |
30,667 | 30,059 | 31,708 | |||||||||
Diluted |
30,979 | 30,422 | 32,178 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Cash flows from operations: |
||||||||||||
Net income |
$ | 86,851 | $ | 68,945 | $ | 57,028 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
67,162 | 67,225 | 57,903 | |||||||||
(Gain) Loss from short-term investments |
(1,339 | ) | 1,910 | 967 | ||||||||
Stock-based compensation expense |
8,661 | 7,954 | 7,255 | |||||||||
Tax benefit from exercise of stock options |
(5,095 | ) | (3,376 | ) | (3,731 | ) | ||||||
Deferred income taxes |
22,950 | (4,107 | ) | (7,276 | ) | |||||||
Other |
2,799 | 228 | 725 | |||||||||
Changes in operating assets and liabilities, excluding
the effect of acquisitions: |
||||||||||||
Trade and other accounts receivable |
(3,554 | ) | 11,650 | (5,549 | ) | |||||||
Inventories |
(336 | ) | (565 | ) | (1,798 | ) | ||||||
Prepaid expenses |
(2,224 | ) | (8,966 | ) | 6,884 | |||||||
Deposits and other |
100 | 1,042 | 231 | |||||||||
Accounts payable |
2,381 | (2,290 | ) | (815 | ) | |||||||
Accrued expenses |
28,901 | 5,450 | 32,398 | |||||||||
Deferred rent |
3,591 | 6,211 | 5,885 | |||||||||
Other long-term liabilities |
4,056 | 6,013 | 4,138 | |||||||||
Net cash provided by operating activities |
214,904 | 157,324 | 154,245 | |||||||||
Cash flows from investing activities: |
||||||||||||
Additions to property and equipment |
(54,684 | ) | (63,163 | ) | (124,133 | ) | ||||||
Proceeds from sale of assets |
| | 1,844 | |||||||||
Acquisitions, net of cash acquired |
| (2,704 | ) | (71,039 | ) | |||||||
Short-term investments transferred from cash and cash equivalents |
| | (26,526 | ) | ||||||||
Investment maturities proceeds |
5,465 | 17,162 | 22,361 | |||||||||
Net cash used in investing activities |
(49,219 | ) | (48,705 | ) | (197,493 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net (payments) borrowing under credit facility |
| (75,000 | ) | 75,000 | ||||||||
Repurchase of common stock |
(3,453 | ) | (48,893 | ) | (27,487 | ) | ||||||
Exercise of employee stock options |
22,818 | 17,621 | 6,576 | |||||||||
Tax benefit from exercise of stock options |
5,095 | 3,376 | 3,731 | |||||||||
Proceeds from issuance of common stock |
1,626 | 1,898 | 1,782 | |||||||||
Purchase of noncontrolling interest |
(20,081 | ) | | | ||||||||
Capitalized debt issuance costs |
| (1,153 | ) | (209 | ) | |||||||
Net cash provided by (used in) financing activities |
6,005 | (102,151 | ) | 59,393 | ||||||||
Net increase in cash and cash equivalents |
171,690 | 6,468 | 16,145 | |||||||||
Cash and cash equivalents at beginning of period |
74,710 | 68,242 | 52,097 | |||||||||
Cash and cash equivalents at end of period |
$ | 246,400 | $ | 74,710 | $ | 68,242 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive | Class A | Class B | Treasury Stock | Paid-in | Retained | Comprehensive | NonControllnig | |||||||||||||||||||||||||||||||||||||||||
Total | Income | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Interest | |||||||||||||||||||||||||||||||||||||
Balance, December 26, 2006 |
$ | 397,666 | 30,344 | $ | 3 | 1,400 | $ | | 109 | $ | (900 | ) | $ | 176,241 | $ | 222,322 | $ | | $ | | ||||||||||||||||||||||||||||
Net income |
57,028 | | | | | | | | 57,456 | | (428 | ) | ||||||||||||||||||||||||||||||||||||
Acquisition of Paradise Bakery & Café (Note 3) |
2,443 | | | | | | | | | | 2,443 | |||||||||||||||||||||||||||||||||||||
Issuance of common stock |
1,782 | 42 | | | | | | 1,782 | | | | |||||||||||||||||||||||||||||||||||||
Issuance of restricted stock (net of forfeitures) |
| 160 | | | | | | | | | | |||||||||||||||||||||||||||||||||||||
Exercise of employee stock options |
6,576 | 310 | | | | | | 6,576 | | | | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
7,255 | | | | | | | 7,255 | | | | |||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A |
| 2 | | (2 | ) | | | | | | | | ||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(27,487 | ) | (760 | ) | | | | 7 | (288 | ) | (27,199 | ) | | | | |||||||||||||||||||||||||||||||||
Income tax benefit related to stock option plan |
3,731 | | | | | | | 3,731 | | | | |||||||||||||||||||||||||||||||||||||
Cumulative
effect of adopting the pronouncement related to uncertain tax
positions |
(815 | ) | | | | | | | | (815 | ) | | | |||||||||||||||||||||||||||||||||||
Balance, December 25, 2007 |
$ | 448,179 | 30,098 | $ | 3 | 1,398 | $ | | 116 | $ | (1,188 | ) | $ | 168,386 | $ | 278,963 | $ | | $ | 2,015 | ||||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
68,945 | $ | 68,945 | | | | | | | | 67,436 | | 1,509 | |||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
(394 | ) | (394 | ) | | | | | | | | | (394 | ) | | |||||||||||||||||||||||||||||||||
Total other comprehensive income |
(394 | ) | (394 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
68,551 | $ | 68,551 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock |
1,898 | 52 | | | | | | 1,898 | | | | |||||||||||||||||||||||||||||||||||||
Issuance of restricted stock (net of forfeitures) |
| 173 | | | | | | | | | | |||||||||||||||||||||||||||||||||||||
Exercise of employee stock options |
17,621 | 532 | | | | | | 17,621 | | | | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
7,954 | | | | | | | 7,954 | | | | |||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(48,893 | ) | (1,433 | ) | | | | 20 | (1,016 | ) | (47,877 | ) | | | | |||||||||||||||||||||||||||||||||
Income tax benefit related to stock option plan |
3,376 | | | | | | | 3,376 | | | | |||||||||||||||||||||||||||||||||||||
Balance, December 30, 2008 |
$ | 498,686 | 29,422 | $ | 3 | 1,398 | $ | | 136 | $ | (2,204 | ) | $ | 151,358 | $ | 346,399 | $ | (394 | ) | $ | 3,524 | |||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
86,851 | $ | 86,851 | | | | | | | | 86,050 | | 801 | |||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency
translation
adjustment |
618 | 618 | | | | | | | | | 618 | | ||||||||||||||||||||||||||||||||||||
Total other comprehensive income |
618 | 618 | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
87,469 | $ | 87,469 | |||||||||||||||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
(23,124 | ) | | | | | | | (18,799 | ) | | | (4,325 | ) | ||||||||||||||||||||||||||||||||||
Adjustment to noncontrolling interest |
(742 | ) | | | | | | | (742 | ) | | | | |||||||||||||||||||||||||||||||||||
Issuance of common stock |
1,626 | 36 | | | | | | 1,626 | | | | |||||||||||||||||||||||||||||||||||||
Issuance of restricted stock (net of forfeitures) |
| 165 | | | | | | | | | | |||||||||||||||||||||||||||||||||||||
Exercise of employee stock options |
22,818 | 628 | | | | | | 22,818 | | | | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
8,661 | | | | | | | 8,661 | | | | |||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A |
| 6 | | (6 | ) | | | | | | | | ||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(3,453 | ) | (60 | ) | | | | 32 | (1,724 | ) | (1,729 | ) | | | | |||||||||||||||||||||||||||||||||
Income tax benefit related to stock option plan |
5,095 | | | | | | | 5,095 | | | | |||||||||||||||||||||||||||||||||||||
Balance, December 29, 2009 |
$ | 597,036 | 30,197 | $ | 3 | 1,392 | $ | | 168 | $ | (3,928 | ) | $ | 168,288 | $ | 432,449 | $ | 224 | $ | | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Panera Bread Company and its subsidiaries operate a retail bakery-cafe business and franchising
business under the concept names Panera Bread®, Saint Louis Bread Co.®, and Paradise Bakery &
Café®. As of December 29, 2009, the Companys retail operations consisted of 585 Company-owned
bakery-cafes and 795 franchise-operated bakery-cafes. The Company specializes in meeting consumer
dining needs by providing high quality food, including the following: fresh baked goods,
made-to-order sandwiches on freshly baked breads, soups, salads, and cafe beverages, and targets
suburban dwellers and workers by offering a premium specialty bakery-cafe experience with a
neighborhood emphasis. Bakery-cafes are principally located in suburban, strip mall, and regional
mall locations and currently operate in the United States and Canada. Bakery-cafes use fresh dough
for their artisan and sourdough breads and bagels. As of December 29, 2009, the Companys fresh
dough operations, which supply fresh dough items daily to most Company-owned and franchise-operated
bakery-cafes, consisted of 21 Company-owned fresh dough facilities.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Panera Bread Company and its subsidiaries (the Company)
have been prepared in accordance with generally accepted accounting principles in the U.S. (GAAP)
and under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). The
consolidated financial statements consist of the accounts of Panera Bread Company and its wholly
owned direct and indirect consolidated subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Fiscal Year
The Companys fiscal year ends on the last Tuesday in December. Each of the Companys fiscal years
ended December 29, 2009 and December 25, 2007 had 52 weeks. The Companys fiscal year ended
December 30, 2008 had 53 weeks, with the fourth quarter comprising 14 weeks.
Adoption of the FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (ASC). The ASC became the single source for all authoritative GAAP
recognized by the FASB and is required to be applied to financial statements issued for interim and
annual periods ending after September 15, 2009. The ASC does not change GAAP and did not impact the
Companys consolidated financial statements.
Subsequent Events
The Company has evaluated the period from December 30, 2009 through February 26, 2010, the date the
financial statements herein were issued, for subsequent events requiring recognition or disclosure
in the financial statements. No material subsequent events were identified.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and 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
The Company reclassified deposits and other from cash flows from investing activities to cash flows
from operations in the Consolidated Statements of Cash Flows to more appropriately reflect the
nature of the activities in the account. The Company has reclassified prior periods in order to conform to the current presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity at the time of
purchase of three months or less to be cash equivalents.
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Short-term Investments
The Companys investments consist of trading securities that are stated at fair value, with gains
or losses resulting from changes in fair value recognized currently in earnings as other (income)
expense, net. Management designates the appropriate classification of its investments at the time
of purchase based upon its intended holding period. See Note 5 for further information with respect
to the Companys short-term investments.
Trade and Other Accounts Receivable
Trade accounts receivable consists primarily of amounts due to the Company from its franchisees for
purchases of fresh dough from the Companys fresh dough facilities, royalties due to the Company
from franchisee sales, and receivables from credit card sales. The Company does not require
collateral and maintains reserves for potential uncollectible accounts based on historical losses
and existing economic conditions, when relevant. The allowance for doubtful accounts at December
29, 2009 and December 30, 2008 was $0.1 million and $0.2 million, respectively.
As of December 29, 2009, other accounts receivable consisted primarily of tenant allowances due
from landlords of $3.0 million, $2.8 million due from wholesalers of the Companys gift cards, and
a $3.3 million receivable from the Companys Canadian franchisee representing the cost of the three
bakery-cafes Panera developed on behalf of the franchisee (see Note 13 for further explanation). As
of December 30, 2008, other accounts receivable consisted primarily of tenant allowances due from
landlords of $2.4 million and a $3.9 million receivable from the Companys Canadian franchisee
representing the cost of the three bakery-cafes Panera developed on behalf of the franchisee.
Inventories
Inventories, which consist of food products, paper goods and supplies, and promotional items, are
valued at the lower of cost or market, with cost determined under the first-in, first-out method.
Property and Equipment
Property, equipment, and leasehold improvements are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of their estimated useful lives or the
related reasonably assured lease term. Costs incurred in connection with the development of
internal-use software are capitalized in accordance with the accounting standard for internal-use
software in the Companys consolidated financial statements and accompanying notes, and amortized
over the expected useful life of the asset. The estimated useful lives used for financial statement
purposes are:
Leasehold improvements |
15-20 years | |||
Machinery and equipment |
3-10 years | |||
Furniture and fixtures |
2-7 years | |||
External signage |
3-7 years | |||
Capitalized software |
3-5 years |
Interest, to the extent it is incurred, is capitalized when incurred 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 assets estimated useful life. No interest was
incurred for such purposes for the fiscal years ended December 29, 2009 and December 25, 2007.
Interest costs capitalized were approximately $0.1 million for fiscal year ended December 30, 2008.
Upon retirement or sale, the cost of assets disposed and their related accumulated depreciation are
removed from the accounts. Any resulting gain or loss is credited or charged to operations.
Maintenance and repairs are charged to expense when incurred, while certain betterments are
capitalized. The total amounts expensed for maintenance and repairs were $30.7 million, $27.4
million, and $21.7 million for the fiscal years ended December 29, 2009, December 30, 2008, and
December 25, 2007, respectively.
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of net assets acquired.
Goodwill and indefinite-lived intangible assets recorded in the financial statements are required
to be evaluated for impairment annually or when events or circumstances occur indicating that
goodwill might be impaired by the accounting standard for goodwill and other intangibles. The
Company performs its impairment assessment by comparing discounted cash flows from reporting units
with the carrying value of the underlying net assets inclusive of goodwill. The Company completed
annual impairment tests as of the first day of the fourth quarter of fiscal 2009, fiscal 2008, and
fiscal 2007, none of which identified any impairment. The fair value of the Companys reporting
units
exceeded carrying value by more than 100 percent for all the reporting units with goodwill.
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As quoted market prices for the Companys reporting units are not available, fair value is
estimated based on the present value of expected future cash flows, with forecasted average growth
rates of approximately four percent and average discount rates of 10 percent used in the fiscal
2009 analysis for the reporting units, which are commensurate with the risks involved in the
reporting units. The Company uses current results, trends, future prospects, and other economic
factors as the basis for expected future cash flows.
Assumptions in estimating future cash flows are subject to a high degree of judgment and
complexity. The Company makes every effort to forecast these future cash flows as accurately as
possible with the information available at the time the forecast is developed. However, changes in
the assumptions and estimates may affect the carrying value of goodwill, and could result in
additional impairment charges in future periods. Factors that have the potential to create
variances between forecasted cash flows and actual results include but are not limited to (i)
fluctuations in sales volumes, (ii) commodity costs, such as wheat and fuel; and (iii) acceptance
of the Companys pricing actions undertaken in response to rapidly changing commodity prices and
other product costs. Refer to Forward-Looking Statements included in the beginning of the
Companys Form 10-K for further information regarding the impact of estimates of future cash flows.
