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EXCEL - IDEA: XBRL DOCUMENT - PANERA BREAD CO | Financial_Report.xls |
EX-32 - EXHIBIT 32 - PANERA BREAD CO | c09739exv32.htm |
EX-21 - EXHIBIT 21 - PANERA BREAD CO | c09739exv21.htm |
EX-31.1 - EXHIBIT 31.1 - PANERA BREAD CO | c09739exv31w1.htm |
EX-23.1 - EXHIBIT 23.1 - PANERA BREAD CO | c09739exv23w1.htm |
EX-31.2 - EXHIBIT 31.2 - PANERA BREAD CO | c09739exv31w2.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 28, 2010
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.) |
|
3630 South Geyer Road, Suite 100, St. Louis, MO (Address of Principal Executive Offices) |
63127 (Zip Code) |
(314) 984-1000
(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
þ 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 of the registrant, based on the last sale price of the registrants Class A Common
Stock at the close of business on June 29, 2010, was $1,673,643,693. There is no public trading
market for the registrants Class B Common Stock.
As of February 18, 2011, the registrant had 30,074,057 shares of Class A Common Stock ($.0001 par
value per share) and 1,391,337 shares of Class B Common Stock ($.0001 par value per share)
outstanding.
Part III of this Annual Report incorporates by reference certain information from the registrants
definitive proxy statement for the 2011 annual meeting of shareholders, which the registrant
intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later
than 120 days after the registrants fiscal year end of December 28, 2010.
TABLE OF CONTENTS
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REGISTRANTS SUBSIDIARIES |
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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CERTIFICATION |
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CERTIFICATION |
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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 |
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Exhibit 21 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
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, plan, goal, 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 represent our
estimates as of the date made and should not be relied upon as representing our estimates as of any
subsequent date. While we may elect to update forward-looking statements at some point in the
future, we specifically disclaim any obligation to update any forward-looking statement to reflect
events or circumstances that arise after the date such statement was made.
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 1,453 Company-owned and
franchise-operated bakery-cafe locations in 40 states, the District of Columbia, and 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, and are currently 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 the United States 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 and other product operations. As of December 28, 2010, our Company bakery-cafe
operations segment consisted of 662 Company-owned bakery-cafes, located throughout the United
States and in Ontario, Canada, and our franchise operations segment consisted of 791
franchise-operated bakery-cafes, all located in the United States. As of December 28, 2010, our
fresh dough and other product operations segment, which supplies fresh dough and other products
daily to most Company-owned and franchise-operated bakery-cafes, consisted of 26 fresh dough
facilities (22 Company-owned and four franchise-operated). In the fiscal year ended December 28,
2010, or fiscal 2010, our revenues were $1,542.5 million, consisting of $1,321.2 million of
Company-owned net bakery-cafe sales, $86.2 million of franchise royalties and fees, and $135.1
million of fresh dough and other product sales to franchisees. Franchise-operated net bakery-cafe
sales, as reported by franchisees, were $1,802.1 million in fiscal 2010. 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 28,
2010 and December 29, 2009 had 52 weeks. Our fiscal year ended December 30, 2008 had 53 weeks,
with the fourth quarter comprising 14 weeks.
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Table of Contents
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 customers that we believe differentiates us
from our competitors. Concept Essence begins with artisan bread, quality products, and a warm,
friendly, 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 the use of our bakery-cafes 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. In fiscal 2010, we completed the rollout of our MyPaneraTM loyalty
program, which we believe will allow us to build deeper relationships with our customers and entice
them to return to our bakery-cafes.
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 off-premise 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. We
understand people choose restaurants depending on individual food preferences and mood. Our goal
is to be the first choice for those customers craving soup, salad, or a sandwich.
In addition to the dine-in and take out business, we offer Panera Catering, 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. Panera Catering 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 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 antibiotic-free chicken, as well as unique
recipes and toppings designed to provide appealing, flavorful products that 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 and side items, 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 improved Tomato
Mozzarella Salad, Cuban Chicken Panini, and our All Natural Steak Chili with Cornbread Crumbles.
New product rollouts are integrated into periodic or seasonal menu rotations, referred to as
Celebrations. Examples of products we introduced in fiscal 2010 include the Mediterranean
Salmon Salad, Salmon Club, and Salmon Caesar, which were launched in the first Celebration of 2010.
The Cuban Chicken Panini, All Natural Steak Chili with Cornbread Crumbles, and Asiago Bagel
Breakfast Sandwich were also added to help build on the success of those products. Additionally,
we introduced a Strawberry and Cream Scone, Apple Crunch Muffin, Seasonal Iced Cookies, and a Mint
Crinkle Cookie.
We believe our menu innovation is one reason our value scores with customers remain so strong.
Zagats 2010 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 Salad, and Best Facilities while ranking us second in Healthy Options, Best
Value, and Best Breakfast Sandwich.
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Table of Contents
Operational Excellence
We believe that operational excellence is the most important element of Panera Warmth and that
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 hands-on 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 and maximums),
which is based upon a percentage of the cash flows of the bakery-cafes they operate. The programs
five-year period improves operator quality, management retention, and creates team stability,
generally resulting in a higher level of consistency and customer service 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 and operational
improvements.
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 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 customers and create
additional competitive advantage. In fiscal 2010, we completed the rollout of our MyPanera
customer loyalty program through which our customers earn rewards based on registration in the
program and purchases from our bakery-cafes. We believe MyPanera will allow us to build deeper
relationships with our customers by enhancing their experience with us through receipt of rewards
and enticing them to return to our bakery-cafes.
Our franchise agreements generally require our franchisees to pay us advertising fees. In the
first two quarters of fiscal 2010, our franchise-operated bakery-cafes contributed 0.7 percent of
their net sales to a national advertising fund, paid us a marketing administration fee of 0.4
percent of their net sales, and were required to spend 2.0 percent of their net sales on
advertising in their respective local markets. As of June 30, 2010, the first day of our fiscal
third quarter, franchisee contributions to the national advertising fund were increased to 1.2
percent of their net sales to support a continued increase in marketing activities. We contributed
the same net sales percentages from Company-owned bakery-cafes towards the national advertising
fund and marketing administration fee. Under the terms of our franchise agreements, we have the
ability to increase national advertising fund contributions from current levels up to a maximum of
2.6 percent of net 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 $250.0
million credit facility. During fiscal 2010 we had no borrowings outstanding.
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Table of Contents
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 bakery-cafe 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.
This process is designed to ensure we have the appropriate size bakery-cafe and deploy capital in
the right market.
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 was approximately 4,600 square feet as of
December 28, 2010. 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 maintenance, 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 or
changes in external indices. 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 42
Company-owned bakery-cafes that opened in fiscal 2010 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.
On November 17, 2009, our Board of Directors approved a three year share repurchase authorization
of up to $600.0 million of our Class A common stock, pursuant to which share repurchases may be
effected from time to time on the open market or in privately negotiated transactions and may be
made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status
of authorized but unissued shares or may be held by us as treasury stock. This repurchase
authorization is reviewed quarterly by our Board of Directors and may be modified, suspended, or
discontinued at any time. Since the repurchase authorization was approved, we have repurchased
1,932,969 shares at a weighted-average price of $78.50 for an aggregate purchase price of
approximately $152.0 million. We have approximately $448.0 million available under the existing
$600.0 million repurchase authorization.
Franchise Operations
Our franchisees, which as of December 28, 2010, operated approximately 54.4 percent of our
bakery-cafes, are comprised of 48 franchise groups with an average of approximately 16 bakery-cafes
per group. 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 28, 2010, we had 791 franchise-operated bakery-cafes open, all located in the United
States and we have received commitments to open 176 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 of these
bakery-cafes to open in the next four to five years. The ADAs require 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 franchisees 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.
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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, which are generally 4 percent to 5 percent of net
sales per bakery-cafe. Franchise royalties and fees in fiscal 2010 were $86.2 million, or 5.6
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
fresh dough and other products from sources approved by us. Our fresh dough facility system
supplies fresh dough and other products to substantially all franchise-operated bakery-cafes. We
do not generally finance franchisee construction or ADA payments. However, in the fiscal year
ended December 30, 2008, or 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 our
former 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 28, 2010, we did not hold an equity
interest in any of our franchise-operated bakery-cafes.
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 our regional fresh dough facilities
supply on a daily basis dough for our fresh bread along with, tuna, cream cheese, and certain
produce to substantially all of our Company-owned and franchise-operated bakery-cafes. As of
December 28, 2010, we had 26 fresh dough facilities, 22 of which were Company-owned, including a
limited production facility that is co-located with one of our Company-owned bakery-cafes in
Ontario, Canada to support the three Company-owned bakery-cafes located in that market.
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 28, 2010,
we leased 196 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 and other products to seven bakery-cafes.
Our bakers work through the night shaping, scoring, glazing, and baking 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 and
other products.
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 support centers. 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.
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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 transaction count, average check, 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.
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 28, 2010, we had approximately 15,900 full-time associates (defined as associates
who average 25 hours or more per week), of whom approximately 800 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 13,900 were employed in our bakery-cafe
operations as bakers, managers, and associates. We also had approximately 9,700 part-time hourly
associates at our bakery-cafes as of December 28, 2010. 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, unfair competition, and contract laws.
The Panera®, Panera Bread®, Saint Louis Bread Co.®, Panera Catering®, You Pick Two®, Paradise
Bakery®, Paradise Bakery & Café®, the Mother Bread® design, and MyPaneraTM 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 trademarks with the United States Patent and Trademark
Office. We have also registered some of our trademarks in a number of foreign countries.
Corporate History and Additional Information
We are a Delaware corporation. Our principal offices are located at 3630 South Geyer Road, Suite
100, St. Louis, Missouri 63127 and our telephone number is (314) 984-1000.
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.
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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.
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, consolidated financial condition and 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 consolidated financial condition or results of operations.
ITEM 1A. RISK FACTORS
The following risk factors could materially affect our business, financial condition and results of
operations. The risks and uncertainties described below are those that we have identified as
material, but are not the only risks and uncertainties facing us. Our business is also subject to
general risks and uncertainties that affect many other companies, including overall economic and
industry conditions. Additional risks and uncertainties not currently known to us or that we
currently believe are not material also may impair our business, financial condition and results of
operations.
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 two or three times per week. In addition, we supply Company-owned and
franchise-operated bakery-cafes with fresh dough and other products on a daily basis. These daily
deliveries are particularly susceptible to supply volatility as a result of weather conditions.
Our dependence on frequent deliveries to our bakery-cafes 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 is sold
in most Company-owned and franchise-operated bakery-cafes and we have introduced and tested the
sale of other antibiotic-free proteins in our Company-owned and franchise-operated bakery-cafes.
Our antibiotic-free chicken is currently supplied to us by three different companies. However,
there are few producers of antibiotic-free chicken or other antibiotic-free proteins, which may
make it difficult or more costly for us to find alternative suppliers if necessary.
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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 consolidated results of operations.
Changes in food and supply costs could adversely affect our consolidated 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 for, among other things, fuel, proteins, dairy, produce, wheat, tuna, and cream cheese
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 consolidated results of operations have not been materially adverse. However,
increased volatility in certain commodity markets, including those for wheat, produce, or proteins
including chicken or turkey could have an adverse effect on us depending upon whether we are able to
increase menu prices to cover such increases.
Disruptions or supply issues in our fresh dough facilities could adversely affect our business and
consolidated results of operations.
We operate 22 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 and
other product distribution system delivers fresh dough and other 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 our
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 and other products at our bakery-cafes. Such a shortage of fresh dough and other
products could, depending on the extent and duration, have a material adverse effect on our
business and consolidated results of operations.
Additionally, while fuel costs remained relatively constant in 2010 and 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 consolidated 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 could be costly and the results
uncertain.
Economic conditions in the United States and globally could adversely affect our business and
financial results and have a material adverse effect on our liquidity and capital resources as well
as that of our suppliers.
As our business depends upon discretionary consumer spending, our financial results may be impacted
by the broader global economic environment. 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, average
check amount and margin growth, any significant decrease in customer traffic or average profit per
transaction resulting from fewer purchases from our customers or our customers trading down to
lower priced products on our menu will negatively impact our financial performance. Financial
difficulties experienced by our suppliers could result in product delays or shortages. An economy
that continues to fail to substantially 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
successfully 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.
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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, a production run of items produced in our fresh dough facilities,
food-borne illness, injury, health concerns, allergens, or nutritional content could cause
customers to shift their preferences. For example, past outbreaks of E. coli in certain beef food
products caused consumers to avoid certain products and restaurant chains. 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 or
trichinosis), 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.
Our ability to increase our revenues and operating profits could be adversely affected if we are
unable to execute our growth strategy or achieve sufficient returns on invested capital in
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:
| general economic conditions; |
||
| obstacles to hiring and training qualified operating personnel in the local market; |
||
| identification and availability of suitable locations for new bakery-cafes on acceptable terms,
including costs and appropriate delivery distances from our fresh dough facilities; |
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| 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 |
||
| impact of inclement weather, natural disasters, and other acts of nature. |
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
28, 2010, approximately 54.4 percent of our bakery-cafes were operated by franchisees (791
franchise-operated bakery-cafes out of a total of 1,453 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.
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Additionally, our consolidated 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 revenues 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 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 weekly net 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 may not be successful in implementing important strategic initiatives, which may have an adverse
impact on our business and financial results.
Our business depends upon our ability to continue to grow and evolve through various important
strategic initiatives. There can be no assurance that we will be able to implement these important
strategic initiatives, which could in turn adversely affect our business. These strategic
initiatives include:
| introducing desirable new menu items and improving existing items consistent with
customer tastes and expectations; |
||
| balancing unit growth while meeting target returns on invested capital for locations; |
||
| increasing same store sales and gross profit per transaction through investments in
areas such as category management, catering, and technology in an effort to increase
overall traffic and transaction count; and |
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| increasing brand awareness through greater investment in multi-channel marketing and
advertising, including our MyPanera loyalty program. |
Our failure or inability to protect our
trademarks or other proprietary rights could adversely
affect our business and competitive position.
We believe that our 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.®, Panera
Catering®, You
Pick Two®, Paradise
Bakery®,
Paradise Bakery & Café®, the
Mother Bread® design,
and MyPaneraTM 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.
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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 marketing or 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, consolidated results of operations, and consolidated 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.
Damage to our brands or reputation could negatively impact our business.
Our success depends substantially on the value of our brands and our reputation for offering a
memorable experience with superior customer service. Our brands have been highly rated in annual
consumer studies and have received high recognition in several industry publications. We believe
that we must protect and grow the value of our brands through our Concept Essence to differentiate
ourselves from our competitors and continue our success. Any incident that erodes consumer trust
in or affinity for our brands could significantly reduce their value. If consumers do not continue
to perceive us as a company that customers can trust to serve high quality food in a warm,
friendly, comfortable environment, our brand value could suffer, which could have an adverse effect
on our business.
Competition may adversely affect our operations and consolidated results of operations.
The restaurant industry is highly competitive with respect to location, customer service, price,
taste, 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.
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.
We operate in Canada and therefore, we may be exposed to
uncertainties and risks that could negatively impact our consolidated results of operations.
We recently expanded our operations into Canadian markets. Our expansion
into Canada has made us subject to Canadian economic conditions, particularly currency exchange
rate fluctuations, increased regulations, quotas, tariffs, and political factors, any of which
could have a material adverse effect on our consolidated financial condition and results of
operations if our Canadian operations continue to expand. 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; and |
||
| 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, state, and local labor laws govern our operations and our relationship with our
associates, including prevailing wages, 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.
Regulatory changes in and customer focus on nutrition and advertising practices could adversely
affect our business.
In recent years, there has been increased consumer emphasis on and regulatory scrutiny of
restaurants operating in the quick-service and fast-casual segments, with respect to nutrition and
advertising practices. While we have taken steps to respond to these developments by updating our
menu boards and printed menus to include caloric information in all of our Company-owned
bakery-cafes, we may become subject to other initiatives in the area of nutrition disclosure or
advertising which would require us to make certain additional nutritional information available to
guests or restrict the sales of certain types of ingredients. We may experience higher costs
associated with the implementation and oversight of such changes that could have an adverse impact
on our business.
Rising insurance costs could negatively impact our profitability.
We self-insure a significant portion of potential 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 consolidated 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 the recently enacted legislation, which requires 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, advertising claims, 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 Exchange Act 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 consolidated 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 consolidated 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. 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; |
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| limited or no operational experience in the acquired bakery-cafe market; |
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| 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 consolidated 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 net sales and comparable net bakery-cafe sales due to: |
| lower customer traffic or average check per transaction, including as a result of the
introduction or removal of new menu items;
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; |
||
| negative publicity about the ingredients we use or the occurrence of food-borne illnesses or
other problems at our bakery-cafes; and |
||
| 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; |
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| fluctuations in supply costs, shortages, or interruptions; and |
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| natural disasters and other calamities. |
Increased advertising and marketing costs could adversely affect our consolidated results of
operations.
We expect our advertising expenses to continue to increase and to dedicate greater resources to
advertising and marketing than in previous years. If new advertising and other marketing
programs, including our MyPanera loyalty program, do not drive increased net bakery-cafe sales or
if the costs of advertising, media, or marketing
increase greater than expected, our consolidated 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 consolidated financial position and results of operations.
We are subject to federal, state, and local taxes in the United States and Canada including sales,
use, and other applicable taxes. Significant judgment is required in determining the provision for
taxes. Although we believe our tax estimates are reasonable, if the Internal Revenue Service or
another 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
consolidated financial position and results of operations.
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.
16
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Regional factors could negatively impact our consolidated results of operations.
There are several states in which we, 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 consolidated 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 net
bakery-cafe sales revenues, operating margins, and diluted earnings per share, the market price of
our stock will likely decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
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ITEM 2. PROPERTIES
The average size of a Company-owned bakery-cafe as of December 28, 2010 was 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, fresh dough facilities, and support centers. Lease terms for our
bakery-cafes, fresh dough facilities, and support centers 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 maintenance, 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 or changes in external indices. 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.
The square footage of our Company-owned leased fresh dough facilities as of December 28, 2010 is
set forth below:
Square | ||||
Facility | Footage | |||
Atlanta, GA |
18,000 | |||
Beltsville, MD |
35,700 | |||
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 | |||
Houston, TX |
20,700 | |||
Kansas City, KS |
17,000 | |||
Minneapolis, MN |
10,300 | |||
Miramar, FL |
15,100 | |||
Ontario, CA |
27,800 | |||
Orlando, FL |
16,500 | |||
Phoenix, AZ |
13,100 | |||
Seattle, WA |
16,600 | |||
St. Louis, MO |
30,000 | |||
Stockton, CA |
15,800 | |||
Warren, OH |
16,300 | |||
Ontario, CAN (2) |
300 |
(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 Company-owned
bakery-cafes in Ontario, Canada to support the Company-owned bakery-cafes located in this
market. |
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As of December 28, 2010, we operated 1,453 bakery-cafes in the following locations:
Company- | Franchise- | |||||||||||
Owned | Operated | Total | ||||||||||
Bakery- | Bakery- | Bakery- | ||||||||||
Location | Cafes | Cafes | Cafes | |||||||||
Alabama |
11 | 3 | 14 | |||||||||
Arizona |
30 | 4 | 34 | |||||||||
Arkansas |
| 6 | 6 | |||||||||
California |
45 | 60 | 105 | |||||||||
Colorado |
| 37 | 37 | |||||||||
Connecticut |
12 | 11 | 23 | |||||||||
Delaware |
| 3 | 3 | |||||||||
Florida |
44 | 81 | 125 | |||||||||
Georgia |
13 | 18 | 31 | |||||||||
Illinois |
69 | 34 | 103 | |||||||||
Indiana |
33 | 6 | 39 | |||||||||
Iowa |
2 | 16 | 18 | |||||||||
Kansas |
| 18 | 18 | |||||||||
Kentucky |
17 | 3 | 20 | |||||||||
Maine |
| 4 | 4 | |||||||||
Maryland |
| 43 | 43 | |||||||||
Massachusetts |
14 | 37 | 51 | |||||||||
Michigan |
46 | 15 | 61 | |||||||||
Minnesota |
24 | 3 | 27 | |||||||||
Missouri |
45 | 23 | 68 | |||||||||
Nebraska |
11 | 2 | 13 | |||||||||
Nevada |
| 5 | 5 | |||||||||
New Hampshire |
| 9 | 9 | |||||||||
New Jersey |
37 | 11 | 48 | |||||||||
New York |
37 | 37 | 74 | |||||||||
North Carolina |
13 | 31 | 44 | |||||||||
Ohio |
9 | 92 | 101 | |||||||||
Oklahoma |
| 17 | 17 | |||||||||
Oregon |
5 | 4 | 9 | |||||||||
Pennsylvania |
25 | 47 | 72 | |||||||||
Rhode Island |
| 6 | 6 | |||||||||
South Carolina |
9 | 7 | 16 | |||||||||
South Dakota |
1 | | 1 | |||||||||
Tennessee |
13 | 17 | 30 | |||||||||
Texas |
21 | 32 | 53 | |||||||||
Utah |
| 6 | 6 | |||||||||
Virginia |
56 | 10 | 66 | |||||||||
Washington |
16 | 1 | 17 | |||||||||
West Virginia |
| 7 | 7 | |||||||||
Wisconsin |
| 25 | 25 | |||||||||
District of Columbia |
1 | | 1 | |||||||||
Ontario, Canada |
3 | | 3 | |||||||||
662 | 791 | 1,453 | ||||||||||
19
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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. 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. On August 10, 2009, we filed a new 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. On March 16, 2010, the Court granted in part and denied in part our motion
for summary judgment. On April 5, 2010, the Court granted a joint motion by the parties to stay
the case through July 6, 2010, which stay was subsequently extended by the Court until July 30,
2010, pending an attempt by the parties to resolve through mediation. On August 30, 2010 we
answered the complaint. On December 3, 2010, the parties filed a joint motion to stay the case
pending the submission of a stipulation of settlement and the plaintiffs motion for preliminarily
approval, to be filed on or before January 28, 2011, which stay was extended until February 11,
2011. On February 11, 2011, the parties filed with the Court a Stipulation of Settlement regarding
the class action lawsuit. Under the terms of the Stipulation of Settlement, our primary directors
and officers liability insurer will deposit $5.7 million into a settlement fund for payment to
class members, plaintiffs attorneys fees and costs of administering the settlement. The
settlement must be approved by the Court before becoming effective. The Stipulation of Settlement
contains no admission of wrongdoing. We and the other defendants have maintained and continue to
deny liability and wrongdoing of any kind with respect to the claims made in the class action
lawsuit. However, given the potential cost and burden of continued litigation, we believe the
settlement is in our best interests and the best interests of our
stockholders. On February 22, 2011, the Court preliminary
approved the settlement and scheduled a settlement hearing on
June 22, 2011. If the Court
grants final approval of the Stipulation of Settlement, the Court will dismiss the class action
lawsuit with prejudice and the plaintiff will be deemed to have released all claims against us
relating to the allegations in the class action. We can provide no assurance that the Court will
approve the Stipulation of Settlement. If the Court does
not approve the Stipulation of
Settlement, we will continue to defend against these claims, which could have a material adverse
effect on our financial condition and business. If these matters were concluded in a manner
adverse to us, we could be required to pay substantially more in damages than the amount provided
for in the Stipulation of Settlement. In addition, the costs to us of defending any litigation or
other proceeding, even if resolved in our favor, could be substantial. Such litigation could also
substantially divert the attention of our management and our resources in general. The amount to be deposited by our
primary directors and officers liability insurer into the settlement fund of $5.7 million is
included in other accounts receivable and accrued expenses 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. On July 18, 2008, we filed a motion to
dismiss all of the claims in this lawsuit, which, on December 14, 2009, the Court denied. We filed
an answer to the complaint on January 27, 2010 and the case subsequently moved into discovery. On
July 28, 2010, we filed a motion for summary judgment. The Court held a hearing on the motion for
summary judgment on November 19, 2010. On December 20, 2010, the parties filed a joint motion
requesting that the Court defer its ruling on the motion for summary judgment pending the
finalization of a settlement agreement. On January 18, 2011, the parties advised the Court in a
status conference that they intended to submit a stipulation of settlement and plaintiffs motion
for preliminary approval by February 14, 2011. On February 22, 2011, the parties filed with the
Court a Stipulation of Settlement regarding the shareholder derivative lawsuit. Under the terms of
the Stipulation of Settlement, we agreed, among other things, to implement and maintain certain
corporate governance additions, modifications and/or formalizations, and our insurer will pay
plaintiffs attorneys fees and expenses of $1.4 million. The Stipulation of Settlement contains
no admission of wrongdoing. We and the other defendants have maintained and continue to deny
liability and wrongdoing of any kind with respect to the claims made in the shareholder derivative
action. However, given the potential cost and burden of continued litigation, we believe the
settlement is in our best interests and the best interests of our
stockholders. On February 22, 2011, the Court preliminarily
approved the settlement and scheduled a settlement hearing on
April 8, 2011. If the Court
grants final approval of the Stipulation of Settlement, the Court
will dismiss the shareholder derivative lawsuit with prejudice and the plaintiff will be deemed to
have released all claims against us relating to the allegations in the derivative action. We can
provide no assurance that the Court will approve the Stipulation of Settlement. If the Court does
not approve the Stipulation of Settlement, we will continue to defend against these claims, which
could have a material adverse effect on our financial condition and business. If these matters
were concluded in a manner adverse to us, we could be required to pay substantially more in damages
than the amount provided for in the Stipulation of Settlement. In addition, the costs to us of
defending any litigation or other proceeding, even if resolved in our favor, could be substantial.