The calculation of fair value could increase or decrease depending on changes in the inputs and
assumptions used, such as changes in the financial performance of the reporting units, future
growth rate, and discount rate. In order to evaluate the sensitivity of the fair value calculations
on the goodwill impairment test, the Company applied a hypothetical decrease in cash flows, and
made changes to its projected growth rate and discount rate which the Company believes are
considered appropriate. Based on the goodwill analysis performed as of September 30, 2009, the
first day of the Companys fourth quarter of fiscal 2009, the outlined changes in the Companys
assumptions would not affect the results of the impairment test, as all reporting units still had
an excess of fair value over the carrying value.
Other Intangible Assets
Other intangible assets consist primarily of the fair value of favorable lease agreements,
re-acquired territory rights, and trademarks. The Company amortizes the fair value of favorable
lease agreements over the remaining related lease terms at the time of the acquisition, which
ranged from approximately 2 years to 17 years. The fair value of re-acquired territory rights was
based on the present value of bakery-cafe cash flow streams. The Company amortizes the fair value
of re-acquired territory rights over the average remaining useful life of at the time of the
acquisition, which ranged from approximately 13 years to 20 years. The fair value of trademarks is
amortized over their estimated useful life of 22 years.
The Company reviews intangible assets with finite lives for impairment when events or circumstances
indicate these assets might be impaired. The Company tests impairment using historical cash flows
and other relevant facts and circumstances as the primary basis for an estimate of future cash
flows. As of December 29, 2009, no impairment of intangible assets with finite lives had been
recognized. There can be no assurance that future intangible asset impairment tests will not result
in a charge to earnings.
Impairment of Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that indicate the remaining
estimated useful life of long-lived assets may warrant revision or that the remaining balance of an
asset may not be recoverable. When appropriate, the Company determines if there is impairment by
comparing anticipated undiscounted cash flows from the related long-lived assets of a bakery-cafe
or fresh dough facility with their respective carrying values. If impairment exists, the amount of
impairment is determined by comparing anticipated discounted cash flows from the related long-lived
assets of a bakery-cafe or a fresh dough facility, which approximates fair value, with their
respective carrying values. In performing this analysis, management considers such factors as
current results, trends, future prospects, and other economic factors. The Company recognized an
impairment loss of $0.6 million during the fiscal year ended December 29, 2009 related to one
underperforming Company-owned bakery-cafe in the normal course of business. The Company recognized
an impairment loss of $0.1 million during the fiscal year ended December 25, 2007 related to one
underperforming Company-owned bakery-cafe in the normal course of business. These losses were
recorded in other operating expenses in the Consolidated Statements of Operations. No impairment of
long-lived assets was recorded during the fiscal year ended December 30, 2008.
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Self-Insurance Reserves
The Company is self-insured for a significant portion of its workers compensation, group health,
and general, auto, and property liability insurance with varying deductibles of as much as $0.5
million of individual claims, depending on the type of claim. The Company also purchases aggregate
stop-loss and/or layers of loss insurance in many categories of loss. The Company utilizes third
party actuarial experts estimates of expected losses based on statistical analyses of historical
industry data, as well as its own
estimates based on the Companys actual historical data to determine required self-insurance
reserves. The assumptions are closely reviewed, monitored, and adjusted when warranted by changing
circumstances. The estimated accruals for these liabilities could be affected if actual experience
related to the number of claims and cost per claim differs from these assumptions and historical
trends. Based on information known at December 29, 2009, the Company believes it has provided
adequate reserves for its self-insurance exposure. As of December 29, 2009 and December 30, 2008,
self-insurance reserves were $15.9 million and $12.1 million, respectively, and were included in
accrued expenses in the Consolidated Balance Sheets. The total amounts expensed for self-insurance
were $37.1 million, $33.0 million, and $22.7 million, for the fiscal years ended December 29, 2009,
December 30, 2008, and December 25, 2007, respectively.
Income Taxes
The Company completes the provision for income taxes in accordance with the accounting standard for
income taxes in the Companys consolidated financial statements and accompanying notes. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Any effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the period that includes the
enactment date.
In accordance with the authoritative guidance on income taxes issued by the FASB, the Company
establishes additional provisions for income taxes when, despite the belief that tax positions are
fully supportable, there remain certain positions that do not meet the minimum probability
threshold, which is a tax position that is more likely than not to be sustained upon examination by
the applicable taxing authority. In the normal course of business, the Company and its subsidiaries
are examined by various Federal, State and foreign tax authorities. The Company regularly assesses
the potential outcomes of these examinations and any future examinations for the current or prior
years in determining the adequacy of its provision for income taxes. The Company continually
assesses the likelihood and amount of potential adjustments and adjusts the income tax provision,
the current tax liability and deferred taxes in the period in which the facts that give rise to a
revision become known. The Company classifies estimated interest and penalties related to the
underpayment of income taxes as a component of income taxes in the Consolidated Statements of
Operations.
Capitalization of Certain Development Costs
The Company has elected to account for construction costs in accordance with the accounting
standard for real estate in the Companys consolidated financial statements and accompanying notes.
The Company capitalizes direct and indirect costs clearly associated with the acquisition,
development, design, and construction of new bakery-cafe locations and fresh dough facilities as
these costs have a future benefit to the projects. The types of specifically identifiable costs
capitalized by the Company include primarily payroll and payroll related taxes and benefit costs
incurred within the Companys development department. The Companys development department focuses
solely on activities involving the acquisition, development, design, and construction of
bakery-cafes and fresh dough facilities. The Company does not consider for capitalization payroll
or payroll-related costs incurred in other departments, including general and administrative
functions, as these other departments do not directly support the acquisition, development, design,
and construction of bakery-cafes and fresh dough facilities. The Company uses an activity-based
methodology to determine the amount of costs incurred within the development department for
Company-owned projects, which are capitalized, and those for franchise-operated projects and
general and administrative activities, which both are expensed as incurred. If the Company
subsequently makes a determination that a site for which development costs have been capitalized
will not be acquired or developed, any previously capitalized development costs are expensed and
included in general and administrative expenses in the Consolidated Statements of Operations.
The Company capitalized $8.4 million, $8.0 million, and $10.2 million direct and indirect costs
related to the development of Company-owned bakery-cafes for the fiscal years ended December 29,
2009, December 30, 2008, and December 25, 2007, respectively. The Company amortizes capitalized
development costs for each bakery-cafe and fresh dough facility using the straight-line method over
the shorter of their estimated useful lives or the related reasonably assured lease term and
includes such amounts in depreciation and amortization in the Consolidated Statements of
Operations. In addition, the Company assesses the recoverability of capitalized costs through the
performance of impairment analyses on an individual bakery-cafe and fresh dough facility basis
pursuant to the accounting standard for property, plant and equipment, specifically related to the
accounting for the impairment or disposal of long-lived assets.
Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and
amortized to interest expense based on the related debt agreement using the straight-line method,
which approximates the effective interest method. The unamortized
amounts are included in deposits and other assets in the Consolidated Balance Sheets and were $0.8
million and $1.1 million at December 29, 2009 and December 30, 2008, respectively.
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Revenue Recognition
The Company records revenue from bakery-cafe sales upon delivery of the related food and other
products to the customer. Revenue from fresh dough sales to franchisees is also recorded upon
delivery.
The Company records a liability in the period in which a gift card is issued and proceeds are
received. As gift cards are redeemed, this liability is reduced and revenue is recognized.
Franchise fees are the result of the sale of area development rights and the sale of individual
franchise locations to third parties. The initial franchise fee is generally $35,000 per
bakery-cafe to be developed under the Area Development Agreement (ADA). Of this fee, $5,000 is
generally paid at the time of the signing of the ADA and is recognized as revenue when it is
received, as it is non-refundable and the Company has to perform no other service to earn this fee.
The remainder of the fee is paid at the time an individual franchise agreement is signed and is
recognized as revenue upon the opening of the bakery-cafe. Franchise fees were $1.2 million,
$2.2 million, and $2.6 million for the fiscal years ended December 29, 2009, December 30, 2008, and
December 25, 2007, respectively. Royalties are generally paid weekly based on the percentage of
sales specified in each ADA (generally 4 percent to 5 percent of sales). Royalties are recognized
as revenue when they are earned. Royalties were $77.1 million, $72.6 million, and $64.6 million for
the fiscal years ended December 29, 2009, December 30, 2008, and December 25, 2007, respectively.
Advertising Costs
National advertising fund and marketing administration contributions received from
franchise-operated bakery-cafes are consolidated with those from the Company in the Companys
consolidated financial statements. Liabilities for unexpended funds received from franchisees are
included in accrued expenses in the Consolidated Balance Sheets. The Companys contributions to the
national advertising and marketing administration funds are recorded as part of general and
administrative expenses in the Consolidated Statements of Operations, while the Companys own local
bakery-cafe media costs are recorded as part of other operating expenses in the Consolidated
Statements of Operations. The Companys policy is to record advertising costs as expense in the
period in which the cost is incurred. The Companys advertising costs include national, regional
and local expenditures utilizing primarily radio, billboards, social networking, television, and
print. The total amounts recorded as advertising expense were $15.3 million, $14.2 million, and
$10.8 million for the fiscal years ended December 29, 2009, December 30, 2008, and December 25,
2007, respectively.
Pre-Opening Expenses
All pre-opening costs directly associated with the opening of new bakery-cafe locations, which
consists primarily of pre-opening rent expense, labor and food costs incurred during in-store
training and preparation for opening, but exclude manager training costs which are included in
other operating expenses in the Consolidated Statements of Operations, are expensed when incurred.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term
as defined in the accounting standard for leases. The reasonably assured lease term for most
bakery-cafe leases is the initial non-cancelable lease term plus one renewal option period, which
generally equates to 15 years. The reasonably assured lease term on most fresh dough facility
leases is the initial non-cancelable lease term plus one to two renewal option periods, which
generally equates to 20 years. In addition, certain of the Companys lease agreements provide for
scheduled rent increases during the lease terms or for rental payments commencing at a date other
than the date of initial occupancy. The Company includes any rent escalations and construction
period and other rent holidays in its determination of straight-line rent expense. Therefore, rent
expense for new locations is charged to expense beginning with the start of the construction
period.
The Company records landlord allowances and incentives received which are not related to structural
building improvements as deferred rent, which is included in accrued expenses or deferred rent in
the Consolidated Balance Sheets based on their short-term or long-term nature. This deferred rent
is amortized on a straight-line basis over the reasonably assured lease term as a reduction of rent
expense.
Earnings Per Share Data
The Company accounts for earnings per common share in accordance with the relevant accounting
guidance in the Companys consolidated financial statements and accompanying notes, which requires
companies to present basic earnings per share and diluted earnings per share. Basic earnings per
share are computed by dividing net income by the weighted-average number of shares of common stock
outstanding during the year. Diluted earnings per common share are computed by dividing net income
by the weighted-average number of shares of common stock outstanding and dilutive securities
outstanding during the year.
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Foreign Currency Translation
The Company has Canadian subsidiaries which have foreign operations and use their local currency as
their functional currency. Assets and liabilities are translated into U.S. dollars using the
current exchange rate in effect at the balance sheet date, while revenues and expenses are
translated at the weighted-average exchange rate during the fiscal period. The resulting
translation adjustments are recorded as a separate component of accumulated other comprehensive
income (loss) in the Consolidated Statements of Stockholders Equity. Gains and losses resulting
from foreign currency transactions have not historically been significant and are included in other
(income) expense, net in the Consolidated Statements of Operations.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include short-term investments
in trading securities, accounts receivable, accounts payable, and other accrued expenses,
approximate their fair values due to their short maturities. The Companys investments in trading
securities are stated at fair value, with gains or losses resulting from changes in fair value
recognized currently in earnings as other (income) expense, net in the Consolidated Statements of
Operations.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the accounting standard for
share based payment, which requires the Company to measure and record compensation expense in the
Companys consolidated financial statements for all stock-based compensation awards using a fair
value method. The Company maintains several stock-based incentive plans under which the Company may
grant incentive stock options, non-statutory stock options and stock settled appreciation rights
(collectively, option awards) to certain directors, officers, employees and consultants. The
Company also may grant restricted stock and restricted stock units and the Company offers a stock
purchase plan where employees may purchase the Companys common stock each calendar quarter through
payroll deductions at 85 percent of market value on the purchase date and the Company recognizes
compensation expense on the 15 percent discount.
For option awards, fair value is determined using the Black-Scholes option pricing model, while
restricted stock is valued using the closing stock price on the date of grant. The Black-Scholes
option pricing model requires the input of subjective assumptions. These assumptions include
estimating the expected term until the option awards are either exercised or canceled, the expected
volatility of the Companys stock price, for a period approximating the expected term, the
risk-free interest rate with a maturity that approximates the option awards expected term, and the
dividend yield based on the Companys anticipated dividend payout over the expected term of the
option awards. Additionally, the Company uses its historical experience to estimate the expected
forfeiture rate in determining the stock-based compensation expense for these awards. The fair
value of the awards is amortized over the vesting period. Options and restricted stock generally
vest ratably over a four-year period beginning two years from the date of grant and options
generally have a six-year term. Stock-based compensation expense was included in general and
administrative expenses in the Consolidated Statements of Operations.
Asset Retirement Obligations
The Company recognizes the future cost to comply with lease obligations at the end of a lease as it
relates to tangible long-lived assets in accordance with the accounting standard for the asset
retirement and environmental obligations in the Companys consolidated financial statements and
accompanying notes. A liability for the fair value of an asset retirement obligation along with a
corresponding increase to the carrying value of the related long-lived asset is recorded at the
time a lease agreement is executed. The Company amortizes the amount added to property and
equipment and recognizes accretion expense in connection with the discounted liability over the
life of the respective lease. The estimated liability is based on experience in closing
bakery-cafes and the related external cost associated with these activities. Revisions to the
liability could occur due to changes in estimated retirement costs or changes in lease term.
Variable Interest Entities
The Company applies the accounting standard for consolidations in the Companys consolidated
financial statements and accompanying notes to all franchise entities, which operate the Companys
franchise-operated bakery-cafes, in which the Company holds an interest. Generally a variable
interest entity (VIE) is an entity with one or more of the following characteristics: (a) the
total equity investment at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support; (b) as a group the holders of the equity
investment at risk lack (i) the ability to make decisions about an entitys activities through
voting or similar rights, (ii) the obligation to absorb the expected losses of the entity; or (c)
the equity investors have voting rights that are not proportional to their economic interests and
substantially all of the entitys activities either involve, or are conducted on behalf of, an
investor that has disproportionately fewer voting rights. The accounting standard for consolidation
requires a VIE to be consolidated in the financial statements of the entity that is determined to
be the primary beneficiary of the VIE.
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The Companys determination of the primary beneficiary of each VIE requires judgment and is based
on an analysis of all relevant facts and circumstances including: (a) the existence of a
principal-agency relationship between the Company and the franchisee; (b) the relationship and
significance of the activities of the VIE to the Company and the franchisee; (c) the Company and
the franchisees exposure to the expected losses of the VIE; and (d) the design of the VIE. The
Company does not posses any ownership interests in franchise entities. The franchise agreements are
designed to provide the franchisee with key decision-making ability to enable it to oversee its
operations and to have a significant impact on the success of the franchise, while the Companys
decision-making rights are related to protecting its brand. Based upon its analysis of all the
relevant facts and considerations of the franchise entities, the Company has concluded that it is
not the primary beneficiary of the entities and therefore, these entities have not been
consolidated.
Accounting Standards Issued Not Yet Adopted
In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial
assets, which is effective for reporting periods beginning after November 15, 2009. This new
guidance limits the circumstances in which a financial asset may be de-recognized when the
transferor has not transferred the entire financial asset or has continuing involvement with the
transferred asset. The concept of a qualifying special-purpose entity, which had previously
facilitated sale accounting for certain asset transfers, is removed by this new guidance. The
Company expects that the adoption of this new guidance will not have a material effect on its
financial position or results of operations.
In June 2009, the FASB issued authoritative guidance on accounting for variable interest entities
(VIE), which is effective for reporting periods beginning after November 15, 2009, and changes
the process for how an enterprise determines which party consolidates a VIE, to a primarily
qualitative analysis. The party that consolidates the VIE (the primary beneficiary) is defined as
the party with (1) the power to direct activities of the VIE that most significantly affect the
VIEs economic performance and (2) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE. Upon adoption, reporting enterprises must reconsider their
conclusions on whether an entity should be consolidated and should a change result, the effect on
net assets will be recorded as a cumulative effect adjustment to retained earnings. The Company
expects that the adoption of this new guidance will not have a material effect on its financial
position or results of operations.
3. Business Combinations
On June 21, 2007, the Company purchased substantially all of the assets of ten bakery-cafes and the
area development rights for certain markets in Illinois from its area developer, SLB of Central
Illinois, L.L.C., for a purchase price of approximately $16.6 million, net of the $0.4 million
contractual settlement charge determined in accordance with the accounting guidance for business
combinations, plus approximately $0.1 million in acquisition costs. Approximately $16.2 million of
the acquisition price was paid with cash on hand at the time of closing while the remaining
approximately $0.8 million was paid with interest in fiscal 2008. The Consolidated Statements of
Operations include the results of operations from the operating bakery-cafes from the date of the
acquisition. The pro forma impact of the acquisition on prior periods is not presented, as the
impact is not material to reported results. The Company allocated the purchase price to the
tangible and intangible assets acquired in the acquisition at their estimated fair values with the
remainder allocated to tax deductible goodwill as follows: $0.2 million to inventories, $5.1
million to property and equipment, $7.1 million to intangible assets, which represents the fair
value of re-acquired territory rights and favorable lease agreements, $0.6 million to liabilities,
and $4.9 million to goodwill. As a result of the acquisition, the Company incurred a contractual
settlement charge of $0.4 million pursuant to the accounting guidance on business combinations,
reflecting the termination of franchise agreements for certain bakery-cafes that operated at a
royalty rate lower than the Companys current market royalty rates. The charge is reported as other
(income) expense, net in the Consolidated Statements of Operations.
On June 21, 2007, the Company also purchased substantially all of the assets of 22 bakery-cafes and
the area development rights for certain markets in Minnesota from its area developer, SLB of
Minnesota, L.L.C., for a purchase price of approximately $18.3 million, net of the $0.7 million
contractual settlement charge determined in accordance with the accounting guidance for business
combinations, plus approximately $0.1 million in acquisition costs. Approximately $18.1 million of
the acquisition price was paid with cash on hand at the time of closing while the remaining
approximately $0.9 million was paid with interest in fiscal 2008. The Consolidated Statements of
Operations include the results of operations from the operating bakery-cafes from the date of the
acquisition. The pro forma impact of the acquisition on prior periods is not presented, as the
impact is not material to reported results. The Company allocated the purchase price to the
tangible and intangible assets acquired in the acquisition at their estimated fair values with the
remainder allocated to tax deductible goodwill as follows: $0.3 million to inventories, $8.7
million to property and equipment, $2.2 million to intangible assets, which represents the fair
value of re-acquired territory rights and favorable lease agreements, $0.3 million to liabilities,
and $7.5 million to goodwill. As a result of the acquisition, the Company incurred a contractual
settlement charge of $0.7 million pursuant to the relevant authoritative guidance, reflecting the
termination of franchise agreements for
certain bakery-cafes that operated at a royalty rate lower than the Companys current market
royalty rates. The charge is reported as other (income) expense, net in the Consolidated Statements
of Operations.
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On June 6, 2007, the Company sold substantially all of the assets of one bakery-cafe and the area
development rights for certain markets in Southern California to a new area developer, Pride
Bakeries, LLC, for a sales price of approximately $1.8 million, resulting in a gain of
approximately $0.5 million, which is classified in other (income) expense, net in the Consolidated
Statements of Operations. Pride Bakeries, LLC, also agreed to develop 12 additional bakery-cafes in
certain previously undeveloped Southern California markets.
On February 28, 2007, the Company purchased substantially all of the assets of four bakery-cafes,
as well as two bakery-cafes then under construction, and the area development rights for certain
markets in California from its area developer, R&S Bread Group, Inc., for a purchase price of
approximately $5.1 million plus approximately $0.02 million in acquisition costs. Approximately
$4.6 million of the acquisition price was paid with cash on hand at the time of closing,
approximately $0.3 million plus accrued interest was paid in cash in fiscal 2007 and the remaining
approximately $0.2 million was paid with interest in fiscal 2008. The Consolidated Statements of
Operations include the results of operations from the operating bakery-cafes from the date of the
acquisition. The pro forma impact of the acquisition on prior periods is not presented, as the
impact is not material to reported results. The Company allocated the purchase price to the
tangible and intangible assets acquired in the acquisition at their estimated fair values with the
remainder allocated to tax deductible goodwill as follows: $0.1 million to inventories, $2.7
million to property and equipment, $1.2 million to intangible assets, which represents the fair
value of re-acquired territory rights and favorable and unfavorable lease agreements, and $1.1
million to goodwill.
On February 1, 2007, the Company purchased 51 percent of the outstanding stock of Paradise Bakery &
Café, Inc. (Paradise), then owner and operator of 22 bakery-cafes, 17 of which are in the Phoenix
market, and one commissary, and franchisor of 22 bakery-cafes and one commissary, for a purchase
price of approximately $21.1 million plus approximately $0.5 million in acquisition costs.
Approximately $20.1 million of the acquisition price was paid with cash on hand at the time of
closing, approximately $0.6 million plus accrued interest was paid in cash in fiscal 2007 and the
remaining approximately $0.4 million was paid with interest in fiscal 2009. In addition, the
Company had the right to purchase the remaining 49 percent of the outstanding stock of Paradise
after January 1, 2009 at a contractually determined value, which approximated fair value. Also, if
the Company had not exercised its right to purchase the remaining 49 percent of the outstanding
stock of Paradise, the remaining Paradise owners had the right to purchase the Companys 51 percent
ownership interest in Paradise after June 30, 2009 for $21.1 million. In conjunction with the
transaction, Paradise entered into a credit facility with the Company pursuant to which Paradise
borrowed $6.1 million from the Company with approximately $4.8 million of the borrowing paid
directly to Paradises third-party creditors and the remaining $1.3 million retained by Paradise
for working capital purposes. The Consolidated Statements of Operations include the results of
operations of Paradise from the date of the acquisition. The pro forma impact of the acquisition on
prior periods is not presented as the impact is not material to reported results. The Company
allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed
in the acquisition at their estimated fair values with any remainder allocated to tax deductible
goodwill as follows: $5.1 million to current assets, $5.8 million to intangible assets, which
represents the fair value of trademarks and favorable lease agreements, $16.6 million to goodwill,
$7.4 million to other long-term assets, $8.9 million to current liabilities, $2.0 million to
long-term liabilities and $2.4 million to minority interest.
There were no business combinations consummated during the fiscal years ended December 29, 2009 and
December 30, 2008. Subsequent to the original allocation of purchase price for the aforementioned
acquisitions to the various tangible and intangible assets, the Company had approximately $0.1
million of adjustments during fiscal 2009, which resulted in a $0.1 million increase to goodwill,
and $0.2 million of adjustments during fiscal 2008, which resulted in a net $0.2 million increase
to goodwill, and approximately $0.2 million of adjustments during fiscal 2007, which resulted in a
net $0.2 million decrease to goodwill in the Consolidated Balance Sheets as a result of the
settlement of certain purchase price adjustments. Further, the pro forma impact of the acquisitions
on prior periods is not presented, as the impact of the series of individually immaterial business
combinations completed during fiscal 2007 were not material in the aggregate to reported results.
During the fiscal years ended December 30, 2008 and December 25, 2007, the Company paid
approximately $2.5 million and $9.6 million, including accrued interest, of previously accrued
acquisition purchase price in accordance with the asset purchase agreements, respectively. There
was no accrued purchase price payments made in the fiscal year ended December 29, 2009. There was
no contingent or accrued purchase price remaining as of December 29, 2009 or December 30, 2008.
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4. Noncontrolling Interest
Effective December 31, 2008, the first day of fiscal 2009, the Company implemented the accounting
standard for the reporting of noncontrolling interests in the Companys consolidated financial
statements and accompanying notes. This standard changed the accounting and reporting for minority
interests, which are to be recorded initially at fair market value and reported as noncontrolling
interests as a component of equity, separate from the parent companys equity. Purchases or sales
of noncontrolling interests that do not result in a change in control are to be accounted for as
equity transactions. In addition, net income attributable to the noncontrolling interest is to be
included in consolidated net income in the Consolidated Statements of Operations and upon a loss of
control, the interest sold, as well as any interest retained, will be recorded at fair value with
any gain or loss recognized in earnings. The Company has applied these presentation and disclosure
requirements retrospectively.
During fiscal 2009, the Company recorded an adjustment of $0.7 million to noncontrolling interest
to reflect deferred taxes prior to the purchase of the remaining 49 percent of Paradise. This
adjustment was recorded to additional paid-in capital as a result of the June 2, 2009 purchase of
the remainder of Paradise.
Purchase of Noncontrolling Interest
On February 1, 2007, the Company purchased 51 percent of the outstanding stock of Paradise, then
owner and operator of 22 bakery-cafes and one commissary and franchisor of 22 bakery-cafes and one
commissary, for a purchase price of $21.1 million plus $0.5 million in acquisition costs. As a
result, Paradise became a majority-owned consolidated subsidiary of the Company, with its operating
results included in the Companys Consolidated Statements of Operations and the 49 percent portion
of equity attributable to Paradise presented as minority interest, and subsequently as
noncontrolling interest, in the Companys Consolidated Balance Sheets. In connection with this
transaction, the Company received the right to purchase the remaining 49 percent of the outstanding
stock of Paradise after January 1, 2009 at a contractually determined value, which approximated
fair value. In addition, the related agreement provided that if the Company did not exercise its
right to purchase the remaining 49 percent of the outstanding stock of Paradise by June 30, 2009,
the remaining Paradise owners had the right to purchase the Companys 51 percent interest in
Paradise thereafter for $21.1 million.
On June 2, 2009, the Company exercised its right to purchase the remaining 49 percent of the
outstanding stock of Paradise, excluding certain agreed upon assets totaling $0.7 million, for a
purchase price of $22.3 million, $0.1 million in transaction costs, and settlement of $3.4 million
of debt owed to the Company by the shareholders of the remaining 49 percent of Paradise.
Approximately $20.0 million of the purchase price, as well as the transaction costs, were paid on
June 2, 2009, with $2.3 million retained by the Company for certain holdbacks. The holdbacks are
primarily for certain indemnifications and expire on the second anniversary of the transaction
closing date, June 2, 2011, with any remaining holdback amounts reverting to the prior shareholders
of the remaining 49 percent of Paradise. The transaction was accounted for as an equity
transaction, by adjusting the carrying amount of the noncontrolling interest balance to reflect the
change in the Companys ownership interest in Paradise, with the difference between fair value of
the consideration paid and the amount by which the noncontrolling interest was adjusted recognized
in equity attributable to the Company.
The following table illustrates the effect on the Companys equity of its purchase of the remaining
49 percent of outstanding stock of Paradise on June 2, 2009 (in thousands):
For the fiscal year ended | ||||||||
December 29, 2009 | December 30, 2008 | |||||||
Net income attributable to the Company |
$ | 86,050 | $ | 67,436 | ||||
Decrease in equity for purchase of noncontrolling interest |
$ | (18,799 | ) | $ | | |||
Change from net income attributable to the Company and the purchase of
noncontrolling interest |
$ | 67,251 | $ | 67,436 | ||||
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5. Fair Value Measurements
Effective December 26, 2007, the first day of fiscal 2008, the Company implemented the accounting
standard regarding disclosures for financial assets, financial liabilities, non-financial assets
and non-financial liabilities recognized or disclosed at fair value in the consolidated financial
statements on a recurring basis (at least annually). Effective December 31, 2008, the first day of
fiscal 2009, the Company also implemented the accounting standard for non-financial assets and
non-financial liabilities reported or disclosed at fair value on a non-recurring basis, the
adoption of which had no impact on fiscal 2009. This standard defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. This standard also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The following describes the three levels of inputs
used to measure fair value:
Level 1 Quoted market prices in active markets for identical assets or liabilities.
Level 2 Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 Unobservable inputs that are not corroborated by market data.
The Companys $115.9 million and $76.6 million in cash equivalents at December 29, 2009 and
December 30, 2008, respectively, were carried at fair value in the Consolidated Balance Sheets
based on quoted market prices for identical securities (Level 1 inputs).
Historically, the Company invested a portion of its cash balances on hand in a private placement of
units of beneficial interest in the Columbia Strategic Cash Portfolio, or Columbia Portfolio, which
was an enhanced cash fund previously sold as an alternative to traditional money-market funds.
Prior to the fourth quarter of fiscal 2007, the amounts were appropriately classified as trading
securities in cash and cash equivalents in the Consolidated Balance Sheets as the fund was
considered both short-term and highly liquid in nature. The Columbia Portfolio included investments
in certain asset backed securities and structured investment vehicles that were collateralized by
sub-prime mortgage securities or related to mortgage securities, among other assets. As a result of
adverse market conditions that unfavorably affected the fair value and liquidity availability of
collateral underlying the Columbia Portfolio, it was overwhelmed with withdrawal requests from
investors and the Columbia Portfolio was closed with a restriction placed upon the cash redemption
ability of its holders in the fourth quarter of fiscal 2007. As such, the Company classified the
Columbia Portfolio units in short-term and long-term investments rather than cash and cash
equivalents in the Consolidated Balance Sheets and carried the investments at fair value.