Such litigation could also substantially divert the attention of our management and our resources
in general. The amount to be deposited by our
primary directors and officers liability insurer into the settlement fund of $1.4 million is
included in other accounts receivable and accrued expenses in our Consolidated Balance Sheets.
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Table of Contents
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.
On December 16, 2010, a purported class action lawsuit was filed against us by Denarius Lewis and
Corey Weiner, former employees of one of our subsidiaries, and Caroll Ruiz, an employee of one of
our franchisees. The lawsuit was filed in the United States District Court for Middle District of
Florida. The complaint alleges, among other things, violations of the Fair Labor Standards Act.
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.
In addition, we are subject to other routine legal proceedings, claims and litigation in the
ordinary course of 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. [REMOVED AND RESERVED]
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 quarterly high and low sale prices for our Class A common stock as reported by
Nasdaq for the fiscal years ended December 28, 2010 and December 29, 2009.
December 28, 2010 | December 29, 2009 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 79.27 | $ | 65.65 | $ | 58.03 | $ | 43.33 | ||||||||
Second Quarter |
$ | 87.77 | $ | 74.31 | $ | 63.75 | $ | 49.62 | ||||||||
Third Quarter |
$ | 89.25 | $ | 73.82 | $ | 58.05 | $ | 48.59 | ||||||||
Fourth Quarter |
$ | 106.42 | $ | 88.34 | $ | 68.63 | $ | 53.24 |
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On February 18, 2011, the last sale price for the Class A common stock, as reported on the
Nasdaq Global Select Market, was $119.43. As of February 18, 2011, we had approximately 1,929
holders of record of our Class A common stock and approximately 34 holders of record of our Class B
common stock.
Dividend Policy
We periodically evaluate various options for the use of our capital, including the potential
issuance of dividends. We have never paid cash dividends on our capital stock and we do not have
current plans to do so.
Share Repurchases
On November 17, 2009, our Board of Directors approved a three year share repurchase authorization
of up to $600.0 million of our Class A common stock, pursuant to which share repurchases may be
effected from time to time on the open market or in privately negotiated transactions, and which
may be made under a Rule 10b5-1 Plan. Repurchased shares may be retired immediately and resume the
status of authorized but unissued shares or they may be held by us as treasury stock. The
repurchase authorization may be modified, suspended, or discontinued by our Board of Directors at
any time. During fiscal 2010, we repurchased 1,905,540 shares under the share repurchase
authorization at a weighted-average price of $78.72 for an aggregate purchase price of $150.0
million.
During the fourth quarter of fiscal 2010, we repurchased Class A common stock as follows:
Total Number of | Approximate Dollar Value of | |||||||||||||||
Weighted-Average | Shares Purchased as | Shares That May Yet Be | ||||||||||||||
Total Number of | Price Paid per | Part of Publicly | Purchased Under the | |||||||||||||
Period | Shares Purchased | Share | Announced Program | Announced Program | ||||||||||||
September 29, 2010 - October 26, 2010 |
51 | (1) | $ | 84.79 | | $ | 448,238,968 | |||||||||
October 27, 2010 - November 30, 2010 |
1,201 | (1) | $ | 93.31 | | $ | 448,238,968 | |||||||||
December 1, 2010 - December 28, 2010 |
| $ | | | $ | 448,238,968 | ||||||||||
Total |
1,252 | $ | 92.97 | | $ | 448,238,968 |
(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 amended, 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
authorizations. |
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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 Consolidated Financial Condition and Results of Operations and our consolidated financial
statements and notes thereto.
For the fiscal year ended (1) | ||||||||||||||||||||
(in thousands, except per share and percentage information) | ||||||||||||||||||||
December 28, | December 29, | December 30, | December 25, | December 26, | ||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Bakery-cafe sales, net |
$ | 1,321,162 | $ | 1,153,255 | $ | 1,106,295 | $ | 894,902 | $ | 666,141 | ||||||||||
Franchise royalties and fees |
86,195 | 78,367 | 74,800 | 67,188 | 61,531 | |||||||||||||||
Fresh dough and other product sales to franchisees |
135,132 | 121,872 | 117,758 | 104,601 | 101,299 | |||||||||||||||
Total revenues |
1,542,489 | 1,353,494 | 1,298,853 | 1,066,691 | 828,971 | |||||||||||||||
Costs and expenses: |
||||||||||||||||||||
Bakery-cafe expenses: |
||||||||||||||||||||
Cost of food and paper products |
$ | 374,816 | $ | 337,599 | $ | 332,697 | $ | 271,442 | $ | 196,849 | ||||||||||
Labor |
419,140 | 370,595 | 352,462 | 286,238 | 204,956 | |||||||||||||||
Occupancy |
100,970 | 95,996 | 90,390 | 70,398 | 48,602 | |||||||||||||||
Other operating expenses |
177,059 | 155,396 | 147,033 | 121,325 | 92,176 | |||||||||||||||
Total bakery-cafe expenses |
1,071,985 | 959,586 | 922,582 | 749,403 | 542,583 | |||||||||||||||
Fresh dough and other product cost of sales to franchisees |
110,986 | 100,229 | 108,573 | 92,852 | 85,951 | |||||||||||||||
Depreciation and amortization |
68,673 | 67,162 | 67,225 | 57,903 | 44,166 | |||||||||||||||
General and administrative expenses |
101,494 | 83,169 | 84,393 | 68,966 | 59,306 | |||||||||||||||
Pre-opening expenses |
4,282 | 2,451 | 3,374 | 8,289 | 6,173 | |||||||||||||||
Total costs and expenses |
1,357,420 | 1,212,597 | 1,186,147 | 977,413 | 738,179 | |||||||||||||||
Operating profit |
185,069 | 140,897 | 112,706 | 89,278 | 90,792 | |||||||||||||||
Interest expense |
675 | 700 | 1,606 | 483 | 92 | |||||||||||||||
Other expense (income), net |
4,232 | 273 | 883 | 333 | (1,976 | ) | ||||||||||||||
Income before income taxes |
180,162 | 139,924 | 110,217 | 88,462 | 92,676 | |||||||||||||||
Income taxes |
68,563 | 53,073 | 41,272 | 31,434 | 33,827 | |||||||||||||||
Net income |
111,599 | 86,851 | 68,945 | 57,028 | 58,849 | |||||||||||||||
Less: net (loss) income attributable to noncontrolling interest |
(267 | ) | 801 | 1,509 | (428 | ) | | |||||||||||||
Net income attributable to Panera Bread Company |
$ | 111,866 | $ | 86,050 | $ | 67,436 | $ | 57,456 | $ | 58,849 | ||||||||||
Earnings per common share attributable
to Panera Bread Company: |
||||||||||||||||||||
Basic |
$ | 3.65 | $ | 2.81 | $ | 2.24 | $ | 1.81 | $ | 1.88 | ||||||||||
Diluted |
$ | 3.62 | $ | 2.78 | $ | 2.22 | $ | 1.79 | $ | 1.84 | ||||||||||
Weighted average shares of common and common
equivalent shares outstanding: |
||||||||||||||||||||
Basic |
30,614 | 30,667 | 30,059 | 31,708 | 31,313 | |||||||||||||||
Diluted |
30,922 | 30,979 | 30,422 | 32,178 | 32,044 | |||||||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 229,299 | $ | 246,400 | $ | 74,710 | $ | 68,242 | $ | 52,097 | ||||||||||
Short-term investments |
152 | | 2,400 | 23,198 | 20,025 | |||||||||||||||
Total assets |
924,581 | 837,165 | 673,917 | 698,752 | 542,609 | |||||||||||||||
Long-term liabilities |
117,457 | 97,870 | 61,217 | 122,807 | 35,333 | |||||||||||||||
Stockholders equity |
595,608 | 597,036 | 495,162 | 446,164 | 397,666 | |||||||||||||||
Franchisee revenues (2) |
$ | 1,802,116 | $ | 1,640,309 | $ | 1,542,791 | $ | 1,376,430 | $ | 1,245,472 | ||||||||||
Comparable net bakery-cafe sales percentage for (2)(3): |
||||||||||||||||||||
Company-owned bakery-cafes |
7.5 | % | 2.4 | % | 3.8 | % | 1.7 | % | 3.2 | % | ||||||||||
Franchise-operated bakery-cafes |
8.2 | % | 2.0 | % | 3.5 | % | 1.5 | % | 4.3 | % | ||||||||||
Bakery-cafe data: |
||||||||||||||||||||
Company-owned bakery-cafes open |
662 | 585 | 562 | 532 | 391 | |||||||||||||||
Franchise-operated bakery-cafes open |
791 | 795 | 763 | 698 | 636 | |||||||||||||||
Total bakery-cafes open |
1,453 | 1,380 | 1,325 | 1,230 | 1,027 | |||||||||||||||
(1) | Fiscal 2008 was a 53 week year consisting of 371 days. All other fiscal years presented
contained 52 weeks consisting of 364 days. |
|
(2) | Comparable net 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 United States., or GAAP,
and may not be equivalent to comparable net bakery-cafe sales as defined or used by other
companies. We do not record franchise-operated net bakery-cafe sales as revenues. However,
royalty revenues are calculated based on a
percentage of franchise-operated net 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 net bakery-cafe sales for fiscal 2010 and 2009
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 of fiscal 2008 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 net bakery-cafe sales for the fiscal year ended
December 29, 2009, or fiscal 2009, would have been approximately
2.2 percent and
2.0 percent, respectively. Adjusted to reflect a comparative 53 week period in the fiscal
year ended December 25, 2007, or fiscal 2007 (52 weeks in fiscal 2007 plus one week of fiscal 2008),
Company-owned and franchise-operated comparable bakery-cafe sales for fiscal 2008 would have been
approximately 3.5 percent and 3.3 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 net bakery-cafe sales
for fiscal 2009 would have been 2.4 percent and 2.0 percent, respectively. For further
information regarding comparable net bakery-cafe sales and the modification to the method by which
we determine bakery-cafes included in our comparable net bakery-cafe sales, see Item 7.
Managements Discussion and Analysis of Consolidated Financial Condition and Results of
Operations. |
23
Table of Contents
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Our revenues are derived from Company-owned net bakery-cafe sales, fresh dough and other product
sales to franchisees, and franchise royalties and fees. Fresh dough and other product sales to
franchisees are primarily comprised of sales of fresh dough, produce, 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 net bakery-cafe sales. The cost of fresh
dough and other product sales to franchisees relates primarily to the sale of fresh dough, produce,
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 28,
2010 and December 29, 2009, 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 net bakery-cafe sales percentages. In fiscal 2010, we modified the method by which we
determine bakery-cafes included in our comparable net bakery-cafe sales percentages to include
those bakery-cafes with an open date prior to the first day of our prior fiscal year, which we
refer to as our base store bakery-cafes. Previously, comparable net bakery-cafe sales percentages
were based on bakery-cafes that had been in operation for 18 months. While this methodology
modification did not have a material impact on previously reported amounts, prior periods have been
updated to conform to current methodology. Company-owned comparable net bakery-cafe sales
percentages are based on sales from Company-owned bakery-cafes included in our base store
bakery-cafes. Franchise-operated comparable net bakery-cafe sales percentages are based on sales
from franchise-operated bakery-cafes, as reported by franchisees, that are included in our base
store bakery-cafes. System-wide comparable net bakery-cafe sales percentages are based on sales at
Company-owned and franchise-operated bakery-cafes that are included in our base store bakery-cafes.
Acquired Company-owned and franchise-operated bakery-cafes and other restaurant or bakery-cafe
concepts are included in our comparable net bakery-cafe sales percentages after we have acquired a
100 percent ownership interest and such acquisition occurred prior to the first day of our prior
fiscal year. Comparable net bakery-cafe sales exclude closed locations.
Comparable net 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 United States, or GAAP, and may not be
equivalent to comparable net bakery-cafe sales as defined or used by other companies. We do not
record franchise-operated net bakery-cafe sales as revenues. However, royalty revenues are
calculated based on a percentage of franchise-operated net 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 our 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 net sales, and
provides information that is relevant for comparison within the industry.
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We also include in this report information on Company-owned, franchise-operated, and system-wide
average weekly net sales. Average weekly net sales are calculated by dividing total net sales in
the period by operating weeks in the period. Accordingly, year-over-year results reflect sales for
all locations, whereas comparable net bakery-cafe sales exclude closed locations and are based on
sales from bakery-cafes included in our base store bakery-cafes. New stores typically experience
an opening honeymoon period during which they generate higher average weekly net 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 net sales during the honeymoon period. As a result, year-over-year
results of average weekly net sales are generally lower than the results in comparable net
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 2010, we earned $3.62 per diluted share with the following performance on key metrics:
system-wide comparable net bakery-cafe sales growth of 7.9 percent (growth of 7.5 percent for
Company-owned bakery-cafes and growth of 8.2 percent for franchise-operated bakery-cafes);
system-wide average weekly net sales increased 7.3 percent to $42,852 ($41,899 for Company-owned
bakery-cafes and $43,578 for franchise-operated bakery-cafes); 76 new bakery-cafes opened
system-wide (42 Company-owned bakery-cafes and 34 franchise-operated bakery-cafes); and three
bakery-cafes closed system-wide (two Company-owned bakery-cafes and one franchise-operated
bakery-cafes). Our fiscal 2010 results of $3.62 per diluted share included a favorable impact of
$0.10 per diluted share from the repurchase of 1,905,540 shares under our $600.0 million share
repurchase authorization.
In the fiscal quarter ended December 28, 2010, we earned $1.21 per diluted share with the following
performance on key metrics: system-wide comparable net bakery-cafe sales growth of 5.8 percent
(growth of 5.2 percent for Company-owned bakery-cafes and growth of 6.1 percent for
franchise-operated bakery-cafes); system-wide average weekly net sales increased 5.1 percent to
$44,727 ($44,034 for Company-owned bakery-cafes and $45,301 for franchise-operated bakery-cafes);
33 new bakery-cafes opened system-wide (21 Company-owned bakery-cafes and 12 franchise-operated
bakery-cafes); and one Company-owned bakery-cafe closed.
In fiscal 2009, we earned $2.78 per diluted share with the following performance on key metrics:
system-wide comparable net bakery-cafe sales growth of 2.2 percent (growth of 2.4 percent for
Company-owned bakery-cafes and growth of 2.0 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 net 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 net bakery-cafe sales growth of 3.6 percent (growth of 3.8 percent for
Company-owned bakery-cafes and growth of 3.5 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 net 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.
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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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Revenues: |
||||||||||||
Bakery-cafe sales, net |
85.7 | % | 85.2 | % | 85.2 | % | ||||||
Franchise royalties and fees |
5.6 | 5.8 | 5.8 | |||||||||
Fresh dough and other product sales to franchisees |
8.8 | 9.0 | 9.1 | |||||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Costs and expenses: |
||||||||||||
Bakery-cafe expenses (1): |
||||||||||||
Cost of food and paper products |
28.4 | % | 29.3 | % | 30.1 | % | ||||||
Labor |
31.7 | 32.1 | 31.9 | |||||||||
Occupancy |
7.6 | 8.3 | 8.2 | |||||||||
Other operating expenses |
13.4 | 13.5 | 13.3 | |||||||||
Total bakery-cafe expenses |
81.1 | 83.2 | 83.4 | |||||||||
Fresh dough and other product cost of sales to franchisees (2) |
82.1 | 82.2 | 92.2 | |||||||||
Depreciation and amortization |
4.5 | 5.0 | 5.2 | |||||||||
General and administrative expenses |
6.6 | 6.1 | 6.5 | |||||||||
Pre-opening expenses |
0.3 | 0.2 | 0.3 | |||||||||
Total costs and expenses |
88.0 | 89.6 | 91.3 | |||||||||
Operating profit |
12.0 | 10.4 | 8.7 | |||||||||
Interest expense |
| 0.1 | 0.1 | |||||||||
Other expense, net |
0.3 | | 0.1 | |||||||||
Income before income taxes |
11.7 | 10.3 | 8.5 | |||||||||
Income taxes |
4.4 | 3.9 | 3.2 | |||||||||
Net income |
7.2 | 6.4 | 5.3 | |||||||||
Less: net (loss) income attributable to noncontrolling interest |
| 0.1 | 0.1 | |||||||||
Net income attributable to Panera Bread Company |
7.3 | % | 6.4 | % | 5.2 | % | ||||||
(1) | As a percentage of net bakery-cafe sales. |
|
(2) | As a percentage of fresh dough and other product 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Number of bakery-cafes: |
||||||||||||
Company-owned: |
||||||||||||
Beginning of period |
585 | 562 | 532 | |||||||||
Bakery-cafes opened |
42 | 30 | 35 | |||||||||
Bakery-cafes closed |
(2 | ) | (7 | ) | (5 | ) | ||||||
Bakery-cafes acquired from franchisees (1) |
40 | | | |||||||||
Bakery-cafe sold to a franchisee (2) |
(3 | ) | | | ||||||||
End of period |
662 | 585 | 562 | |||||||||
Franchise-operated: |
||||||||||||
Beginning of period |
795 | 763 | 698 | |||||||||
Bakery-cafes opened |
34 | 39 | 67 | |||||||||
Bakery-cafes closed |
(1 | ) | (7 | ) | (2 | ) | ||||||
Bakery-cafes sold to Company (1) |
(40 | ) | | | ||||||||
Bakery-cafe purchased from Company (2) |
3 | | | |||||||||
End of period |
791 | 795 | 763 | |||||||||
System-wide: |
||||||||||||
Beginning of period |
1,380 | 1,325 | 1,230 | |||||||||
Bakery-cafes opened |
76 | 69 | 102 | |||||||||
Bakery-cafes closed |
(3 | ) | (14 | ) | (7 | ) | ||||||
End of period |
1,453 | 1,380 | 1,325 | |||||||||
(1) | In March 2010, we acquired controlling interest in three bakery-cafes from our Canadian
franchisee and subsequently purchased the remaining noncontrolling interest on December 28,
2010. Additionally, in September 2010, we acquired 37 bakery-cafes from our New Jersey
franchisee. |
|
(2) | In May 2010, we sold three bakery-cafes in the Mobile, Alabama market to an existing
franchisee. |
Comparable Bakery-Cafe Sales, net
Fiscal 2010 and fiscal 2009 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 of sales in the additional week of
fiscal 2008 for Company-owned and franchise-operated bakery-cafes, respectively. Accordingly, we
believe it is appropriate to provide the following three separate measures of comparable net
bakery-cafe sales for fiscal 2009: calendar basis, adjusted fiscal basis, and fiscal basis.
Calendar Basis
We believe that comparable net 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 net bakery-cafe sales growth on a calendar basis
for the fiscal year ended December 29, 2009 was
2.4 percent, 2.0 percent and 2.2 percent for
Company-owned, franchise-operated, and system-wide bakery-cafes, respectively. The comparable
Company-owned net bakery-cafe sales growth on a calendar basis was driven by approximately 0.3
percent transaction growth and approximately 2.1 percent average check growth. Average check
growth, in turn, was comprised of retail price increases of
approximately 2.6 percent and negative
mix impact of approximately 0.5 percent in comparison to fiscal 2008.
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 net bakery-cafe sales over those periods. Comparable net bakery-cafe
sales growth on an adjusted fiscal basis for fiscal 2009 was 2.2 percent, 2.0 percent
and 2.1 percent for Company-owned, franchise-operated, and system-wide bakery-cafes, respectively.
Comparable net bakery-cafe sales growth on an adjusted fiscal basis for fiscal 2008 was 3.5
percent, 3.3 percent and 3.4 percent for Company-owned, franchise-operated, and
system-wide bakery-cafes, respectively. The fiscal 2009 comparable Company-owned net bakery-cafe
sales growth on an adjusted fiscal basis was driven by approximately 2.1 percent average
check growth. Average check growth, in turn, was comprised of retail price increases of
approximately 2.6 percent and negative mix impact of approximately 0.5 percent in
comparison to fiscal 2008.
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Fiscal Basis
Comparable net bakery-cafe sales growth for the fiscal periods indicated were as follows:
For the fiscal year ended | ||||||||||||
December 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
(52 weeks) | (52 weeks) | (53 weeks) | ||||||||||
Company-owned |
7.5 | % | 2.4 | % | 3.8 | % | ||||||
Franchise-operated |
8.2 | % | 2.0 | % | 3.5 | % | ||||||
System-wide |
7.9 | % | 2.2 | % | 3.6 | % |
In fiscal 2010, we modified the method by which we determine bakery-cafes included in our
comparable net bakery-cafe sales percentages to include those bakery-cafes with an open date prior
to the first day of our prior fiscal year. Previously, comparable net bakery-cafe sales
percentages were based on bakery-cafes that had been 100 percent owned and in operation for 18
months. While this methodology modification did not have a material impact on previously reported
amounts, prior periods have been updated to conform to current
methodology.
The 7.5 percent growth in fiscal 2010 comparable Company-owned net bakery-cafe sales was driven by
approximately 2.1 percent of transaction growth and 5.4 percent average check growth. Average
check growth, in turn, was comprised of retail price increases of 2.0 percent and positive mix
impact of 3.4 percent in comparison to the prior fiscal year.
Results of Operations
Fiscal 2010 Compared to Fiscal 2009
Revenues
Total revenues in fiscal 2010 increased 14.0 percent to $1,542.5 million compared to $1,353.5
million in fiscal 2009. The growth in total revenues in fiscal 2010 compared to the prior year was
primarily due to the opening of 76 new bakery-cafes system-wide in fiscal 2010 and to the 7.9
percent increase in system-wide comparable net bakery-cafe sales in fiscal 2010, partially offset
by the closure of three bakery-cafes system-wide in fiscal 2010.
The system-wide average weekly net sales per bakery-cafe for the periods indicated are as follows:
For the fiscal year ended | Percentage | |||||||||||
December 28, 2010 | December 29, 2009 | Change | ||||||||||
System-wide average weekly net sales |
$ | 42,852 | $ | 39,926 | 7.3 | % |
Net bakery-cafe sales in fiscal 2010 increased 14.6 percent to $1,321.2 million compared to
$1,153.3 million in fiscal 2009. The increase in net bakery-cafe sales in fiscal 2010 compared to
the prior fiscal year was primarily due to the opening of 42 new
Company-owned bakery-cafes, the acquisition of 40 franchise-operated
bakery-cafes, and the 7.5 percent increase in comparable Company-owned net
bakery-cafe sales in fiscal 2010, partially offset by the closure of two Company-owned
bakery-cafes and the sale of three Company-owned bakery-cafes. This 7.5 percent growth in comparable net bakery-cafe sales was driven by
approximately 2.1 percent of transaction growth and approximately 5.4 percent average check growth.
Average check growth, in turn, was comprised of retail price increases of approximately 2.0
percent and positive mix impact of approximately 3.4 percent in comparison to the same period in
the prior fiscal year. In total, Company-owned net bakery-cafe sales as a percentage of total
revenues increased by 0.5 percentage points to 85.7 percent for fiscal 2010 as compared to 85.2
percent in fiscal 2009. In addition, the increase in average weekly net sales for Company-owned
bakery-cafes in fiscal 2010 compared to the prior fiscal year was primarily due to the previously
described average check growth that resulted from our category management initiatives. The average
weekly net 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 28, 2010 | December 29, 2009 | Change | ||||||||||
Company-owned average weekly net sales |
$ | 41,899 | $ | 39,050 | 7.3 | % | ||||||
Company-owned number of operating weeks |
31,532 | 29,533 | 6.8 | % |
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Franchise royalties and fees in fiscal 2010 increased 10.0 percent to $86.2 million compared to
$78.4 million in fiscal 2009. The components of franchise royalties and fees for the periods
indicated are as follows (in thousands):
For the fiscal year ended | ||||||||
December 28, 2010 | December 29, 2009 | |||||||
Franchise royalties |
$ | 84,806 | $ | 77,119 | ||||
Franchise fees |
1,389 | 1,248 | ||||||
Total |
$ | 86,195 | $ | 78,367 | ||||
The increase in franchise royalty and fee revenues in fiscal 2010 compared to the prior fiscal year
was attributed to the opening of 34 new franchise-operated bakery-cafes and the 8.2 percent
increase in comparable franchise-operated net bakery-cafe sales in fiscal 2010, partially offset by
the closure of one franchise-operated bakery-cafe and the
Companys purchase of 40 franchise-operated bakery-cafes. The average weekly net 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 28, 2010 | December 29, 2009 | Change | ||||||||||
Franchise average weekly net sales |
$ | 43,578 | $ | 40,566 | 7.4 | % | ||||||
Franchise number of operating weeks |
41,354 | 40,436 | 2.3 | % |
As of December 28, 2010, there were 791 franchise-operated bakery-cafes open and we have received
commitments to open 176 additional franchise-operated bakery-cafes. The timetables for opening
these bakery-cafes are established in the respective Area Development Agreements, referred to as
ADAs, with franchisees, which provide for the majority of these bakery-cafes to open in the next
four to five years. An ADA requires a franchisee to develop a specified number of bakery-cafes by
specified dates. If a franchisee fails to develop bakery-cafes on the schedule set forth in the
ADA, we have the right to terminate the ADA and develop Company-owned locations or develop
locations through new franchisees in that market. We may exercise one or more alternative remedies
to address defaults by franchisees, including not only development defaults, but also defaults in
complying with our
operating and brand standards and other covenants included in 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 and other product sales to franchisees in fiscal 2010 increased 10.9 percent to $135.1
million compared to $121.9 million in fiscal 2009. The increase in fresh dough and other product
sales to franchisees was primarily driven by the previously described increased number of
franchise-operated bakery-cafes opened since the prior fiscal year, the 8.2 percent increase in
franchise-operated comparable net bakery-cafe sales, and increased produce distribution sales.