As the Columbia Portfolio units were no longer trading and, therefore, had little or no price
transparency, the Company assessed the fair value of the underlying collateral for the Columbia
Portfolio through review of current investment ratings, as available, coupled with the evaluation
of the liquidation value of assets held by each investment and their subsequent distribution of
cash. The Company then utilized this assessment of the underlying collateral from multiple
indicators of fair value, which were then adjusted to reflect the expected timing of disposition
and market risks to arrive at an estimated fair value of the Columbia Portfolio units. During
fiscal 2009, the Company received $5.5 million of cash redemptions, which fully redeemed the
Companys remaining units in the Columbia Portfolio. The Columbia Portfolio units had an estimated
fair value of $0.650 per unit, or $4.1 million, as of December 30, 2008, and $0.960 per unit, or
$23.2 million, as of the date of adopting the fair value accounting standard, December 26, 2007.
Based on the valuation methodology used to determine the fair value, the Columbia Portfolio was
classified within Level 3 of the fair value hierarchy. Realized and unrealized gains/(losses)
relating to the Columbia Portfolio were classified in other (income) expense, net in the
Consolidated Statements of Operations. The following table sets forth a summary of the changes in
the fair value of the Companys Level 3 financial asset for the periods indicated (in thousands):
For the Fiscal Year Ended | ||||||||
December 29, 2009 | December 30, 2008 | |||||||
Beginning balance |
$ | 4,126 | $ | 23,198 | ||||
Net realized and unrealized gains (losses) (1) |
1,339 | (1,910 | ) | |||||
Redemptions |
(5,465 | ) | (17,162 | ) | ||||
Ending balance |
$ | | $ | 4,126 | ||||
(1) | Includes $2.0 million of losses attributable to the change in unrealized losses relating to
the units of the Columbia Portfolio still held as of December 30, 2008. |
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6. Inventories
Inventories consisted of the following (in thousands):
December 29, 2009 | December 30, 2008 | |||||||
Food: |
||||||||
Fresh dough facilities: |
||||||||
Raw materials |
$ | 2,573 | $ | 3,040 | ||||
Finished goods |
275 | 319 | ||||||
Bakery-cafes: |
||||||||
Raw materials |
7,304 | 6,533 | ||||||
Paper goods |
2,143 | 2,021 | ||||||
Retail merchandise |
| 46 | ||||||
$ | 12,295 | $ | 11,959 | |||||
7. Property and Equipment
Major classes of property and equipment consisted of the following (in thousands):
December 29, 2009 | December 30, 2008 | |||||||
Leasehold improvements |
$ | 375,689 | $ | 355,744 | ||||
Machinery and equipment |
236,196 | 221,963 | ||||||
Furniture and fixtures |
68,172 | 62,057 | ||||||
Signage |
17,848 | 17,129 | ||||||
Smallwares |
16,144 | 14,557 | ||||||
Construction in progress |
17,880 | 12,452 | ||||||
731,929 | 683,902 | |||||||
Less: accumulated depreciation |
(328,145 | ) | (266,896 | ) | ||||
Property and equipment, net |
$ | 403,784 | $ | 417,006 | ||||
The Company recorded depreciation expense related to these assets of $65.9 million, $65.9 million,
and $57.0 million in fiscal 2009, 2008, and 2007, respectively.
8. Goodwill
The changes in the carrying amount of goodwill at December 29, 2009 and December 30, 2008 were as
follows (in thousands):
Company Bakery- | Franchise | Fresh Dough | ||||||||||||||
Cafe Operations | Operations | Operations | Total | |||||||||||||
Balance December 25, 2007 |
83,463 | 1,934 | 1,695 | 87,092 | ||||||||||||
Goodwill arising from acquisitions |
242 | | | 242 | ||||||||||||
Balance December 30, 2008 |
$ | 83,705 | $ | 1,934 | $ | 1,695 | $ | 87,334 | ||||||||
Goodwill arising from acquisitions |
147 | | | 147 | ||||||||||||
Balance December 29, 2009 |
$ | 83,852 | $ | 1,934 | $ | 1,695 | $ | 87,481 | ||||||||
Goodwill accumulated amortization was $7.9 million at December 29, 2009 and December 30, 2008.
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9. Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
December 29, 2009 | December 30, 2008 | |||||||||||||||||||||||
Gross | Gross | Net | ||||||||||||||||||||||
Carrying | Accumulated | Net | Carrying | Accumulated | Carrying | |||||||||||||||||||
Value | Amortization | Carrying Value | Value | Amortization | Value | |||||||||||||||||||
Trademark |
$ | 5,610 | $ | (742 | ) | $ | 4,868 | $ | 5,610 | $ | (488 | ) | $ | 5,122 | ||||||||||
Re-acquired territory rights |
14,629 | (2,357 | ) | 12,272 | 14,629 | (1,571 | ) | 13,058 | ||||||||||||||||
Favorable leases |
2,776 | (721 | ) | 2,055 | 2,776 | (481 | ) | 2,295 | ||||||||||||||||
Total other intangible assets |
$ | 23,015 | $ | (3,820 | ) | $ | 19,195 | $ | 23,015 | $ | (2,540 | ) | $ | 20,475 | ||||||||||
Amortization expense on these intangible assets for the fiscal years ended December 29, 2009,
December 30, 2008, and December 25, 2007, was approximately (in thousands): $1,280, $1,303, and
$935 respectively. Future amortization expense on these intangible assets as of December 29, 2009
is estimated to be approximately (in thousands): $1,236 in 2010, $1,233 in 2011, $1,228 in 2012,
$1,243 in 2013, $1,215 in 2014, and $13,040 thereafter.
10. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 29, 2009 | December 30, 2008 | |||||||
Unredeemed gift cards |
$ | 37,454 | $ | 33,042 | ||||
Compensation and related employment taxes |
33,416 | 22,508 | ||||||
Insurance |
16,265 | 12,482 | ||||||
Taxes, other than income tax |
11,072 | 4,898 | ||||||
Capital expenditures |
6,108 | 6,448 | ||||||
Fresh dough operations |
5,263 | 5,191 | ||||||
Rent |
5,019 | 4,567 | ||||||
Utilities |
3,163 | 3,258 | ||||||
Advertising |
2,465 | 3,698 | ||||||
Deferred purchase price of noncontrolling interest (Note 4) |
2,264 | | ||||||
Deferred revenue |
1,334 | 2,024 | ||||||
Income taxes payable |
| 1,259 | ||||||
Other |
12,019 | 10,603 | ||||||
$ | 135,842 | $ | 109,978 | |||||
11. Credit Facility
On March 7, 2008, the Company and certain of its direct and indirect subsidiaries, as guarantors,
entered into an amended and restated credit agreement (the Amended and Restated Credit Agreement)
with Bank of America, N.A., and other lenders party thereto to amend and restate in its entirety
the Companys Credit Agreement, dated as of November 27, 2007, by and among the Company, Bank of
America, N.A., and the lenders party thereto (the Original Credit Agreement). The Amended and
Restated Credit Agreement provides for a secured revolving credit facility of $250.0 million. The
borrowings under the Amended and Restated Credit Agreement bear interest, at the Companys option
at the time each loan is made, at either (a) the Base Rate determined by reference to the higher of
(1) the prime rate of Bank of America, N.A., as administrative agent, or (2) the Federal Funds Rate
plus 0.50 percent, or (b) LIBOR plus an Applicable Rate, ranging from 0.75 percent to 1.50 percent,
based on the Companys Consolidated Leverage Ratio, as each term is defined in the Amended and
Restated Credit Agreement. The Company also pays commitment fees for the unused portion of the
credit facility on a quarterly basis equal to the Applicable Rate for commitment fees times the
actual daily unused commitment for that calendar quarter. The Applicable Rate for commitment fees
is between 0.15 percent and 0.30 percent based on the Companys Consolidated Leverage Ratio.
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The Amended and Restated Credit Agreement includes usual and customary covenants for a credit
facility of this type, including covenants limiting liens, dispositions, fundamental changes,
investments, indebtedness, and certain transactions and payments. In addition, the Amended and
Restated Credit Agreement also requires the Company satisfy two financial covenants at the end of
each fiscal quarter for the previous four consecutive fiscal quarters: (1) a consolidated leverage
ratio less than or equal to 3.25 to 1.00, and (2) a consolidated fixed charge coverage ratio of
greater than or equal to 2.00 to 1.00. The credit facility, which is collateralized by the capital
stock of the Companys present and future material subsidiaries, will become due on March 7, 2013,
subject to acceleration upon certain specified events of default, including breaches of
representations or covenants, failure to pay other material indebtedness or a change of control of
the Company, as defined in the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement allows the Company from time to time to request that the
credit facility be further increased by an amount not to exceed, in the aggregate, $150.0 million,
subject to receipt of lender commitments and other conditions precedent. The Company has not
exercised these requests for increases in available borrowings as of December 29, 2009. The
proceeds from the credit facility will be used for general corporate purposes, including working
capital, capital expenditures, and permitted acquisitions and share repurchases.
As of December 29, 2009, the Company had no loans outstanding under the Amended and Restated Credit
Agreement. The Company incurred $0.4 million of commitment fees for the fiscal year ended December
29, 2009. As of December 29, 2009, the Company was in compliance with all covenant requirements in
the Amended and Restated Credit Agreement, and accrued interest related to the commitment fees on
the Amended and Restated Credit Agreement was $0.1 million.
As of December 30, 2008, the Company had no loans outstanding under the Amended and Restated Credit
Agreement. The Company incurred $0.3 million of commitment fees and $1.2 million of interest for
the fiscal year ended December 30, 2008 and accrued interest related to the commitment fees on the
Amended and Restated Credit Agreement was $0.1 million. In connection with the amendment and
restatement of the Original Credit Agreement, the Company capitalized $1.2 million of debt issuance
costs in fiscal 2008, which are being amortized over the life of the Amended and Restated Credit
Agreement.
12. Share Repurchase Program
On November 17, 2009, the Companys Board of Directors approved a three year share repurchase
program of up to $600 million of the Companys Class A common stock. The share repurchases may be
effected from time to time on the open market or in privately negotiated transactions and the
Company may make such repurchases under a Rule 10b5-1 Plan. Repurchased shares will be retired
immediately and will resume the status of authorized but unissued shares. The repurchase program
may be modified, suspended, or discontinued by the Board of Directors at any time. Under the share
repurchase program, the Company repurchased a total of 27,429 shares of the Companys Class A
common stock at a weighted-average price of $62.98 per share for an aggregate purchase price of
$1.7 million in fiscal 2009.
On November 27, 2007, in connection with a share repurchase program approved by the Companys Board
of Directors on November 20, 2007, the Company entered into a written trading plan in compliance
with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, to purchase up to an
aggregate of $75.0 million of the Companys Class A common stock, subject to maximum per share
purchase price. The Company entered into a credit facility that initially provided for $75.0
million in secured loans to the Company. Proceeds from the credit facility were used to finance
the share repurchase program. See Note 11 for further information with respect to the credit
facility. Under the share repurchase program, the Company repurchased a total of 752,930 shares of
its Class A common stock at a weighted-average price of $36.02 per share for an aggregate purchase
price of $27.1 million during the fiscal year ended December 25, 2007. During the fiscal year
ended December 30, 2008, the Company repurchased a total of 1,413,358 shares of its Class A common
stock at a weighted-average price of $33.87 per share for an aggregate purchase price of $47.9
million, which completed its share repurchase program. Shares repurchased under the program were
retired immediately and resumed the status of authorized but unissued shares.
In addition, the Company has repurchased shares of its Class A common stock through a share
repurchase program approved by its Board of Directors from participants of the Panera Bread 1992
Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan, which are netted and
surrendered as payment for applicable tax withholding on the vesting of their restricted stock.
Shares so surrendered by the participants are repurchased by the Company pursuant to the terms of
those plans and the applicable award agreements and not pursuant to publicly announced share
repurchase programs. See Note 16 for further information with respect to the Companys repurchase
of the shares.
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13. Commitments and Contingent Liabilities
Operating Lease Commitments
The Company is obligated under non-cancelable operating leases for its bakery-cafes, fresh dough
facilities and trucks, and support centers. Lease terms for its trucks are generally for five to
seven years. Lease terms for its bakery-cafes, fresh dough facilities, and support centers 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. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based
on sales in excess of specified amounts. Certain of the Companys lease agreements provide for
scheduled rent increases during the lease terms or for rental payments commencing at a date other
than the date of initial occupancy.
Aggregate minimum requirements under non-cancelable operating leases, excluding contingent
payments, as of December 29, 2009, were as follows (in thousands):
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
$ | 82,017 | 82,418 | 81,745 | 81,577 | 79,255 | 481,809 | $ | 888,821 |
Rental expense under operating leases was approximately $79.9 million, $77.9 million, and $64.4
million, in fiscal 2009, fiscal 2008, and fiscal 2007, respectively, which included contingent
(i.e. percentage rent) payments of $0.8 million, $1.1 million, and $1.0 million, respectively.
In accordance with the accounting guidance for asset retirement obligations the Company complies
with lease obligations at the end of a lease as it relates to tangible long-lived assets. The
liability as of December 29, 2009 and December 30, 2008 was $4.3 million and $4.1 million,
respectively, and is included in other long-term liabilities in the Consolidated Balance Sheets.
During the first quarter of fiscal 2008, the Company recorded a reserve of $1.2 million relating to
the termination of operating leases for specific sites, which the Company determined not to
develop. During fiscal 2009, the Company made required lease payments on certain of these sites,
settled one lease, and made a decision to open two bakery-cafes resulting in a decrease in the
reserve of approximately $0.5 million. The Company increased its reserve by $0.4 million for the
termination of operating leases for three additional sites it closed or determined not to develop.
No other significant changes were made to the accrual throughout fiscal 2009. As of December 29,
2009, the Company had approximately $0.8 million accrued in its Consolidated Balance Sheets
relating to the termination of these specific leases. During fiscal 2008, the Company settled one
lease and decreased the reserve by approximately $0.3 million. No other significant changes were
made to the accrual throughout fiscal 2008. As of December 30, 2008, the Company had approximately
$0.9 million accrued in its Consolidated Balance Sheets relating to the termination of these
specific leases.