Costs and Expenses
The cost of food and paper products includes the costs associated with the fresh dough and other
product operations that sell fresh dough and other 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 and other product operations that sell fresh dough and other
products to the franchise-operated bakery-cafes are excluded from the cost of food and paper
products and are shown separately as fresh dough and other product cost of sales to franchisees in
the Consolidated Statements of Operations.
The cost of food and paper products was $374.8 million, or 28.4 percent of net bakery-cafe sales in
fiscal 2010, compared to $337.6 million, or 29.3 percent of net bakery-cafe sales, in fiscal 2009.
This decrease in the cost of food and paper products as a percentage of net bakery-cafe sales was
principally due to category management initiatives, purchasing improvements, food cost deflation,
improved leverage of our fresh dough manufacturing costs due to additional bakery-cafe openings,
and improved leverage overall from higher comparable net bakery-cafe sales, partially offset by
costs incurred related to the roll-out of our MyPanera loyalty program. In fiscal 2010, there was
an average of 65.2 bakery-cafes per fresh dough facility compared to an average of 62.5 in fiscal
2009.
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Labor expense was $419.1 million, or 31.7 percent of net bakery-cafe sales, in fiscal 2010 compared
to $370.6 million, or 32.1 percent of net bakery-cafe sales, in fiscal 2009. The decrease in labor
expense as a percentage of net bakery-cafe sales was primarily a result of improved leverage from
higher comparable net bakery-cafe sales and lower costs due to the timing of lower than normal
self-insurance claims, partially offset by the increased labor investment related to the rollout of
our MyPanera loyalty program.
Occupancy cost was $101.0 million, or 7.6 percent of net bakery-cafe sales, in fiscal 2010 compared
to $96.0 million, or 8.3 percent of net bakery-cafe sales, in fiscal 2009. The decrease in
occupancy cost as a percentage of net bakery-cafe sales was primarily a result of common area
maintenance credits received in 2010, as landlords spent less on common area maintenance in prior
years than anticipated, improved leverage from higher comparable net bakery-cafe sales, and lower
occupancy costs in new bakery-cafes.
Other operating expenses were $177.1 million, or 13.4 percent of net bakery-cafe sales, in fiscal
2010 compared to $155.4 million, or 13.5 percent of net bakery-cafe sales, in fiscal 2009. The
decrease in other operating expenses as a percentage of net bakery-cafe sales was primarily a
result of improved leverage from higher comparable net bakery-cafe sales, partially offset by costs
associated with the roll-out of our MyPanera loyalty program.
Fresh dough and other product cost of sales to franchisees was $111.0 million, or 82.1 percent of
fresh dough and other product sales to franchisees, in fiscal 2010 compared to $100.2 million, or
82.2 percent of fresh dough and other product sales to franchisees, in fiscal 2009. The decrease
in the fresh dough and other product cost of sales to franchisees as a percentage of fresh dough
and other product sales to franchisees was primarily the result of the year-over-year decrease in
ingredient costs, improved leverage from new bakery-cafes, higher comparable net bakery-cafe
sales, and the Companys purchase of 40 franchise-operated
bakery-cafes.
General and administrative expenses were $101.5 million, or 6.6 percent of total revenues, in
fiscal 2010 compared to $83.2 million, or 6.1 percent of total revenues, in fiscal 2009. The
increase in general and administrative expenses as a percent of total revenues was primarily the
result of investments made in our marketing infrastructure and higher incentive compensation
expense compared to the prior year driven by our fiscal 2010 performance exceeding original
targets, partially offset by improved leverage from increased revenues.
Interest Expense
Interest expense was $0.7 million, or less than 0.1 percent of total revenues, in fiscal 2010
compared to $0.7 million, or 0.1 percent of total revenues, in fiscal 2009. The year-over-year
decrease in interest expense as a percentage of total revenues was the result of
increased revenues.
Other Expense, net
Other expense, net in fiscal 2010 increased to $4.2 million, or 0.3 percent of total revenues, from
$0.3 million, or less than 0.1 percent of total revenues, in fiscal 2009. Other expense, net for
fiscal 2010 was primarily comprised of charges related to unclaimed property audit exposures,
certain state sales tax audit exposures, and immaterial items. Other expense, net for fiscal 2009
was primarily comprised of charges related to certain state sales tax audit exposures, write-offs
associated with smallwares and panini grills, the closure of bakery-cafes, and impairment of one
bakery-cafe, partially offset by a gain related to the Columbia Strategic Cash Portfolio and the
Company-owned life insurance program, and immaterial items.
Income Taxes
The provision for income taxes increased to $68.6 million in fiscal 2010 compared to $53.1 million
in fiscal 2009. The tax provision for fiscal 2010 and fiscal 2009 reflects a combined federal,
state, and local effective tax rate of 38.1 percent and 37.9 percent, respectively. The increase
in the effective tax rate between fiscal 2010 and 2009 was primarily driven by state taxes.
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 revenues 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 2.2 percent increase in system-wide comparable net
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.
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The system-wide average weekly net 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 net sales |
$ | 39,926 | $ | 39,239 | 1.8 | % |
Net 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 net bakery-cafe sales
of approximately $17.5 million in fiscal 2008. The increase in net 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 2.4 percent increase in comparable
Company-owned net 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 net bakery-cafe sales as a percentage of total revenues remained consistent
at 85.2 percent in both fiscal 2009 and fiscal 2008. In addition, the increase in average weekly
net 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 net 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 net 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 revenues 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 2.0 percent increase in comparable franchise-operated net 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 net 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 net 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 by specified dates. If a franchisee fails
to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop
Company-owned locations or develop locations through new franchisees in that market. We may
exercise one or more alternative remedies to address defaults by franchisees, 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.
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Fresh dough and other product 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 and other product sales to franchisees of approximately $2.2 million in fiscal
2008. The increase in fresh dough and other product 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 and other 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 and other products to franchise-operated bakery-cafes
are excluded and are shown separately as fresh dough and other product 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 net bakery-cafe sales in
fiscal 2009 compared to $332.7 million, or 30.1 percent of net bakery-cafe sales, in fiscal 2008.
This decrease in the cost of food and paper products as a percentage of net 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.
Labor expense was $370.6 million, or 32.1 percent of net bakery-cafe sales, in fiscal 2009 compared
to $352.5 million, or 31.9 percent of net bakery-cafe sales, in fiscal 2008. The increase in labor
expense as a percentage of net 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 net bakery-cafe sales, in fiscal 2009 compared
to $90.4 million, or 8.2 percent of net bakery-cafe sales, in fiscal 2008. The modest increase in
occupancy cost as a percentage of net 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 net bakery-cafe sales, in fiscal
2009 compared to $147.0 million, or 13.3 percent of net bakery-cafe sales, in fiscal 2008. The
increase in other operating expenses as a percentage of net 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, a charge related to the write-off of assets as a result of the closure of three
bakery-cafes, and a charge related to the impairment of one bakery-cafe. Fiscal 2008 results
included a charge related to asset write-offs involving our new coffee program.
Fresh dough and other product cost of sales to franchisees was $100.2 million, or 82.2 percent of
fresh dough and other product sales to franchisees, in fiscal 2009 compared to $108.6 million, or
92.2 percent of fresh dough and other product sales to franchisees, in fiscal 2008. The decrease
in the fresh dough and other product cost of sales to franchisees as a percentage of fresh dough
and other product 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 revenues, in fiscal
2009 compared to $84.4 million, or 6.5 percent of total revenues, 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 our strong operating performance.
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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 Expense, net
Other expense, net in fiscal 2009 decreased to $0.3 million, or less than 0.1 percent of total
revenues, from $0.9 million, or 0.1 percent of total revenues, in fiscal 2008. Other expense, net
for fiscal 2009 was primarily comprised of charges related to certain state sales tax audit
exposures, write-offs associated with smallwares and panini grills, the closure of bakery-cafes,
and impairment of one bakery-cafe, partially offset by a gain related to the Columbia Strategic
Cash Portfolio and the Company-owned life insurance program, and immaterial items. Other expense,
net for fiscal 2008 was primarily comprised of a charge attributable to the Columbia Strategic Cash
Portfolio, partially offset by interest income, and immaterial items.
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 37.9 percent and 37.4 percent, respectively. The increase
in the effective tax rate between fiscal 2009 and 2008 was primarily the 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.
Liquidity and Capital Resources
Cash and cash equivalents were $229.3 million at December 28, 2010 compared to $246.4 million at
December 29, 2009. This $17.1 million decrease was primarily a result of $153.5 million used to
repurchase shares of our Class A common stock, $82.2 million used on capital expenditures, and
$52.2 million used for acquisitions, partially offset by $237.6 million of cash generated from
operations and $25.6 million received from the exercise of employee stock options. Our primary
source of liquidity is cash provided by operations, although we have the ability to borrow under a
credit facility, as described below. Historically, our principal requirements for cash have
primarily resulted from the cost of food and paper products, employee labor, and 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.
We had working capital of $119.2 million at December 28, 2010 compared to $179.8 million at
December 29, 2009. The decrease in working capital resulted primarily from the previously
described decrease in cash and cash equivalents of $17.1 million and an increase in accrued
expenses of $61.9 million and other long-term liabilities of $12.3 million. Partially offsetting
the decrease in working capital was an increase in prepaid expenses of $7.7 million, an increase in
trade and other accounts receivable, net of $13.2 million, and an increase of $4.7 million in
deferred income taxes. We believe that cash provided by our 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 (used in) provided by: | December 28, 2010 | December 29, 2009 | December 30, 2008 | |||||||||
Operating activities |
$ | 237,634 | $ | 214,904 | $ | 157,324 | ||||||
Investing activities |
$ | (132,199 | ) | $ | (49,219 | ) | $ | (48,705 | ) | |||
Financing activities |
$ | (122,536 | ) | $ | 6,005 | $ | (102,151 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
$ | (17,101 | ) | $ | 171,690 | $ | 6,468 | |||||
Operating Activities
Cash flows provided by operating activities in fiscal 2010 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
accrued expenses and other long-term liabilities, partially offset by an increase in prepaid
expenses and trade and other accounts receivable, net. 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 accrued expenses, accounts payable, and deferred rent,
partially offset by an increase in 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.
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Investing Activities
Capital Expenditures
Capital expenditures are the largest ongoing component of our investing activities and include
expenditures for new bakery-cafes and fresh dough facilities, improvements to existing 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
New bakery-cafe and fresh dough facilities |
$ | 42,294 | $ | 28,036 | $ | 39,122 | ||||||
Bakery-cafe and fresh dough facility improvements |
27,009 | 21,695 | 20,665 | |||||||||
Other capital needs |
12,923 | 4,953 | 3,376 | |||||||||
Total |
$ | 82,226 | $ | 54,684 | $ | 63,163 | ||||||
Our capital requirements, including development costs related to the opening or acquisition of
additional bakery-cafes and fresh dough facilities and maintenance and remodel expenditures, have
been and will continue to be significant. Our future capital requirements and the adequacy of
available funds will depend on many factors, including the pace of expansion, real estate markets,
site locations, and the nature of the arrangements negotiated with landlords. We believe that cash
provided by our 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 95 to 105 system-wide bakery-cafe openings in fiscal 2011. 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 $750,000, which is net of landlord
allowances and excludes capitalized development overhead.