Lease Guarantees
As of December 29, 2009, the Company guaranteed operating leases of 27 franchisee bakery-cafes and
four locations of the Companys former Au Bon Pain division, or its franchisees, which the Company
accounted for in accordance with the accounting requirements for guarantees. These leases have
terms expiring on various dates from January 31, 2010 to December 31, 2018 and have a potential
amount of future rental payments of approximately $30.0 million as of December 29, 2009. The
obligation from these leases will generally continue to decrease over time as these operating
leases expire. The Company has not recorded a liability for certain of these guarantees as they
arose prior to the implementation of the accounting requirements for guarantees and, unless
modified, are exempt from its requirements. The Company has not recorded a liability for those
guarantees issued after the effective date of the accounting requirements because the fair value of
each such lease guarantee was determined by the Company to be insignificant based on analysis of
the facts and circumstances of each such lease and each such franchisees performance, and the
Company did not believe it was probable it would be required to perform under any guarantees at the
time the guarantees were issued. The Company has not had to make any payments related to any of
these guaranteed leases. Au Bon Pain or the applicable franchisees continue to have primary
liability for these operating leases. As of December 29, 2009, future commitments under these
leases were as follows (in thousands):
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
$ | 3,975 | 3,226 | 3,020 | 3,013 | 2,897 | 13,909 | $ | 30,040 |
Employee Commitments
The Company has executed Confidential and Proprietary Information and Non-Competition Agreements
(Non-Compete Agreements) with certain employees. These Non-Compete Agreements contain a provision
whereby employees would be due a certain number of weeks of their salary if their employment was
terminated by the Company as specified in the Non-Compete Agreement. The Company has not recorded
a liability for these amounts potentially due employees. Rather, the Company will record a
liability for these amounts when an amount becomes due to an employee in accordance with the
appropriate authoritative literature. As of December 29, 2009, the total amount potentially owed
employees under these Non-Compete Agreements was $12.0 million.
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Related Party Credit Agreement
In order to facilitate the opening of the first Panera Bread bakery-cafes in Canada, on September
10, 2008, the Companys Canadian subsidiary, Panera Bread ULC, as lender, entered into a Cdn. $3.5
million secured revolving credit facility agreement with Millennium Bread Inc., (Millennium), as
borrower, and certain of Millenniums present and future subsidiaries (the Franchisee
Guarantors), who have entered into franchise agreements with Panera Bread ULC to operate three
Panera Bread bakery-cafes in Canada. Covenants under the credit agreement require Millennium to
maintain a certain level of cash equity contributions or subordinated loans from its shareholders
in relation to the principal outstanding under the credit agreement. The borrowings under the
credit agreement bear interest at the per annum rate of 7.58 percent, calculated daily and payable
monthly in arrears on the last business day of each of Panera Bread ULCs fiscal months. The
credit facility, which is collateralized by present and future property and assets of Millennium
and the Franchisee Guarantors, as well as the personal guarantees of certain individuals, became
due on September 9, 2009. On September 9, 2009 the maturity date was extended to December 9, 2009,
on December 10, 2009 the maturity date was extended to February 19, 2010, and on February 22, 2010
the maturity date was extended to March 30, 2010. The credit facility is subject to acceleration
upon certain specified events of default, including breaches of representations or covenants,
failure to pay other material indebtedness or a change of control of Millennium, as defined in the
credit agreement. The proceeds from the credit facility may be used by Millennium to pay costs and
expenses to develop and construct the Franchisee Guarantors bakery-cafes and for their day-to-day
operating requirements.
As part of the franchise agreement between Millennium and Panera Bread ULC, Panera Bread ULC
developed and equipped three bakery-cafes as typical Panera Bread bakery-cafes in accordance with
the Companys current design and construction standards and specifications as applied by Panera
Bread ULC, in its sole discretion. Millennium was required to pay Panera Bread ULC an amount equal
to the total cost of development of the bakery-cafes, which includes any and all costs and expenses
incurred by Panera Bread ULC in connection with selection and development of the bakery-cafes,
excluding overhead expenses of Panera Bread ULC. On September 15, 2008, October 27, 2008, and
December 16, 2008, Panera Bread ULC delivered possession of the three bakery-cafes in Canada to
Millennium, which bakery-cafes subsequently opened on October 6, 2008, November 10, 2008, and
January 26, 2009, respectively. The total development cost billed to Millennium for these three
bakery-cafes was approximately Cdn. $3.7 million. On April 7, 2009, Millennium requested a Cdn.
$3.5 million advance under the Credit Agreement, which was applied against the outstanding
receivable as previously described. The remaining Cdn. $0.2 million receivable was resolved during
fiscal 2009. The Cdn. $3.5 million note receivable from Millennium is included in other accounts
receivable in the Consolidated Balance Sheets as of December 29, 2009.
Legal Proceedings
On January 25, 2008 and February 26, 2008, purported class action lawsuits were filed against the
Company and three of the Companys current or former executive officers by the Western Washington
Laborers-Employers Pension Trust and Sue Trachet, respectively, on behalf of investors who
purchased the Companys common stock during the period between November 1, 2005 and July 26, 2006.
Both lawsuits were filed in the United States District Court for the Eastern District of Missouri,
St. Louis Division. Each complaint alleges that the Company and the other defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and Rule 10b-5 under the Exchange Act in connection with the Companys disclosure of system-wide
sales and earnings guidance during the period from November 1, 2005 through July 26, 2006. Each
complaint seeks, among other relief, class certification of the lawsuit, unspecified damages, costs
and expenses, including attorneys and experts fees, and such other relief as the Court might find
just and proper. On June 23, 2008, the lawsuits were consolidated and the Western Washington
Laborers-Employers Pension Trust was appointed lead plaintiff. On August 7, 2008, the plaintiff
filed an amended complaint, which extended the class period to November 1, 2005 through July 26,
2007. The Company believes that it and the other defendants have meritorious defenses to each of
the claims in this lawsuit and the Company is vigorously defending the lawsuit. On October 6,
2008, the Company filed a motion to dismiss all of the claims in this lawsuit. Following filings
by both parties on the Companys motion to dismiss, on June 25, 2009, the Court converted the
Companys motion to one for summary judgment and denied it without prejudice. The Court
simultaneously gave the Company until July 20, 2009 to file a new motion for summary judgment,
which deadline the Court subsequently extended until August 10, 2009. On August 10, 2009, the
Company filed a motion for
summary judgment. On September 9, 2009, the plaintiff filed a request to deny or continue the
Companys motion for summary judgment to allow the plaintiff to conduct discovery. Following a
hearing and subsequent filings by both parties on the plaintiffs request for discovery, on
November 6, 2009, the Court denied the plaintiffs request. The plaintiff filed an opposition to
the Companys motion for summary judgment on December 12, 2009, and the Company filed its reply in
support of its motion on December 21, 2009. The Companys motion for summary judgment is pending as
of the date of this filing. There can be no assurance that the Company will be successful, and an
adverse resolution of the lawsuit could have a material adverse effect on the Companys
consolidated financial position and results of operations in the period in which the lawsuit is
resolved. The Company is not presently able to reasonably estimate potential losses, if any,
related to the lawsuit and as such, has not recorded a liability in its Consolidated Balance
Sheets.
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On February 22, 2008, a shareholder derivative lawsuit was filed against the Company as nominal
defendant and against certain of its current or former officers and certain current directors. The
lawsuit was filed by Paul Pashcetto in the Circuit Court of St. Louis, Missouri. The complaint
alleges, among other things, breach of fiduciary duty, abuse of control, waste of corporate assets
and unjust enrichment between November 5, 2006 and February 22, 2008. The complaint seeks, among
other relief, unspecified damages, costs and expenses, including attorneys fees, an order
requiring the Company to implement certain corporate governance reforms, restitution from the
defendants and such other relief as the Court might find just and proper. The Company believes
that it and the other defendants have meritorious defenses to each of the claims in this lawsuit
and the Company is vigorously defending the lawsuit. On July 18, 2008, the Company filed a motion
to dismiss all of the claims in this lawsuit. Following filings by both parties on the Companys
motion to dismiss, on December 14, 2009, the Court denied the Companys motion. The Company filed
an answer to the complaint on January 27, 2010. There can be no assurance that the Company will be
successful, and an adverse resolution of the lawsuit could have a material adverse effect on the
Companys consolidated financial position and results of operations in the period in which the
lawsuit is resolved. The Company is not presently able to reasonably estimate potential losses, if
any, related to the lawsuit and as such, has not recorded a liability in its Consolidated Balance
Sheets.
On February 22, 2008, a purported class action lawsuit was filed against the Company and one of its
subsidiaries by Pati Johns, a former employee of the Company, in the United States District Court
for the District of Northern California. The complaint alleged, among other things, violations of
the Fair Labor Standards Act and the California Labor Code for failure to pay overtime and
termination compensation. Although the Company believes that its policies and practices were
lawful and that it had meritorious defenses to each of the claims in this case, following mediation
with the plaintiff, the Company entered into a Court-approved settlement agreement in late fiscal
2008. As a result, the Company accrued approximately $0.5 million in legal settlement costs for the
fiscal year ended December 30, 2008, which it paid in fiscal 2009.
On December 9, 2009, a purported class action lawsuit was filed against the Company and one of its
subsidiaries by Nick Sotoudeh, a former employee of the Company. The lawsuit was filed in the
California Superior Court, County of Contra Costa. The complaint alleges, among other things,
violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest
periods and termination compensation and violations of Californias Unfair Competition Law. The
complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified
damages, costs and expenses, including attorneys fees, and such other relief as the Court might
find just and proper. The Company believes it and the other defendant have meritorious defenses to
each of the claims in this lawsuit and the Company is prepared to vigorously defend the lawsuit.
There can be no assurance, however, that the Company will be successful, and an adverse resolution
of the lawsuit could have a material adverse effect on the Companys consolidated financial
position and results of operations in the period in which the lawsuit is resolved. The Company is
not presently able to reasonably estimate potential losses, if any, related to the lawsuit and as
such, has not recorded a liability in its accompanying Consolidated Balance Sheets.
In addition, the Company is subject to other routine legal proceedings, claims and litigation in
the ordinary course of its business. Defending lawsuits requires significant management attention
and financial resources and the outcome of any litigation, including the matters described above,
is inherently uncertain. The Company does not, however, currently expect that the costs to resolve
these routine matters will have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
Other
The Company is subject to on-going federal and state income tax audits and sales tax audits and any
unfavorable rulings could materially and adversely affect its financial condition or results of
operations. The Company believes reserves for these matters are adequately provided for in its
consolidated financial statements.
14. Income Taxes
The components of income before income taxes, by tax jurisdiction, were as follows for the periods
indicated (in thousands):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
United States |
$ | 139,005 | $ | 110,220 | $ | 88,399 | ||||||
Canada |
919 | (3 | ) | 63 | ||||||||
Income before income taxes |
$ | 139,924 | $ | 110,217 | $ | 88,462 | ||||||
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The provision for income taxes consisted of the following for the periods indicated (in thousands):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 (1) | December 25, 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 24,428 | $ | 37,188 | $ | 30,438 | ||||||
State |
5,390 | 8,192 | 6,453 | |||||||||
Foreign |
304 | | | |||||||||
30,122 | 45,380 | 36,891 | ||||||||||
Deferred: |
||||||||||||
Federal |
20,006 | (3,589 | ) | (4,624 | ) | |||||||
State |
2,945 | (519 | ) | (833 | ) | |||||||
Foreign |
| | | |||||||||
22,951 | (4,108 | ) | (5,457 | ) | ||||||||
Tax Provision |
$ | 53,073 | $ | 41,272 | $ | 31,434 | ||||||
(1) | The Company developed its first bakery-cafes in Canada in fiscal 2008. Fiscal 2008 current and
deferred income taxes consisted primarily of United States taxes. Canadian taxes were nominal, and
thus were not shown separately. |
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows
for the periods indicated:
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Statutory rate provision |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal tax benefit and other |
3.1 | 3.0 | 0.4 | |||||||||
38.1 | % | 38.0 | % | 35.4 | % | |||||||
The tax effects of the significant temporary differences which comprise the deferred tax assets and
liabilities were as follows for the periods indicated (in thousands):
December 29, 2009 | December 30, 2008 | |||||||
Deferred tax assets: |
||||||||
Accrued expenses |
$ | 42,029 | $ | 28,794 | ||||
Stock-based compensation |
2,531 | 3,875 | ||||||
Other |
15 | 1,463 | ||||||
Total deferred tax assets |
$ | 44,575 | $ | 34,132 | ||||
Deferred tax liabilities: |
||||||||
Property and equipment |
$ | (39,433 | ) | $ | (7,021 | ) | ||
Goodwill and other intangibles |
(15,270 | ) | (13,825 | ) | ||||
Total deferred tax liabilities |
$ | (54,703 | ) | $ | (20,846 | ) | ||
Net deferred tax asset (liability) |
$ | (10,128 | ) | $ | 13,286 | |||
Net current deferred tax asset |
$ | 18,685 | $ | 9,937 | ||||
Net non-current deferred tax asset (liability) |
$ | (28,813 | ) | $ | 3,349 | |||
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The following is a roll-forward of the Companys total gross unrecognized tax benefit liabilities
for the fiscal years ended December 30, 2008 and December 29, 2009 (in thousands):
Balance at December 27, 2006 |
$ | 2,700 | ||
Tax positions related to the current year: |
||||
Additions |
579 | |||
Tax positions related to prior years: |
||||
Additions |
1122 | |||
Expiration of statutes of limitations |
(1,720 | ) | ||
Balance at December 25, 2007 |
$ | 2,681 | ||
Tax positions related to the current year: |
||||
Additions |
281 | |||
Tax positions related to prior years: |
||||
Additions |
5,919 | |||
Reductions |
(3,992 | ) | ||
Settlements |
(486 | ) | ||
Expiration of statutes of limitations |
(80 | ) | ||
Balance at December 30, 2008 |
$ | 4,323 | ||
Tax positions related to the current year: |
||||
Additions |
617 | |||
Tax positions related to prior years: |
||||
Additions |
381 | |||
Settlements |
(836 | ) | ||
Expiration of statutes of limitations |
(130 | ) | ||
Balance at December 29, 2009 |
$ | 4,355 | ||
As of December 29, 2009 and December 30, 2008, the amount of unrecognized tax benefits that,
if recognized in full, would be recorded as a reduction of income tax expense was $3.0 million and
$2.9 million, net of federal tax benefits, respectively. The Company expects approximately
$2.9 million of the unrecognized tax benefits principally related to state tax filing positions and
previously deducted expenses will decrease within twelve months of December 29, 2009 as a result of
the expiration of statutes of limitations and the finalization of audits related to prior tax
years. In certain cases, the Companys uncertain tax positions are related to tax years that remain
subject to examination by the relevant tax authorities. Tax returns in the Companys major tax
filing jurisdictions for years after 2005 are subject to future examination by tax authorities.