Business Combinations
We used approximately $52.2 million and $2.7 million of cash flows for acquisitions, in fiscal 2010
and fiscal 2008, respectively. In fiscal 2009 there were no acquisitions. In fiscal 2010, we
purchased a controlling interest in certain assets, liabilities, and the operations of three
bakery-cafes in Ontario, Canada from our Canadian franchisee in a non-cash transaction. We
subsequently purchased the remaining noncontrolling interest in the three bakery-cafes on December
28, 2010 for $0.7 million. Additionally, in fiscal 2010 we purchased substantially all the assets
and certain liabilities of 37 bakery-cafes from our New Jersey franchisee. 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 an additional purchase price of $0.2 million related
to the settlement of certain purchase price adjustments for the first quarter of fiscal 2007
acquisition of Paradise Bakery & Café, Inc., or Paradise. Within our Consolidated Balance Sheets
as of December 28, 2010 and December 29, 2009, $5.0 million and $2.3 million respectively, were
included for contingent or accrued purchase price remaining from previously completed acquisitions.
As of December 30, 2008, we had no contingent or accrued purchase price remaining from previously
completed acquisitions. See Note 3 to the consolidated financial statements for further
information with respect to our acquisition activity in fiscal 2010 and fiscal 2008.
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, which was an enhanced cash fund
previously sold as an alternative to traditional money-market funds. The Columbia Strategic Cash
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 Strategic Cash
Cash Portfolio was closed with a restriction placed upon the cash redemption ability of its holders
in the fourth quarter of fiscal 2007.
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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 Strategic Cash 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 Strategic Cash
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. The estimated fair value of the Columbia Strategic
Cash Portfolio units was $0.650 per unit, or $4.1 million, as of December 30, 2008. 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 Strategic Cash 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 2010, fiscal 2009, and fiscal 2008, we had no investments in U.S. Treasury notes and
government agency securities, and we made no additional cash purchases of investments.
Financing Activities
Financing activities in fiscal 2010 included $153.5 million used to repurchase shares of our Class
A common stock offset by $25.6 million received from the exercise of employee stock options, $3.6
million received from the tax benefit from exercise of stock options, and $1.8 million received
from the issuance of common stock. 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 approximately $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.
Purchase of Noncontrolling Interest
On June 2, 2009, we purchased 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 former
shareholders of the remaining 49 percent of Paradise, whom we refer to as the Prior Shareholders.
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 June 2, 2011, with any remaining holdback amounts
reverting to the Prior Shareholders. 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 authorization
of up to $600.0 million of our Class A common stock, pursuant to which share repurchases may be
effected from time to time on the open market or in privately negotiated transactions and which may
be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and will resume
the status of authorized but unissued shares or they may be held by us as treasury stock. The
repurchase authorization may be modified, suspended, or discontinued by our Board of Directors at
any time. Under the share repurchase authorization, we repurchased a total of 1,905,540 shares of
our Class A common stock at a weighted-average price of $78.72 per share for an aggregate purchase
price of $150.0 million in fiscal 2010. As of the date of this report, under the share repurchase
authorization, we repurchased a total of 1,932,969 shares of our Class A common stock at a
weighted-average price of $78.50 per share for an aggregate purchase price of approximately $152.0
million. We have approximately $448.0 million available under the existing $600.0 million
repurchase authorization.
We have historically repurchased shares of our Class A common stock through a share repurchase
authorization 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.
Repurchased shares are netted and surrendered as payment for applicable tax withholding on the
vesting of participants restricted stock. During fiscal 2010, we repurchased 44,002 shares of
Class A common stock surrendered by participants of the Plans at a weighted-average price of $77.99
per share for an aggregate purchase price of approximately $3.5 million pursuant to the terms of
the Plans and the applicable award agreements. 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.
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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 28, 2010 and December 29, 2009, we had no balance outstanding
under the Amended and Restated Credit Agreement.
Critical Accounting Policies & Estimates
Our discussion and analysis of our consolidated 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 GAAP. The preparation of the consolidated
financial statements requires us to make estimates, judgments and assumptions, which we believe to
be reasonable, based on the information available. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Variances in the estimates or assumptions used to actual
experience 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 that occurred during the fiscal year ended December 28,
2010.
Revenue Recognition
We recognize revenues from net bakery-cafe sales upon delivery of the related food and other
products to the customer. Revenues from fresh dough and other product sales to franchisees are
recorded upon delivery of the fresh dough and other products 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. Sales of soup and other branded
products sold outside our bakery-cafes are generally recognized upon delivery to customers.
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 corresponding bakery-cafe. Royalties are generally paid weekly
based on a percentage of net franchisee sales specified in each ADA (generally 4 percent to 5
percent of net sales). Royalties are recognized as revenue when they are earned.
We maintain a customer loyalty program in which customers earn rewards based on registration in the
program and purchases within our bakery-cafes. We record the full retail value of loyalty program
rewards as a reduction of net bakery-cafe sales and a liability is established within other accrued
expenses as rewards are earned while considering historical redemption rates. Fully earned rewards
expire if unredeemed after 60 days.
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Valuation of Goodwill
We record goodwill related to the excess of the purchase price over the fair value of net assets
acquired. At December 28, 2010 and December 29, 2009, our goodwill balance was $94.4 million and
$87.5 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 our fiscal fourth quarter of each year. Goodwill is tested for impairment in
accordance with the accounting standard for goodwill by comparing the carrying value of reporting
units to their estimated fair values. 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 2010 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.
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 estimated fair value of our reporting units, and could
result in goodwill 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 this 2010 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 rates, and discount rates. In order to evaluate the sensitivity of the fair value
calculations on the goodwill impairment test, we applied hypothetical changes to our projected
growth rates and discount rates which we believe are considered appropriate. Based on the goodwill
analysis performed as of September 29, 2010, the first day of our fiscal fourth quarter, these
hypothetical changes in our assumptions would not affect the results of the impairment test, as all
reporting units individually still have an excess of fair value over their respective carrying
value. The fair value of our reporting units exceeded carrying value under the present value of
expected future cash flows model for all of our reporting units, however there can be no assurance
future goodwill impairment tests will not result in a charge to earnings.
As we did not become aware of any impairment indicators subsequent to the date of the annual
assessment, we determined there was no impairment as of December 28, 2010.
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 28, 2010, we believe we
have provided adequate reserves for our self-insurance exposure. As of December 28, 2010 and
December 29, 2009, self-insurance reserves were $20.2 million and $15.9 million, respectively, and
were included in accrued expenses in the Consolidated Balance Sheets.
Income Taxes
We are subject to income taxes in the United States and Canada. Significant judgment is required
in evaluating our uncertain tax positions and determining our provision for income taxes. We
assess the income tax position and record the liabilities for all years subject to examination
based upon managements evaluation of the facts, circumstances, and information available at the
reporting date.
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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.
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 effective tax rates have differed from the statutory tax rate primarily due to the impact of
state taxes, partially offset by favorable U.S. rules related to donations of inventory to
charitable organizations and domestic manufacturing. Our future effective tax rates could be
adversely affected by changes in the valuation of our deferred tax assets, 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 and other tax filings 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.
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 described 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. Some of our leases
contain provisions that require additional rental payments based upon net bakery-cafe sales volume
or changes in external indices, which we refer to as 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. Additionally, we record landlord allowances for
structural tenant improvements as reduction in depreciation expense. 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, fresh dough facility, and support
center 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 stock-based
compensation, 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.
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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. |
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 95 to 105 system-wide bakery-cafe openings in fiscal 2011. 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
maintenance, 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 or changes in
external indices. 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 28, 2010, 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):
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
Operating Leases (1) |
$ | 1,006,350 | $ | 93,303 | $ | 189,010 | $ | 183,972 | $ | 540,065 | ||||||||||
Capital Lease Obligations (1) |
1,517 | 152 | 304 | 304 | 757 | |||||||||||||||
Purchase Obligations (2) |
190,929 | 186,560 | 3,869 | 500 | | |||||||||||||||
Uncertain Tax Positions (3) |
2,896 | 1,354 | 1,116 | 378 | 48 | |||||||||||||||
Total |
$ | 1,201,692 | $ | 281,369 | $ | 194,299 | $ | 185,154 | $ | 540,870 | ||||||||||
(1) | See Note 13 to the consolidated financial statements for further information with respect
to our operating and capital leases. |
|
(2) | Relates to certain commodity and service agreements where we are committed as of December 28,
2010 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. |
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Off-Balance Sheet Arrangements
As of December 28, 2010, we guaranteed operating leases of 27 franchisee or affiliate bakery-cafes
and one location of our former Au Bon Pain division, which we account for in accordance with the
accounting requirements for guarantees. These leases have terms expiring on various dates from
December 31, 2010 to December 31, 2023 and have a potential amount of future rental payments of
approximately $24.3 million as of December 28, 2010. Our obligation under these leases will
generally 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 issuance 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
obligation for these operating leases. As of December 28, 2010, future commitments under these
leases were as follows (in thousands):
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
Total | 1 year | years | years | 5 years | ||||||||||||||||
Subleases and Lease Guarantees (1) |
$ | 24,278 | 3,304 | 6,152 | 5,086 | 9,736 |
(1) | Represents aggregate minimum requirement see Note 13 to the consolidated financial
statements for further information with respect to our lease guarantees. |
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 to 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 28, 2010, the total amount potentially owed employees under these
Non-Compete Agreements was $12.8 million.
Related Party Note Receivable
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 Cdn. $3.5 million note receivable from Millennium was 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 consolidated results of operations have not been
materially adverse. However, inherent volatility experienced 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
On December 30, 2009, we adopted the updated guidance issued by the Financial Accounting Standards
Board, or FASB, related to fair value measurements and disclosures, which requires a reporting
entity to separately disclose the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and to describe the reasons for the transfers. The updated guidance also
requires that an entity provide fair value measurement disclosures for each class of assets and
liabilities and disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and non-recurring Level 2 and Level 3 fair value measurements. This guidance
was effective for interim or annual financial reporting periods beginning after December 15, 2009.
The adoption of this updated guidance did not have an impact on our consolidated results of
operations or financial condition. In addition, the updated guidance requires that in the
reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a
reporting entity separately disclose information about purchases, sales, issuances and settlements
on a gross basis rather than as one net number. This guidance is effective for fiscal years
beginning after December 15, 2010 and for interim periods therein. Therefore, we have not yet
adopted the guidance with respect to the roll forward activity in Level 3 fair value measurements.
We expect that the adoption of this new guidance will not have a material effect on our
consolidated 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 2010, 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 credit facility at
December 28, 2010. We may have future borrowings under our credit facility, which could result in
an interest rate change that may have an impact on our consolidated 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. We purchased a controlling interest in the three aforementioned cafes on
March 31, 2010 and subsequently purchased the remaining noncontrolling interest on December 28,
2010. Our operating expenses and cash flows are subject to fluctuation 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.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following consolidated financial statements are included in response to this item:
43 | ||||
44 | ||||
45 | ||||
46 | ||||
47 | ||||
48 | ||||
77 |
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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 28, 2010
and December 29, 2009, and the results of their operations and their cash flows for each of the
three years in the period ended December 28, 2010 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 28, 2010, 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
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 22, 2011
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 22, 2011
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PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
December 28, 2010 | December 29, 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 229,299 | $ | 246,400 | ||||
Trade accounts receivable, net |
20,378 | 17,317 | ||||||
Other accounts receivable |
17,962 | 11,176 | ||||||
Inventories |
14,345 | 12,295 | ||||||
Prepaid expenses |
23,905 | 16,211 | ||||||
Deferred income taxes |
24,796 | 18,685 | ||||||
Total current assets |
330,685 | 322,084 | ||||||
Property and equipment, net |
444,094 | 403,784 | ||||||
Other assets: |
||||||||
Goodwill |
94,442 | 87,481 | ||||||
Other intangible assets, net |
48,402 | 19,195 | ||||||
Deposits and other |
6,958 | 4,621 | ||||||
Total other assets |
149,802 | 111,297 | ||||||
Total assets |
$ | 924,581 | $ | 837,165 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,346 | $ | 6,417 | ||||
Accrued expenses |
204,170 | 135,842 | ||||||
Total current liabilities |
211,516 | 142,259 | ||||||
Deferred rent |
47,974 | 43,371 | ||||||
Deferred income taxes |
30,264 | 28,813 | ||||||
Other long-term liabilities |
39,219 | 25,686 | ||||||
Total liabilities |
328,973 | 240,129 | ||||||
Commitments and contingencies (Note 13) |
||||||||
EQUITY |
||||||||
Panera Bread Company stockholders equity: |
||||||||
Common stock, $.0001 par value: |
||||||||
Class A, 75,000,000 shares authorized; 30,125,936 issued and 29,006,844
outstanding in 2010 and 30,364,915 issued and 30,196,808 outstanding in 2009 |
3 | 3 | ||||||
Class B, 10,000,000 shares authorized; 1,391,607 issued and outstanding in 2010 and
1,392,107 in 2009 |
| | ||||||
Treasury stock, carried at cost; 1,119,092 shares in 2010 and 168,107 shares in 2009 |
(78,990 | ) | (3,928 | ) | ||||
Additional paid-in capital |
130,005 | 168,288 | ||||||
Accumulated other comprehensive income |
275 | 224 | ||||||
Retained earnings |
544,315 | 432,449 | ||||||
Total Equity |
595,608 | 597,036 | ||||||
Total Equity and Liabilities |
$ | 924,581 | $ | 837,165 | ||||
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)
For the fiscal year ended | ||||||||||||
December 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Revenues: |
||||||||||||
Bakery-cafe sales, net |
$ | 1,321,162 | $ | 1,153,255 | $ | 1,106,295 | ||||||
Franchise royalties and fees |
86,195 | 78,367 | 74,800 | |||||||||
Fresh dough and other product sales to franchisees |
135,132 | 121,872 | 117,758 | |||||||||
Total revenues |
1,542,489 | 1,353,494 | 1,298,853 | |||||||||
Costs and expenses: |
||||||||||||
Bakery-cafe expenses: |
||||||||||||
Cost of food and paper products |
$ | 374,816 | $ | 337,599 | $ | 332,697 | ||||||
Labor |
419,140 | 370,595 | 352,462 | |||||||||
Occupancy |
100,970 | 95,996 | 90,390 | |||||||||
Other operating expenses |
177,059 | 155,396 | 147,033 | |||||||||
Total bakery-cafe expenses |
1,071,985 | 959,586 | 922,582 | |||||||||
Fresh dough and other product cost of sales to franchisees |
110,986 | 100,229 | 108,573 | |||||||||
Depreciation and amortization |
68,673 | 67,162 | 67,225 | |||||||||
General and administrative expenses |
101,494 | 83,169 | 84,393 | |||||||||
Pre-opening expenses |
4,282 | 2,451 | 3,374 | |||||||||
Total costs and expenses |
1,357,420 | 1,212,597 | 1,186,147 | |||||||||
Operating profit |
185,069 | 140,897 | 112,706 | |||||||||
Interest expense |
675 | 700 | 1,606 | |||||||||
Other expense, net |
4,232 | 273 | 883 | |||||||||
Income before income taxes |
180,162 | 139,924 | 110,217 | |||||||||
Income taxes |
68,563 | 53,073 | 41,272 | |||||||||
Net income |
111,599 | 86,851 | 68,945 | |||||||||
Less: net (loss) income attributable to noncontrolling interest |
(267 | ) | 801 | 1,509 | ||||||||
Net income attributable to Panera Bread Company |
$ | 111,866 | $ | 86,050 | $ | 67,436 | ||||||
Earnings per common share attributable to Panera Bread
Company: |
||||||||||||
Basic |
$ | 3.65 | $ | 2.81 | $ | 2.24 | ||||||
Diluted |
$ | 3.62 | $ | 2.78 | $ | 2.22 | ||||||
Weighted average shares of common and common equivalent shares
outstanding: |
||||||||||||
Basic |
30,614 | 30,667 | 30,059 | |||||||||
Diluted |
30,922 | 30,979 | 30,422 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the fiscal year ended | ||||||||||||
December 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Cash flows from operations: |
||||||||||||
Net income |
$ | 111,599 | $ | 86,851 | $ | 68,945 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
68,673 | 67,162 | 67,225 | |||||||||
(Gain) loss from short-term investments |
| (1,339 | ) | 1,910 | ||||||||
Stock-based compensation expense |
9,558 | 8,661 | 7,954 | |||||||||
Tax benefit from exercise of stock options |
(3,603 | ) | (5,095 | ) | (3,376 | ) | ||||||
Deferred income taxes |
(4,660 | ) | 22,950 | (4,107 | ) | |||||||
Other |
1,114 | 2,799 | 228 | |||||||||
Changes in operating assets and liabilities, excluding
the effect of acquisitions: |
||||||||||||
Trade and other accounts receivable, net |
(13,180 | ) | (3,554 | ) | 11,650 | |||||||
Inventories |
(1,540 | ) | (336 | ) | (565 | ) | ||||||
Prepaid expenses |
(7,694 | ) | (2,224 | ) | (8,966 | ) | ||||||
Deposits and other |
(2,337 | ) | 100 | 1,042 | ||||||||
Accounts payable |
929 | 2,381 | (2,290 | ) | ||||||||
Accrued expenses |
61,891 | 28,901 | 5,450 | |||||||||
Deferred rent |
4,603 | 3,591 | 6,211 | |||||||||
Other long-term liabilities |
12,281 | 4,056 | 6,013 | |||||||||
Net cash provided by operating activities |
237,634 | 214,904 | 157,324 | |||||||||
Cash flows from investing activities: |
||||||||||||
Additions to property and equipment |
(82,226 | ) | (54,684 | ) | (63,163 | ) | ||||||
Acquisitions, net of cash acquired |
(52,177 | ) | (2,704 | ) | ||||||||
Proceeds from sale of bakery-cafes |
2,204 | | | |||||||||
Investment maturities proceeds |
| 5,465 | 17,162 | |||||||||
Net cash used in investing activities |
(132,199 | ) | (49,219 | ) | (48,705 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net payments under credit facility |
| | (75,000 | ) | ||||||||
Repurchase of common stock |
(153,492 | ) | (3,453 | ) | (48,893 | ) | ||||||
Exercise of employee stock options |
25,551 | 22,818 | 17,621 | |||||||||
Tax benefit from exercise of stock options |
3,603 | 5,095 | 3,376 | |||||||||
Proceeds from issuance of common stock under employee benefit plans |
1,802 | 1,626 | 1,898 | |||||||||
Purchase of noncontrolling interest |
| (20,081 | ) | | ||||||||
Capitalized debt issuance costs |
| | (1,153 | ) | ||||||||
Net cash (used in) provided by financing activities |
(122,536 | ) | 6,005 | (102,151 | ) | |||||||
Net (decrease) increase in cash and cash equivalents |
(17,101 | ) | 171,690 | 6,468 | ||||||||
Cash and cash equivalents at beginning of period |
246,400 | 74,710 | 68,242 | |||||||||
Cash and cash equivalents at end of period |
$ | 229,299 | $ | 246,400 | $ | 74,710 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive | Class A | Class B | Treasury Stock | Paid-in | Retained | Comprehensive | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||
Total | Income | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Income (Loss) | Interest | |||||||||||||||||||||||||||||||||||||
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 | ) | | | | |||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
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 | ) | | | | |||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
5,095 | | | | | | | 5,095 | | | | |||||||||||||||||||||||||||||||||||||
Balance, December 29, 2009 |
$ | 597,036 | 30,197 | $ | 3 | 1,392 | $ | | 168 | $ | (3,928 | ) | $ | 168,288 | $ | 432,449 | $ | 224 | $ | | ||||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) |
111,599 | $ | 111,599 | | | | | | | | 111,866 | | (267 | ) | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
64 | 64 | | | | | | | | | 51 | 13 | ||||||||||||||||||||||||||||||||||||
Total other comprehensive income |
64 | 64 | ||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income |
111,663 | $ | 111,663 | |||||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interest in PB Biscuit |
630 | | | | | | | | | | 630 | |||||||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
(743 | ) | | | | | | | (367 | ) | | | (376 | ) | ||||||||||||||||||||||||||||||||||
Issuance of common stock |
1,802 | 28 | | | | | | 1,802 | | | | |||||||||||||||||||||||||||||||||||||
Issuance of restricted stock (net of forfeitures) |
| 132 | | | | | | | | | | |||||||||||||||||||||||||||||||||||||
Exercise of employee stock options |
25,551 | 599 | | | | | | 25,551 | | | | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense |
9,558 | | | | | | | 9,558 | | | | |||||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(153,492 | ) | (1,949 | ) | | | | 951 | (75,062 | ) | (78,430 | ) | | | | |||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
3,603 | | | | | | | 3,603 | | | | |||||||||||||||||||||||||||||||||||||
Balance, December 28, 2010 |
$ | 595,608 | 29,007 | $ | 3 | 1,392 | $ | | 1,119 | $ | (78,990 | ) | $ | 130,005 | $ | 544,315 | $ | 275 | $ | | ||||||||||||||||||||||||||||
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 28, 2010, the Companys retail operations consisted of 662 Company-owned
bakery-cafes and 791 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 28, 2010, the Companys fresh
dough and other product operations, which supply fresh dough, produce, tuna, and cream cheese items
daily to most Company-owned and franchise-operated bakery-cafes, consisted of 22 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 United States
(GAAP) and under the rules and regulations of the 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 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 28, 2010 and December 29, 2009 had 52 weeks. The Companys fiscal year ended
December 30, 2008 had 53 weeks, with the fourth quarter comprising 14 weeks.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
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.
Investments
In fiscal 2010, the Companys investments consisted of municipal industrial revenue bonds that it
intends to hold until maturity. In fiscal 2009, the Companys investments consisted of trading
securities that were stated at fair value, with gains or losses resulting from changes in fair
value recognized in earnings as other 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 investments.
Trade and Other Accounts Receivable, net
Trade accounts receivable consists primarily of amounts due to the Company from its franchisees for
purchases of fresh dough and other products 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 28, 2010 and December 29, 2009 was $0.2 million and $0.1 million,
respectively.
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As of December 28, 2010, other accounts receivable, net consisted primarily of an insurance
receivable for litigation settlements of $7.1 million, tenant allowances due from landlords of $4.0
million, and $3.3 million due from wholesalers of the Companys gift
cards. 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 former Canadian franchisee representing the cost
of the three bakery-cafes Panera developed on behalf of the franchisee (see Note 13 for further
explanation).
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
depreciated 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, and are amortized over the expected useful life of the software. 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 | |||
Software |
3-5 years |
Interest, to the extent it is incurred in connection with the construction of new locations or
facilities, is capitalized. 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 28, 2010 and December 29, 2009. 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 Companys accounts. Any resulting gain or loss is credited or charged to
operations. Maintenance and repairs are charged to expense when incurred, while certain
improvements are capitalized. The total amounts expensed for maintenance and repairs was $33.8
million, $30.7 million, and $27.4 million for the fiscal years ended December 28, 2010, December
29, 2009, and December 30, 2008, 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 periodic evaluation for impairment when circumstances warrant, or at least once
per year. Goodwill is tested for impairment in accordance with the accounting standard for
goodwill by comparing the carrying value of reporting units to their estimated fair values. The
Company completed annual impairment tests as of the first day of the fiscal fourth quarter of
fiscal 2010, fiscal 2009, and fiscal 2008, none of which identified any impairment as the fair
value of the Companys reporting units exceeded the associated carrying values.
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
2010 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 estimated fair value of the Companys reporting units,
and could result in goodwill 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.
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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 hypothetical 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 29, 2010, the first day of the Companys
fourth quarter of fiscal 2010, these hypothetical changes in the Companys assumptions would not
affect the results of the impairment test, as all reporting units individually still had an excess
of fair value over their respective carrying value.
Other Intangible Assets
Other intangible assets consist primarily 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 the acquired bakery-cafe cash flows. The Company amortizes the fair value of re-acquired
territory rights over the remaining contractual terms of the re-acquired territory rights 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. When warranted, the Company tests intangible assets with
finite lives for 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 28, 2010, December 29,
2009, and December 30, 2008, 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 $0.1 million and $0.6 million during the fiscal years ended December 28, 2010
and December 29, 2009, respectively, related to a distinct underperforming Company-owned
bakery-cafe within each fiscal year. The loss was 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.
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 28, 2010, the
Company believes it has provided adequate reserves for its self-insurance exposure. As of December
28, 2010 and December 29, 2009, self-insurance reserves were $20.2 million and $15.9 million,
respectively, and were included in accrued expenses in the Consolidated Balance Sheets. The total
amounts expensed for self-insurance were $35.6 million, $37.1 million, and $33.0 million, for the
fiscal years ended December 28, 2010, December 29, 2009, and December 30, 2008, 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.
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In accordance with the authoritative guidance on income taxes, 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 ultimate settlement with tax authorities
assuming full knowledge of the position and all relevant facts. In the normal course of business,
the Company and its subsidiaries are examined by various Federal, State, foreign, and other 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 unrecognized tax benefits 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. 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 Company. 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 $8.7 million, $8.4 million, and $8.0 million direct and indirect costs
related to the development of Company-owned bakery-cafes for the fiscal years ended December 28,
2010, December 29, 2009, and December 30, 2008, 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 $0.6 million and $0.8 million at
December 28, 2010 and December 29, 2009, respectively.