Estimated interest and penalties related to the underpayment of income taxes are classified as a
component of income tax expense in the Consolidated Statements of Operations and was $0.3 million,
$0.3 million and $0.2 million during fiscal 2009, fiscal 2008 and fiscal 2007
respectively. Accrued interest and penalties were $1.0 million and $0.7 million as of December 29,
2009 and December 30, 2008, respectively.
15. Deposits and Other
Deposits and other consisted of the following (in thousands):
December 29, 2009 | December 30, 2008 | |||||||
Deposits |
$ | 3,800 | $ | 2,869 | ||||
Deferred financing costs |
821 | 1,125 | ||||||
Deferred income taxes |
| 3,349 | ||||||
Company-owned life insurance program |
| 1,031 | ||||||
Note receivable |
| 589 | ||||||
Total deposits and other |
$ | 4,621 | $ | 8,963 | ||||
The Company established a company-owned life insurance (COLI) program covering a substantial
portion of its employees to help manage long-term employee benefit cost and to obtain tax
deductions on interest payments on insurance policy loans. However, due to tax law changes, the
Company froze this program in 1998. Based on current actuarial estimates, the program is expected
to end in 2011.
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At December 29, 2009, the cash surrender value of $0.7 million and the insurance policy loans of
$0.7 million related to the COLI program were netted and included in deposits and other assets in
the Companys Consolidated Balance Sheets. At December 30, 2008, the cash surrender value of $1.7
million, the mortality income receivable of $1.0 million, and the insurance policy loans $1.7
million, related to the COLI program were netted and included in deposits and other assets in the
Companys Consolidated Balance Sheets. Mortality income receivable represents the dividend or death
benefits the Company is due from its insurance carrier at the fiscal year end. The insurance policy
loans are collateralized by the cash values of the underlying life insurance policies and required
interest payments at a rate of 9.08 percent for the year ended December 29, 2009. Interest accrued
on insurance policy loans is netted with other COLI related income statement transactions in other
(income) expense, net in the Consolidated Statements of Operations, which netted income of $1.0
million, loss of $0.1 million, and loss of $0.5 million, in fiscal years 2009, 2008, and 2007,
respectively, the components of which are as follows (in thousands):
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Cash value loss |
$ | 1,018 | $ | 639 | $ | 1,485 | ||||||
Mortlity income |
(1,894 | ) | (644 | ) | (1,283 | ) | ||||||
Interest (income) expense |
(111 | ) | 71 | 292 | ||||||||
Total (income) expense, net |
$ | (987 | ) | $ | 66 | $ | 494 | |||||
The cash value loss is the cumulative change in the cash surrender value for the year and is
adjusted quarterly. Mortality income is recorded periodically as charges are deducted from cash
value. These amounts are recovered by the Company through payment of death benefits and mortality
dividends received. Interest (income) expense is recorded on the accrual basis.
16. Stockholders Equity
Common Stock
The holders of Class A common stock are entitled to one vote for each share owned. The holders of
Class B common stock are entitled to three votes for each share owned. Each share of Class B common
stock has the same dividend and liquidation rights as each share of Class A common stock. Each
share of Class B common stock is convertible, at the stockholders option, into Class A common
stock on a one-for-one basis. At December 29, 2009, the Company had reserved 2,682,931 shares of
its Class A common stock for issuance upon exercise of awards granted under the Companys 1992
Equity Incentive Plan, 2001 Employee, Director, and Consultant Stock Option Plan, and the 2006
Stock Incentive Plan, and upon conversion of Class B common stock.
Registration Rights
At December 29, 2009, 94.2 percent of the Class B common stock is owned by the Companys Chairman
and Chief Executive Officer (CEO). Certain holders of Class B common stock, including the
Companys CEO, pursuant to stock subscription agreements, can require the Company under certain
circumstances to register their shares under the Securities Exchange Act of 1933, or have included
in certain registrations all or part of such shares at the Companys expense.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of Class B preferred stock with a par value of
$.0001. The voting, redemption, dividend, liquidation rights, and other terms and conditions are
determined by the Board of Directors upon approval of issuance. There were no shares issued or
outstanding in fiscal years 2009 and 2008.
Treasury Stock
Pursuant to the terms of the Panera Bread 1992 Stock Incentive Plan and the Panera Bread 2006 Stock
Incentive Plan and the applicable award agreements, the Company repurchased 32,135 shares of Class
A common stock at a weighted-average cost of $53.66 per share during fiscal 2009, 20,378 shares of
Class A common stock at a weighted-average cost of $49.87 per share during fiscal 2008, and 6,594
shares of Class A common stock at a weighted-average cost of $43.62 per share during fiscal 2007,
as were surrendered by participants as payment of applicable tax withholdings on the vesting of
restricted stock. Shares so surrendered by the participants are repurchased by the Company at fair
market value pursuant to the terms of those plans and the applicable award
agreements and not pursuant to publicly announced share repurchase programs. The shares surrendered
to the Company by participants and repurchased by the Company are currently held by the Company as
treasury stock.
Share Repurchase Program
During fiscal 2009, fiscal 2008, and fiscal 2007, the Company purchased shares of Class A common
stock under authorized share repurchase programs. Repurchased shares were retired immediately and
resumed the status of authorized but unissued shares. See Note 12 for further information with
respect to the Companys share repurchase programs.
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17. Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements in accordance with the
accounting standard for share-based payment in the Companys consolidated financial statements and
accompanying notes, which requires the Company to measure and record compensation expense in its
consolidated financial statements for all stock-based compensation awards using a fair value
method.
As of December 29, 2009, the Company had one active stock-based compensation plan, the 2006 Stock
Incentive Plan (2006 Plan), and had options and restricted stock outstanding (but can make no
future grants) under two other stock-based compensation plans, the 1992 Equity Incentive Plan
(1992 Plan) and the 2001 Employee, Director, and Consultant Stock Option Plan (2001 Plan).
2006 Stock Incentive Plan
In the first quarter of fiscal 2006, the Companys Board of Directors adopted the 2006 Plan, which was
approved by the Companys stockholders in May 2006. The 2006 Plan provides for the grant of up to
1,500,000 shares of the Companys Class A common stock (subject to adjustment in the event of stock
splits or other similar events) as incentive stock options, non-statutory stock options and stock
settled appreciation rights (collectively option awards), restricted stock, restricted stock
units and other stock-based awards. As a result of stockholder approval of the 2006 Plan, effective
as of May 25, 2006, the Company will grant no further stock options, restricted stock or other
awards under the 2001 Plan or the 1992 Plan. The Companys Board of Directors administers the 2006
Plan and has sole discretion to grant awards under the 2006 Plan. The Companys Board of Directors
has delegated the authority to grant awards under the 2006 Plan, other than to the Companys
Chairman and Chief Executive Officer, to the Companys Compensation and Stock Option Committee
(the Committee).
Long-Term Incentive Program
In the third quarter of 2005, the Company adopted the 2005 Long Term Incentive Plan (2005 LTIP)
as a sub-plan under the 2001 Plan and the 1992 Plan. In May 2006, the Company amended the 2005 LTIP
to provide that the 2005 LTIP is a sub-plan under the 2006 Plan. Under the amended 2005 LTIP,
certain directors, officers, employees, and consultants, subject to approval by the Committee, may
be selected as participants eligible to receive a percentage of their annual salary in future
years, subject to the terms of the 2006 Plan. This percentage is based on the participants level
in the Company. In addition, the payment of this incentive can be made in several forms based on
the participants level including performance awards (payable in cash or common stock or some
combination of cash and common stock as determined by the Committee), restricted stock, choice
awards of restricted stock or options, or deferred annual bonus match awards. On July 23, 2009, the
Committee further amended the 2005 LTIP to permit the Company to grant stock settled appreciation
rights (SSARs) under the choice awards and to clarify that the Committee may consider the
Companys performance relative to the performance of its peers in determining the payout of
performance awards, as further discussed below. For fiscal 2009, fiscal 2008 and fiscal 2007,
compensation expense related to performance awards, restricted stock, and deferred annual bonus
match was $12.1 million, $6.9 million, and $3.7 million, respectively.
Performance awards under the 2005 LTIP are earned by participants based on achievement of
performance goals established by the Committee. The performance period relating to the performance
awards is a three-fiscal-year period. The performance goals, including each performance metric,
weighting of each metric, and award levels for each metric, for such awards are communicated to
each participant and are based on various predetermined earnings and operating metrics. The
performance awards are earned based on achievement of predetermined earnings and operating
performance metrics at the end of the three-fiscal-year performance period, assuming continued
employment, and after the Committees consideration of the Companys performance relative to the
performance of its peers. The performance awards range from 0 percent to 150 percent of the
participants salary based on their level in the Company and the level of achievement of each
performance metric. The performance awards are payable 50 percent in cash and 50 percent in common
stock or some combination of cash and common stock as determined by the Committee. For fiscal 2009,
fiscal 2008 and fiscal 2007, compensation expense related to the performance awards was $5.3
million, $2.1 million, and $0.9 million, respectively.
Restricted stock of the Company under the 2005 LTIP is granted at no cost to participants. While
participants are generally entitled to voting rights with respect to their respective shares of
restricted stock, participants are generally not entitled to receive accrued cash dividends, if
any, on restricted stock unless and until such shares have vested. The Company does not currently
pay a dividend, and has no current plans to do so. For awards of restricted stock to date under the
2005 LTIP, restrictions limit the sale or transfer of these shares during a five year period
whereby the restrictions lapse on 25 percent of these shares after two years and thereafter 25
percent each year for the next three years, subject to continued employment with the Company. In
the event a participant is no longer employed by the Company, any unvested shares of restricted
stock held by that participant will be
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forfeited. Upon issuance of restricted stock under the 2005 LTIP, unearned compensation is recorded at fair value on the date
of grant to stockholders equity and subsequently amortized to expense over the five year
restriction period. The fair value of restricted stock is based on the market value of the
Companys stock on the grant date. As of December 29, 2009, there was $18.5 million of total
unrecognized compensation cost related to restricted stock included in additional paid-in capital
in the Consolidated Balance Sheets, which is net of a $4.6 million forfeiture estimate, and is
expected to be recognized over a weighted-average period of approximately 3.6 years. For fiscal
2009, fiscal 2008 and fiscal 2007, restricted stock expense was $5.4 million, $3.8 million and $2.1
million, respectively. A summary of the status of the Companys restricted stock activity is set
forth below:
Weighted | ||||||||
Restricted | Average | |||||||
Stock | Grant-Date | |||||||
(in thousands) | Fair Value | |||||||
Non-vested at December 25, 2007 |
387 | $ | 48.04 | |||||
Granted |
228 | 48.76 | ||||||
Vested |
(55 | ) | 51.36 | |||||
Forfeited |
(55 | ) | 47.52 | |||||
Non-vested at December 30, 2008 |
505 | $ | 48.06 | |||||
Granted |
202 | 55.09 | ||||||
Vested |
(102 | ) | 47.92 | |||||
Forfeited |
(36 | ) | 48.96 | |||||
Non-vested at December 29, 2009 |
569 | $ | 50.52 | |||||
Under the deferred annual bonus match award portion of the 2005 LTIP, eligible participants
receive an additional 50 percent of their annual bonus, which is paid three years after the date of
the original bonus payment. For fiscal 2009, fiscal 2008 and fiscal 2007, compensation expense
related to the deferred annual bonus match award was $1.4 million, $1.0 million, and $0.7 million,
respectively, and was included in general and administrative expenses in the Consolidated
Statements of Operations.
Stock options under the 2005 LTIP are granted with an exercise price equal to the quoted market
value of the Companys common stock on the date of grant. In addition, stock options generally vest
ratably over a four-year period beginning two years from the date of grant and have a six-year
term. As of December 29, 2009, the total unrecognized compensation cost related to non-vested
options was $2.2 million, which is net of a $0.7 million forfeiture estimate, and is expected to be
recognized over a weighted average period of approximately 2.4 years. The Company uses historical
data to estimate pre-vesting forfeiture rates. Stock-based compensation expense related to stock
options was as follows for the periods indicated (in thousands):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Charged to general and administrative expenses (1) |
$ | 2,154 | $ | 3,212 | $ | 3,874 | ||||||
Income tax benefit |
(821 | ) | (1,205 | ) | (1,426 | ) | ||||||
Total stock-based compensation expense, net of tax |
$ | 1,333 | $ | 2,007 | $ | 2,448 | ||||||
Effect on basic earnings per share |
0.04 | 0.07 | 0.08 | |||||||||
Effect on diluted earnings per share |
0.04 | 0.07 | 0.08 | |||||||||
(1) | Net of $0.1 million, $0.2 million, and $0.6 million of capitalized compensation cost
related to the acquisition, development, design, and construction of new bakery-cafe locations
and fresh dough facilities for fiscal 2009, fiscal 2008 and fiscal 2007, respectively. |
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The following table summarizes the Companys stock option activity under its stock-based
compensation plans during fiscal 2009, fiscal 2008 and fiscal 2007:
Weighted Average | Aggregate | |||||||||||||||
Weighted | Contractual Term | Intrinsic | ||||||||||||||
Shares | Average | Remaining | Value (1) | |||||||||||||
(in thousands) | Exercise Price | (Years) | (in thousands) | |||||||||||||
Outstanding at December 26, 2006 |
2,311 | $ | 36.36 | |||||||||||||
Granted |
140 | 44.58 | ||||||||||||||
Exercised |
(310 | ) | 21.40 | $ | 10,101 | |||||||||||
Cancelled |
(55 | ) | 40.88 | |||||||||||||
Outstanding at December 25, 2007 |
2,086 | $ | 39.05 | |||||||||||||
Granted |
127 | 45.06 | ||||||||||||||
Exercised |
(532 | ) | 33.03 | $ | 8,293 | |||||||||||
Cancelled |
(229 | ) | 45.68 | |||||||||||||
Outstanding at December 30, 2008 |
1,452 | $ | 40.73 | |||||||||||||
Granted |
7 | 52.23 | ||||||||||||||
Exercised |
(627 | ) | 36.39 | $ | 13,115 | |||||||||||
Cancelled |
(18 | ) | 46.91 | |||||||||||||
Outstanding at December 29, 2009 |
814 | $ | 44.04 | 1.8 | $ | 20,114 | ||||||||||
Exercisable at December 29, 2009 |
575 | $ | 42.66 | 1.1 | $ | 14,998 |
(1) | Intrinsic value for activities other than exercises is defined as the difference between
the grant price and the market value on the last day of fiscal 2009 (or $68.63) for those
stock options where the market value is greater than the exercise price. For exercises,
intrinsic value is defined as the difference between the grant price and the market value on
the date of exercise. |
Cash received from the exercise of stock options in fiscal 2009, fiscal 2008 and fiscal 2007 was
$22.8 million, $17.6 million, and $6.6 million respectively. Windfall tax benefits realized from
exercised stock options in fiscal 2009, fiscal 2008 and fiscal 2007 were $5.1 million, $3.4
million, and $3.7 million, respectively, and were included as cash inflows from financing
activities in the Consolidated Statements of Cash Flows.
The following table summarizes information about stock options outstanding at December 29, 2009:
Stock Options Outstanding | Stock Options Exercisable | |||||||||||||||||||
Weighted Average | ||||||||||||||||||||
Number | Contractual Term | Weighted | Number | Weighted | ||||||||||||||||
Outstanding | Remaining | Average | Exercisable | Average | ||||||||||||||||
Range of Exercise Price | (in thousands) | (Years) | Exercise Price | (in thousands) | Exercise Price | |||||||||||||||
$27.51 $35.29 |
162 | 0.3 | 29.73 | 162 | 29.73 | |||||||||||||||
$35.30 $40.35 |
162 | 0.8 | 37.07 | 157 | 36.96 | |||||||||||||||
$40.36 $44.41 |
143 | 3.8 | 43.08 | 25 | 43.09 | |||||||||||||||
$44.42 $54.30 |
144 | 3.2 | 49.41 | 52 | 49.17 | |||||||||||||||
$54.31 $62.47 |
154 | 1.3 | 54.61 | 141 | 54.53 | |||||||||||||||
$62.48 $72.58 |
49 | 1.8 | 68.46 | 38 | 68.50 | |||||||||||||||
814 | 1.8 | $ | 44.04 | 575 | $ | 42.66 | ||||||||||||||
A SSAR is an award that allows the recipient to receive common stock equal to the appreciation
in the fair market value of the
Companys common stock between the date the award was granted and the conversion date for the
number of shares vested. SSARs under the 2005 LTIP are granted with an exercise price equal to the
quoted market value of the Companys common stock on the date of grant. In addition, SSARs vest
ratably over a four-year period beginning two years from the date of grant and have a six-year
term. As of December 29, 2009, the total unrecognized compensation cost related to non-vested
SSARs was $0.3 million, which is net of a $0.2 million forfeiture estimate, and is expected to be
recognized over a weighted average period of approximately 4.7 years. The Company uses historical
data to estimate pre-vesting forfeiture rates. Stock-based compensation expense related to SSARs
was $0.03 million in fiscal 2009 and was charged to general and administrative expenses in the
Consolidated Statement of Operations.
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The following table summarizes the Companys SSAR activity under its stock-based compensation plan
during fiscal 2009:
Weighted Average | Aggregate | |||||||||||||||
Weighted | Contractual Term | Intrinsic | ||||||||||||||
Shares | Average | Remaining | Value (2) | |||||||||||||
(in thousands) | Conversion Price (1) | (Years) | (in thousands) | |||||||||||||
Outstanding at December 30, 2008 |
| $ | | |||||||||||||
Granted |
23 | 55.20 | ||||||||||||||
Converted |
| | $ | | ||||||||||||
Cancelled |
(1 | ) | 55.20 | |||||||||||||
Outstanding at December 29, 2009 |
22 | $ | 55.20 | 5.6 | $ | 293 | ||||||||||
Convertible at December 29, 2009 |
| $ | | | $ | |
(1) | Conversion price is defined as the price from which SSARs are measured and is equal to the
market value on the date of issuance. |
|
(2) | Intrinsic value for activities other than conversions is defined as the difference between
the grant price and the market value on the last day of fiscal 2009 (or $68.63) for those
SSARs where the market value is greater than the conversion price. For conversions, intrinsic
value is defined as the difference between the grant price and the market value on the date of
conversion. |
All SSARs outstanding at December 29, 2009 have a conversion price of $55.20 and a contractual term
remaining of 5.6 years.
The fair value for both stock options and SSARs (collectively option awards) was estimated on the
date of the grant using the Black-Scholes option pricing model with the following weighted-average
assumptions:
| Expected term - The expected term of the option awards represents the period of time
between the grant date of the option awards and the date the option awards are either
exercised or canceled, including an estimate for those option awards still outstanding, and is
derived from historical terms and other factors. |
| Expected volatility - The expected volatility is based on an average of the historical
volatility of the Companys stock price, for a period approximating the expected term, and the
implied volatility of externally traded options of the Companys stock that were entered into
during the period. |
| Risk-free interest rate - The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time of grant and with a maturity that approximates the option awards
expected term. |
| Dividend yield - The dividend yield is based on the Companys anticipated dividend payout
over the expected term of the option awards. |
The weighted average fair value of option awards granted and assumptions used for the Black-Scholes
option pricing model were as follows for the periods indicated:
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Fair value per option awards |
$ | 21.70 | $ | 15.54 | $ | 15.69 | ||||||
Assumptions: |
||||||||||||
Expected term (years) |
5.0 | 4.5 | 5.0 | |||||||||
Expected volatility |
41.8 | % | 36.5 | % | 30.0 | % | ||||||
Risk-free interest rate |
2.4 | % | 2.5 | % | 4.7 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
1992 Equity Incentive Plan
The Company adopted the 1992 Plan in May 1992. A total of 8,600,000 shares of Class A common stock
were authorized for issuance under the 1992 Plan as awards, which could have been in the form of
stock options (both qualified and non-qualified), stock appreciation rights, performance shares,
restricted stock, or stock units, to employees and consultants. As a result of stockholder approval
of the 2006 Plan, effective as of May 25, 2006, the Company will grant no further stock options,
restricted stock or other awards under the 1992 Plan.
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2001 Employee, Director, and Consultant Stock Option Plan
The Company adopted the 2001 Plan in June 2001. A total of 3,000,000 shares of Class A common stock
were authorized for issuance under the 2001 Plan as awards, which could have been in the form of
stock options to employees, directors, and consultants. As a result of stockholder approval of the
2006 Plan, effective as of May 25, 2006, the Company will grant no further stock options under the
2001 Plan.
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (ESPP) which was authorized to issue
825,000 shares of Class A common stock. The ESPP gives eligible employees the option to purchase
Class A common stock (total purchases in a year may not exceed 10 percent of an employees current
year compensation) at 85 percent of the fair market value of the Class A common stock at the end of
each calendar quarter. There were approximately 36,000, 44,000 and 42,000 shares purchased with a
weighted average fair value of purchase rights of $7.95, $6.41 and $7.42 during fiscal 2009, fiscal
2008 and fiscal 2007, respectively. For fiscal 2009, fiscal 2008 and fiscal 2007, the Company
recognized expense of approximately $0.3 million in each of the respective years related to stock
purchase plan discounts. Cumulatively, there were approximately 790,000 shares issued under this
plan as of December 29, 2009, 754,000 shares issued under this plan as of December 30, 2008, and
approximately 710,000 shares issued under this plan as of December 25, 2007.
18. Defined Contribution Benefit Plan
The Panera Bread Company 401(k) Savings Plan (the Plan) was formed under Section 401(k) of the
Internal Revenue Code (the Code). The Plan covers substantially all employees who meet certain
service requirements. Participating employees may elect to defer a percentage of his or her salary
on a pre-tax basis, subject to the limitations imposed by the Plan and the Code. The Plan provides
for a matching contribution by the Company equal to 50 percent of the first 3 percent of the
participants eligible pay. All employee contributions vest immediately. Company matching
contributions vest beginning in the second year of employment at 25 percent per year, and are fully
vested after 5 years. The Company contributed $1.3 million, $1.1 million, and $0.9 million to the
Plan in fiscal 2009, fiscal 2008, and fiscal 2007, respectively.
19. Business Segment Information
The Company operates three business segments. The Company Bakery-Cafe Operations segment is
comprised of the operating activities of the bakery-cafes owned directly and indirectly by the
Company. The Company-owned bakery-cafes conduct business under the Panera Bread®, Saint Louis Bread
Co.® or Paradise Bakery & Café® names. These bakery-cafes offer some or all of the following: fresh
baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted
coffees, and other complementary products through on-premise sales, as well as catering.
The Franchise Operations segment is comprised of the operating activities of the franchise business
unit which licenses qualified operators to conduct business under the Panera Bread® or Paradise
Bakery & Café® names and also monitors the operations of these bakery-cafes. Under the terms of
most of the agreements, the licensed operators pay royalties and fees to the Company in return for
the use of the Panera Bread® or Paradise Bakery & Café® names.
The Fresh Dough Operations segment supplies fresh dough items and indirectly supplies proprietary
sweet goods items through a contract manufacturing arrangement to both Company-owned and
franchise-operated bakery-cafes. The fresh dough is sold to a number of both Company-owned and
franchise-operated bakery-cafes at a delivered cost generally not to exceed 27 percent of the
retail value of the end product. The sales and related costs to the franchise-operated bakery-cafes
are separately stated line items in the Consolidated Statements of Operations. The operating profit
related to the sales to Company-owned bakery-cafes is classified as a reduction of the costs in the
cost of food and paper products in the Consolidated Statements of Operations.
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The accounting policies applicable to each segment are consistent with those described in Note 2,
Summary of Significant Accounting Policies. Segment information related to the Companys three
business segments follows (in thousands):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Revenues: |
||||||||||||
Company bakery-cafe operations |
$ | 1,153,255 | $ | 1,106,295 | $ | 894,902 | ||||||
Franchise operations |
78,367 | 74,800 | 67,188 | |||||||||
Fresh dough operations |
216,116 | 213,620 | 176,710 | |||||||||
Intercompany sales eliminations |
(94,244 | ) | (95,862 | ) | (72,109 | ) | ||||||
Total Revenues |
$ | 1,353,494 | $ | 1,298,853 | $ | 1,066,691 | ||||||
Segment profit: |
||||||||||||
Company bakery-cafe operations |
$ | 193,669 | $ | 183,713 | $ | 145,499 | ||||||
Franchise operations |
72,381 | 65,005 | 59,011 | |||||||||
Fresh dough operations |
21,643 | 9,185 | 11,749 | |||||||||
Total segment profit |
$ | 287,693 | $ | 257,903 | $ | 216,259 | ||||||
Depreciation and amortization |
67,162 | 67,225 | 57,903 | |||||||||
Unallocated general and administrative expenses |
77,183 | 74,598 | 60,789 | |||||||||
Pre-opening expenses |
2,451 | 3,374 | 8,289 | |||||||||
Interest expense |
700 | 1,606 | 483 | |||||||||
Other (income) expense, net |
273 | 883 | 333 | |||||||||
Income before income taxes |
$ | 139,924 | $ | 110,217 | $ | 88,462 | ||||||
Depreciation and amortization: |
||||||||||||
Company bakery-cafe operations |
$ | 55,726 | $ | 54,814 | $ | 45,021 | ||||||
Fresh dough operations |
7,620 | 8,072 | 8,367 | |||||||||
Corporate administration |
3,816 | 4,339 | 4,515 | |||||||||
Total depreciation and amortization |
$ | 67,162 | $ | 67,225 | $ | 57,903 | ||||||
Capital expenditures: |
||||||||||||
Company bakery-cafe operations |
$ | 46,408 | $ | 56,477 | $ | 111,500 | ||||||
Fresh dough operations |
3,681 | 3,872 | 9,556 | |||||||||
Corporate administration |
4,595 | 2,814 | 3,077 | |||||||||
Total capital expenditures |
$ | 54,684 | $ | 63,163 | $ | 124,133 | ||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Segment assets: |
||||||||||||
Company bakery-cafe operations |
$ | 498,806 | $ | 503,928 | $ | 514,528 | ||||||
Franchise operations |
3,850 | 5,951 | 6,179 | |||||||||
Fresh dough operations |
48,616 | 50,699 | 55,350 | |||||||||
Total segment assets |
$ | 551,272 | $ | 560,578 | $ | 576,057 | ||||||
Unallocated trade and other accounts receivable |
2,267 | 2,435 | 2,468 | |||||||||
Unallocated property and equipment |
14,437 | 13,673 | 15,016 | |||||||||
Unallocated deposits and other |
4,104 | 5,109 | 4,592 | |||||||||
Other unallocated assets |
265,085 | 92,122 | 100,619 | |||||||||
Total assets |
$ | 837,165 | $ | 673,917 | $ | 698,752 | ||||||
Unallocated trade and other accounts receivable relates primarily to rebates and interest
receivable, unallocated property and
equipment relates primarily to corporate fixed assets, unallocated deposits and other relates
primarily to insurance deposits, and other unallocated assets relates primarily to cash and cash
equivalents and deferred taxes.
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20. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except for per share data):
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Amounts used for basic and diluted per share calculations: |
||||||||||||
Net income attributable to Panera Bread Company |
$ | 86,050 | $ | 67,436 | $ | 57,456 | ||||||
Weighted average number of shares outstanding basic |
30,667 | 30,059 | 31,708 | |||||||||
Effect of dilutive stock-based employee compensation awards |
312 | 363 | 470 | |||||||||
Weighted average number of shares outstanding diluted |
30,979 | 30,422 | 32,178 | |||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||
Basic |
$ | 2.81 | $ | 2.24 | $ | 1.81 | ||||||
Diluted |
$ | 2.78 | $ | 2.22 | $ | 1.79 | ||||||
For the fiscal years ended December 29, 2009, December 30, 2008, and December 25, 2007,
weighted-average outstanding stock options, restricted stock and stock-settled appreciation rights
for 0.2 million, 0.6 million, and 0.3 million shares, respectively, were excluded in calculating
diluted earnings per share as the exercise price exceeded fair market value and inclusion would
have been anti-dilutive.
21. Supplemental Cash Flow Information
For the fiscal year ended | ||||||||||||
December 29, 2009 | December 30, 2008 | December 25, 2007 | ||||||||||
Cash paid during the year for (in thousands): |
||||||||||||
Interest |
$ | 380 | $ | 1,748 | $ | 165 | ||||||
Income taxes |
$ | 26,947 | $ | 37,328 | $ | 28,493 | ||||||
Non-cash investing and financing activities (in thousands): |
||||||||||||
Accrued property and equipment purchases |
$ | 6,108 | $ | 6,448 | $ | 17,473 | ||||||
Accrued acquisition purchase price |
$ | | $ | | $ | 2,501 | ||||||
Accrued purchase price of noncontrolling interest |
$ | 2,264 | $ | | $ | |
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22. Selected Quarterly Financial Data (unaudited)
The following table presents selected quarterly financial data for the periods indicated (in
thousands, except per share data):
Fiscal 2009 - quarters ended (1) | ||||||||||||||||
March 31 | June 30 | September 29 | December 29 | |||||||||||||
Revenues |
$ | 320,709 | $ | 330,794 | $ | 335,018 | $ | 366,972 | ||||||||
Operating profit |
28,786 | 32,882 | 31,922 | 47,307 | ||||||||||||
Net income |
18,027 | 20,235 | 18,894 | 29,696 | ||||||||||||
Net income attributable to Panera Bread Company |
17,432 | 20,029 | 18,894 | 29,696 | ||||||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||||||
Basic |
$ | 0.57 | $ | 0.65 | $ | 0.61 | $ | 0.96 | ||||||||
Diluted |
$ | 0.57 | $ | 0.65 | $ | 0.61 | $ | 0.95 | ||||||||
Fiscal 2008 - quarters ended (1) | ||||||||||||||||
March 25 | June 24 | September 23 | December 30 | |||||||||||||
Revenues |
$ | 304,978 | $ | 320,868 | $ | 315,195 | $ | 357,812 | ||||||||
Operating profit |
21,149 | 27,169 | 22,721 | 41,668 | ||||||||||||
Net income |
12,801 | 16,222 | 13,879 | 26,043 | ||||||||||||
Net income attributable to Panera Bread Company |
12,440 | 15,706 | 13,740 | 25,549 | ||||||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||||||
Basic |
$ | 0.42 | $ | 0.52 | $ | 0.46 | $ | 0.84 | ||||||||
Diluted |
$ | 0.41 | $ | 0.52 | $ | 0.45 | $ | 0.84 | ||||||||
(1) | Fiscal quarters may not sum to the fiscal year reported amounts due to rounding. |
The second quarter of fiscal 2009 results included a $1.0 million charge, or $0.02 per diluted
share, to increase reserves for certain state sales tax audit exposures and a $0.8 million charge,
or $0.02 per diluted share, for the write-off of smallwares related to the rollout of new china.
The third quarter of fiscal 2009 results included $2.1 million of net charges, or $0.04 per diluted
share, primarily to increase reserves for certain state sales tax audit exposures, which were
partially offset by a gain recorded on both, the redemptions the Company received during the
quarter on its investment in the Columbia Strategic Cash Portfolio, referred to as the Columbia
Portfolio, and the change in the recorded fair value of the units held as of September 29, 2009.
The fourth quarter of fiscal 2009 results included a $0.4 million charge, or $0.01 per diluted
share, to write-off equipment related to the rollout of panini grills, a $1.4 million charge, or
$0.03 per diluted share, related to the closure of bakery-cafes, and a $0.6 million charge, or
$0.01 per diluted share, related to the impairment of one bakery-cafe.
In the first quarter of fiscal 2008, the Company adjusted its 2008 development plans and made a
determination to raise its sales hurdles for new bakery-cafe development. As a result of this
determination, the Company recorded a charge of $2.7 million, or $0.06 per diluted share, related
to severance, the write-off of capitalized assets and overhead costs and the termination of leases
for specific sites that it decided to no longer develop. The results also included a $0.3 million,
or $0.01 per diluted share, impact from the further write-down of its investment in the Columbia
Portfolio.
The second quarter of fiscal 2008 results included a $0.9 million, or $0.02 per diluted share,
impact of an unfavorable tax adjustment and a $0.6 million, or $0.01 per diluted share, impact from
the further write-down of its investment in the Columbia Portfolio.
The third quarter of fiscal 2008 results included a $0.5 million, or $0.01 per diluted share, net
charge from the write-down of our investment in the Columbia Portfolio, partially offset by the
gain recorded on the redemptions received during the quarter.
The fourth quarter of fiscal 2008 results included a $0.6 million, or $0.01 per diluted share,
charge for a write-down of the Companys investment in the Columbia Portfolio, a $0.6 million, or
$0.01 per diluted share, impact with respect to on-going legal settlements, and a $0.4 million, or
$0.01 per diluted share, charge for asset write-offs related to our new coffee program.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of December 29, 2009. The term disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the companys management,
including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of the Companys
disclosure controls and procedures as of December 29, 2009, the Companys Chief Executive Officer
and Chief Financial Officer concluded that, as of such date, the Companys disclosure controls and
procedures were effective at the reasonable assurance level.
No change in the Companys internal control over financial reporting occurred during the fiscal
quarter ended December 29, 2009 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f)
under the Exchange Act as a process designed by, or under the supervision of, the companys
principal executive and principal financial officers and effected by the companys board of
directors, management and other associates, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and those policies and
procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of December 29, 2009. In making this assessment, the Companys management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission, known as COSO, in Internal Control Integrated Framework. Based on its assessment,
management has concluded that, as of December 29, 2009, the Companys internal control over
financial reporting was effective to provide reasonable assurance based on those criteria. The
scope of managements assessment of the effectiveness of internal control over financial reporting
includes all of the Companys consolidated operations.
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The Companys independent registered public accounting firm audited the financial statements
included in this Annual Report on Form 10-K and has audited the effectiveness of the Companys
internal control over financial reporting. Their report is included in Part II, Item 8 of this
Annual Report on Form 10-K.
ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Incorporated by reference from the information in the Companys proxy statement for the 2010 Annual
Meeting of Stockholders, which the Company will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
The Company has adopted a code of ethics, called the Standards of Business Conduct that applies to
its officers, including its principal executive, financial and accounting officers, and its
directors and employees. The Company has posted the Standards of Business Conduct on its Internet
website at www.panerabread.com under the Corporate Governance section of the About Us Investor
Relations webpage. The Company intends to make all required disclosures concerning any amendments
to, or waivers from, the Standards of Business Conduct on its Internet website.
ITEM 11. | EXECUTIVE COMPENSATION |
Incorporated by reference from the information in the Companys proxy statement for the 2010 Annual
Meeting of Stockholders, which the Company will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
Incorporated by reference from the information in the Companys proxy statement for the 2010 Annual
Meeting of Stockholders, which the Company will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Incorporated by reference from the information in the Companys proxy statement for the 2010 Annual
Meeting of Stockholders, which the Company will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Incorporated by reference from the information in the Companys proxy statement for the 2010 Annual
Meeting of Stockholders, which the Company will file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this report relates.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements: The following consolidated financial statements of the Company are
included in Item 8 herein:
Report of Independent Registered Public Accounting Firm
Consolidated Balance SheetsDecember 29, 2009 and December 30, 2008
Consolidated Statements of OperationsFiscal years ended December 29, 2009, December 30, 2008,
and December 25, 2007
Consolidated Statements of Cash FlowsFiscal years ended December 29, 2009, December 30, 2008,
and December 25, 2007
Consolidated Statements of Stockholders EquityFiscal years ended December 29, 2009, December
30, 2008, and December 25, 2007
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedule: The following financial statement schedule for the Company is
filed herewith:
Schedule II Valuation and Qualifying Accounts
PANERA BREAD COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance - beginning | Additions charged | Deductions/ | Balance - end | |||||||||||||
Description | of period | to expense | other additions | of period | ||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Fiscal year ended December 25, 2007 |
$ | 26 | $ | | $ | 42 | $ | 68 | ||||||||
Fiscal year ended December 30, 2008 |
$ | 68 | $ | 153 | $ | (32 | ) | $ | 189 | |||||||
Fiscal year ended December 29, 2009 |
$ | 189 | $ | 28 | $ | (92 | ) | $ | 125 | |||||||
Self-insurance reserves: |
||||||||||||||||
Fiscal year ended December 25, 2007 |
$ | 7,412 | $ | 22,708 | $ | (21,184 | ) | $ | 8,936 | |||||||
Fiscal year ended December 30, 2008 |
$ | 8,936 | $ | 32,981 | $ | (29,768 | ) | $ | 12,149 | |||||||
Fiscal year ended December 29, 2009 |
$ | 12,149 | $ | 37,077 | $ | (33,292 | ) | $ | 15,934 |
(a)(3) Exhibits: See Exhibit Index incorporated into this item by reference.
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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.
PANERA BREAD COMPANY |
||||
By: | /s/ RONALD M. SHAICH | |||
Ronald M. Shaich | ||||
Chairman and Chief Executive Officer Date: February 26, 2010 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ RONALD M. SHAICH
|
Chairman and Chief Executive Officer | February 26, 2010 | ||
/s/ DOMENIC COLASACCO
|
Director | February 26, 2010 | ||
/s/ FRED K. FOULKES
|
Director | February 26, 2010 | ||
/s/ LARRY J. FRANKLIN
|
Director | February 26, 2010 | ||
/s/ CHARLES J. CHAPMAN III
|
Director | February 26, 2010 | ||
/s/ JEFFREY W. KIP
|
Senior Vice President, Chief Financial Officer | February 26, 2010 | ||
/s/ AMY L. KUZDOWICZ
|
Vice President, Controller | February 26, 2010 | ||
/s/ MARK D. WOOLDRIDGE
|
Assistant Controller, Chief Accounting Officer | February 26, 2010 |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.1 | Certificate of Incorporation of the Registrant, as amended through June 7, 2002
(filed as Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for
the period ended July 13, 2002 (File No. 0-19253), as filed with the Commission
on August 26, 2002 and incorporated herein by reference). |
|||
3.2 | Amended and Restated Bylaws of the Registrant, as amended through March 9, 2006
(filed as Exhibit 3.2 to the Registrants Current Report on Form 8-K (File No.
0-19253), as filed with the Commission on March 15, 2006 and incorporated
herein by reference). |
|||
10.1 | 1992 Employee Stock Purchase Plan, as amended (filed as Exhibit A to the
Registrants Proxy Statement on Schedule 14A dated April 16, 2007 (File No.
0-19253), as filed with the Commission on April 13, 2008 and incorporated
herein by reference). |
|||
10.2 | Formula Stock Option Plan for Independent Directors, as amended (filed as
Exhibit 10.2 to the Registrants Annual Report on Form 10-K for the year ended
December 29, 2001 (File No. 0-19253), as filed with the Commission on March 22,
2002 and incorporated herein by reference). |
|||
10.3 | 1992 Equity Incentive Plan, as amended (filed as Exhibit 10.3 to the
Registrants Registration Statement on Form S-8 (File No. 333-128049), as filed
with the Commission on September 1, 2005 and incorporated herein by
reference). |
|||
10.4 | 2001 Employee, Director and Consultant Stock Option Plan (filed as Appendix A
to the Registrants Proxy Statement on Schedule 14A dated April 21, 2005 (File
No. 0-19253), as filed with the Commission on April 21, 2005 and incorporated
herein by reference). |
|||
10.5 | Amended and restated 2005 Long-Term Incentive Program (filed as Exhibit 10.1 to
the Registrants Current Report on Form 8-K (File No. 0-19253), as filed with
the Commission on July 29, 2009 and incorporated herein by reference). |
|||
10.6 | 2006 Stock Incentive Plan (filed as Exhibit A to the Registrants Proxy
Statement on Schedule 14A dated April 13, 2006 (File No. 0-19253), as filed
with the Commission on April 13, 2006 and incorporated herein by reference). |
|||
10.7 | Form of Non-qualified Stock Option Agreement under the 2006 Stock Incentive
Plan (filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 0-19253), as filed with the Commission on May 25, 2006 and
incorporated herein by reference). |
|||
10.8 | Form of Non-qualified Stock Option Agreement under the 2005 Long Term Incentive
Program (filed as Exhibit 10.3 to the Registrants Current Report on Form 8-K
(File No. 0-19253), as filed with the Commission on May 25, 2006 and
incorporated herein by reference). |
|||
10.9 | Form of Restricted Stock Agreement under the 2005 Long-Term Incentive Program
(filed as Exhibit 10.4 to the Registrants Current Report on Form 8-K (File No.
0-19253), as filed with the Commission on May 25, 2006 and incorporated herein
by reference). |
|||
10.10 | Form of amended Restricted Stock Agreement under the 2005 Long-Term Incentive
Program (filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 0-19253), as filed with the Commission on May 28, 2009 and
incorporated herein by reference). |
|||
10.11 | Form of Stock Settled Appreciation Rights Agreement under the 2005 Long-Term
Incentive Program (filed as Exhibit 10.2 to the Registrants Current Report on
Form 8-K (File No. 0-19253), as filed with the Commission on July 29, 2009 and
incorporated herein by reference). |
|||
10.12 | Employment Letter between the Registrant and Michael Kupstas (filed as Exhibit
10.6.6 to the Registrants Annual Report on Form 10-K for the year ended
December 25, 1999 (File No. 0-19253), as filed with the Commission on April 10,
2000 and incorporated herein by reference). |
|||
10.13 | Employment Letter between the Registrant and Mark Borland (filed as Exhibit
10.6.17 to the Registrants Quarterly Report of Form 10-Q for the period ended
October 5, 2002 (File No. 0-19253), as filed with the Commission on November
18, 2002 and incorporated herein by reference). |
|||
10.14 | Form of Panera, LLC Confidential and Proprietary Information and
Non-Competition Agreement executed by Senior Vice Presidents (filed as Exhibit
10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
October 4, 2003 (File No. 0-19253), as filed with the Commission on November
18, 2003 and incorporated herein by reference). |
|||
10.15 | Description of Compensation Arrangements with Non-Employee Directors (filed as
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the period
ended March 28, 2006 (File No. 0-19253), as filed with the Commission on May 4,
2006 and incorporated herein by reference). |
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Exhibit | ||||
Number | Description | |||
10.16 | Lease and Construction Exhibit between Bachelor Foods, Inc. and Panera, Inc.
dated September 7, 2000 (filed as Exhibit 10.12 to the Registrants Annual
Report on Form 10-K for the year ended December 30, 2000, (File No. 0-19253),
as filed with the Commission on March 28, 2001 and incorporated herein by
reference). |
|||
10.17 | Credit Agreement, dated as of November 27, 2007, among Panera Bread Company,
Bank of America, N.A. and Banc of America Securities LLC (filed as Exhibit 10.2
to the Registrants Current Report on Form 8-K (File No. 0-19253), as filed
with the Commission on December 3, 2007 and incorporated herein by reference). |
|||
10.18 | Amended and Restated Credit Agreement, dated as of March 7, 2008, among Panera
Bread Company, Bank of America, N.A., other Lenders party thereto, Banc of
America Securities LLC and Wells Fargo Bank, N.A. (filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K (File No. 0-19253), as filed with the
Commission on March 13, 2008 and incorporated herein by reference). |
|||
21 | * | Registrants Subsidiaries. |
||
23.1 | * | Consent of Independent Registered Public Accounting Firm. |
||
31.1 | * | Certification by Chief Executive Officer. |
||
31.2 | * | Certification by Chief Financial Officer. |
||
32 | * | Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and
Chief Financial Officer. |
* | Filed herewith. |
|
| Management contract or compensatory plan required to be filed as an exhibit hereto pursuant to
Item 15(a) of Form 10-K. |
79