Revenue Recognition
The Company records revenues from bakery-cafe sales upon delivery of the related food and other
products to the customer. Revenues from fresh dough and other product sales to franchisees were
recorded upon delivery to the franchisees. Sales of soup and other branded products outside of our
bakery-cafes are generally recognized upon delivery to customers.
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 an 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 $1.4 million,
$1.2 million, and $2.2 million for the fiscal years ended December 28, 2010, December 29, 2009, and
December 30, 2008, respectively. Royalties are generally paid weekly based on the percentage of
franchisee sales specified in each ADA (generally 4 percent to 5 percent of net sales). Royalties
are recognized as revenue when they are earned. Royalties were $84.8 million, $77.1 million, and
$72.6 million for the fiscal years ended December 28, 2010, December 29, 2009, and December 30,
2008, respectively.
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The Company maintains a customer loyalty program referred to as MyPaneraTM in which
Panera Bread Company customers earn rewards based on registration in the program and purchases
within our Panera Bread bakery-cafes. The Company records the full retail value of loyalty
program rewards as a reduction of net bakery-cafe sales and a liability is established within other
accrued expenses as rewards are earned while considering historical redemption rates. Fully earned
rewards expire if unredeemed after 60 days. The accrued liability related to the Companys loyalty
program, which is included as a reduction of bakery-cafe sales in the Consolidated Statement of
Operations, was $4.3 million as of December 28, 2010.
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 costs are 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 $27.4 million, $15.3 million, and
$14.2 million for the fiscal years ended December 28, 2010, December 29, 2009, and December 30,
2008, 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 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 in the Consolidated Balance Sheets based on their short-term
or long-term nature. This deferred rent is amortized on a straight-line basis as a reduction of
rent expense. Additionally, the Company records landlord allowances for structural tenant
improvements as a reduction in depreciation expense over the reasonably assured lease term.
Earnings Per Share
The Company accounts for earnings per common share in accordance with the relevant accounting
guidance which requires companies to present basic earnings per share and diluted earnings per
share. Basic earnings per share is computed by dividing net income attributable to the Company by
the weighted-average number of shares of common stock outstanding during the year. Diluted
earnings per common share is computed by dividing net income attributable to the Company by the
weighted-average number of shares of common stock outstanding and dilutive securities outstanding
during the year.
Foreign Currency Translation
The Company has three Company-owned bakery-cafes in Canada which use the Canadian Dollar 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 in the Consolidated
Balance Sheet and Consolidated Statements of Stockholders Equity. Gains and losses resulting from
foreign currency transactions have not historically been
significant and are included in other expense, net in the Consolidated Statements of Operations.
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Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include short-term investments
in trading securities, municipal industrial revenue bonds, 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 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
stock-based compensation, 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. 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 the Companys historical experience in closing
bakery-cafes, FDFs, and support centers 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 terms.
Variable Interest Entities
The Company applies the updated guidance issued by the FASB on accounting for variable interest
entities (VIE), which changes the process for how an enterprise determines which party
consolidates a VIE to a primarily qualitative analysis. The enterprise that consolidates the VIE
(the primary beneficiary) is defined as the enterprise 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, companies
must reconsider their conclusions on whether an entity should be consolidated and, should a change
result, record the effect on net assets as a cumulative effect adjustment to retained earnings.
The Company does not possess any ownership interests in franchise entities or other affiliates.
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 and other
affiliates, the Company has concluded that these entities are not variable interest entities and
they have not been consolidated.
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Accounting Standards Issued Not Yet Adopted
On December 30, 2009, the Company adopted the updated guidance issued by the Financial Accounting
Standards Board (FASB) related to fair value measurements and disclosures, which requires a
reporting entity to separately disclose the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for
the transfers. The updated guidance also requires that an entity provide fair value measurement
disclosures for each class of assets and liabilities and disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and non-recurring Level 2 and Level 3 fair
value measurements. This guidance was effective for interim or annual financial reporting periods
beginning after December 15, 2009. The adoption of this updated guidance did not have an impact on
the Companys consolidated results of operations or financial condition. In addition, the updated
guidance requires that in the reconciliation for fair value measurements using significant
unobservable inputs, or Level 3, a reporting entity separately disclose information about
purchases, sales, issuances and settlements on a gross basis rather than as one net number. This
guidance is effective for fiscal years beginning after December 15, 2010 and for interim periods
therein. Therefore, the Company has not yet adopted the guidance with respect to the roll forward
activity in Level 3 fair value measurements. The Company expects that the adoption of this new
guidance will not have a material effect on its consolidated financial position or results of
operations.
3. Business Combinations
On September 29, 2010 the Company purchased substantially all the assets and certain liabilities of
37 bakery-cafes and the area development rights from its New Jersey franchisee for a purchase price
of approximately $55.0 million. Approximately $52.2 million of the purchase price, as well as
related transaction costs, were paid on September 29, 2010, with $2.8 million retained by the
Company for certain holdbacks. The holdbacks are primarily for certain indemnifications and expire
on the first anniversary of the transaction closing date, September 29, 2011, with any remaining
holdback amounts reverting to the prior franchisee. As a result of the acquisition, the Company
gained control of the 37 bakery-cafes and expanded Company-owned operations into New Jersey. The
Consolidated Statements of Operations include the results of operations from the operating
bakery-cafes from the date of the acquisition.
The acquired business contributed revenues of $24.8 million and net income of $1.9 million for the
period from September 29, 2010 through December 28, 2010. The following supplemental pro forma
information has been prepared for comparative purposes and does not purport to be indicative of
what would have occurred had the acquisition been made on December 31, 2008 or December 30, 2009,
nor are they indicative of any future results (in thousands):
Pro Forma for the Fiscal Year Ended | ||||||||
December 28, 2010 | December 29, 2009 | |||||||
Bakery-cafe sales, net |
$ | 1,606,455 | $ | 1,433,686 | ||||
Net income |
119,621 | 90,710 |
These amounts have been calculated after applying the Companys accounting policies and adjusting
the results of the New Jersey bakery-cafes to reflect the additional depreciation and amortization
that would have been charged assuming the fair value adjustments to property and equipment and
intangible assets had been applied from December 31, 2008, together with the consequential tax
impacts.
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: $0.5 million to inventories, $19.9 million to property and equipment, $31.2 million to
intangible assets, which represents the fair value of re-acquired territory rights and favorable
lease agreements, $1.2 million to liabilities, and $4.6 million to goodwill. The fair value
measurement of tangible and intangible assets and liabilities as of the acquisition date is based
on significant inputs not observed in the market and thus represents a Level 3 measurement.
Goodwill recorded in connection with this acquisition is attributable to the workforce of the
acquired bakery-cafes and synergies expected to arise from cost savings opportunities. All of the
recorded goodwill is anticipated to be tax deductible and is included in the Company Bakery-Cafe
Operations segment.
On April 27, 2010, the Company sold substantially all of the assets of three bakery-cafes and the
area development rights for Mobile, Alabama to an existing franchisee, for a sales price of
approximately $2.2 million, resulting in a gain of approximately $0.6 million, which is classified
in other expense, net in the Consolidated Statements of Operations.
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 acquisitions
which occurred in 2007 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 in the Consolidated Balance Sheets as a result of the settlement of certain
purchase price adjustments.
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During the fiscal years ended December 30, 2008, the Company paid approximately $2.5 million,
including accrued interest, of previously accrued acquisition purchase price in accordance with the
asset purchase agreements, respectively. There were no accrued purchase price payments made in the
fiscal years ended December 28, 2010 or December 29, 2009. There was $5.0 million and $2.3
million, accrued for contingent or accrued purchase price remaining as of December 28, 2010 and
December 29, 2009, respectively.
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
noncontrolling 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.
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 and franchise agreements with
Millennium Bread Inc. (Millennium) and certain of Millenniums present and future subsidiaries
(the Franchise Guarantors), pursuant to which Millennium would operate three Panera Bread
bakery-cafes in Ontario, Canada.
On March 30, 2010, PB Biscuit, ULC (PB Biscuit) was formed by Panera Bread ULC through the
contribution of its Cdn. $3.5 million note receivable from Millennium and cash. On March 31, 2010,
PB Biscuit acquired certain assets and liabilities and the operations of Millenniums three Panera
Bread bakery-cafes. The transaction was accounted for as an acquisition under the business
combination authoritative guidance. In exchange for the bakery-cafe operations and certain assets
and liabilities, PB Biscuit assigned the Cdn. $3.5 million note receivable to and issued
non-controlling interest to Millennium at a fair value of $0.6 million (28.5 percent ownership of
PB Biscuits voting shares), for a total consideration of $4.1 million, subject to certain closing
adjustments. The Consolidated Statements of Operations include the results of operations from the
operating bakery-cafes from the date of the acquisition. This non-cash transaction is excluded from
the Consolidated Statements of Cash Flows for the year ended December 28, 2010. The pro forma
impact of the acquisition on prior periods is not presented, as the impact was not material to
reported results. These acquired bakery-cafes are included in the Company bakery-cafe operations
segment. 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: $2.3 million to property and equipment, $0.5 million of net assumed current
liabilities, and $2.3 million to goodwill.
On December 28, 2010, the Company purchased the remaining non-controlling interest of Millennium
for $0.7 million. 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 Millennium, 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
28.5 percent of outstanding stock of Millennium on December 28, 2010 (in thousands):
For the fiscal year ended | ||||
December 28, 2010 | ||||
Net income attributable to the Company |
$ | 111,866 | ||
Decrease in equity for purchase of noncontrolling interest |
(367 | ) | ||
Change from net income attributable to the Company and the purchase of
noncontrolling interest |
$ | 111,499 | ||
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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 | ||||
Net income attributable to the Company |
$ | 86,050 | ||
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 | ||
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.
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. |
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On December 30, 2009, the Company adopted the updated guidance issued by the Financial Accounting
Standards Board (FASB) related to fair value measurements and disclosures, which requires a
reporting entity to separately disclose the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and to describe the reasons for the transfers. The updated
guidance also requires that an entity provide fair value measurement disclosures for each class of
assets and liabilities and disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and non-recurring Level 2 and Level 3 fair value measurements. The
adoption of this updated guidance did not have an impact on the Companys consolidated results of
operations or financial condition.
The Companys $44.5 million
and $115.9 million in cash equivalents at December 28, 2010 and
December 29, 2009, respectively, were carried at fair value in the Consolidated Balance Sheets
based on quoted market prices for identical securities (Level 1 inputs). The Companys remaining
cash balance in the Consolidated Balance Sheets is held in FDIC insured accounts. In fiscal year 2010,
the Company invested in municipal industrial revenue bonds in the amount of $1.5 million and
valued these bonds using Level 2 inputs as they can be corroborated by market data.
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, 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 Strategic Cash 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 Strategic Cash Portfolio, it was overwhelmed with withdrawal requests from
investors and the Columbia Strategic Cash 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 Strategic Cash 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 Strategic Cash 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 Strategic Cash 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
Strategic Cash Portfolio units. During fiscal 2009, the Company received $5.5 million of cash
redemptions, which fully redeemed the Companys remaining units in the Columbia Strategic Cash
Portfolio. The Columbia Strategic Cash 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 Strategic Cash Portfolio was classified
within Level 3 of the fair value hierarchy. Realized and unrealized gains/(losses) relating to the
Columbia Strategic Cash Portfolio were classified in other 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 period indicated (in thousands):
December 29, 2009 | ||||
Beginning balance |
$ | 4,126 | ||
Net realized and unrealized gains |
1,339 | |||
Redemptions |
(5,465 | ) | ||
Ending balance |
$ | | ||
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6. Inventories
Inventories consisted of the following (in thousands):
December 28, 2010 | December 29, 2009 | |||||||
Food: |
||||||||
Fresh dough facilities: |
||||||||
Raw materials |
$ | 2,338 | $ | 2,573 | ||||
Finished goods |
261 | 275 | ||||||
Bakery-cafes: |
||||||||
Raw materials |
8,780 | 7,304 | ||||||
Paper goods |
2,966 | 2,143 | ||||||
$ | 14,345 | $ | 12,295 | |||||
7. Property and Equipment
Major classes of property and equipment consisted of the following (in thousands):
December 28, 2010 | December 29, 2009 | |||||||
Leasehold improvements |
$ | 416,286 | $ | 375,689 | ||||
Machinery and equipment |
259,966 | 236,196 | ||||||
Furniture and fixtures |
78,349 | 68,172 | ||||||
External signage |
19,766 | 17,848 | ||||||
Smallwares |
18,758 | 16,144 | ||||||
Construction in progress |
29,531 | 17,880 | ||||||
822,656 | 731,929 | |||||||
Less: accumulated depreciation |
(378,562 | ) | (328,145 | ) | ||||
Property and equipment, net |
$ | 444,094 | $ | 403,784 | ||||
The Company recorded depreciation expense related to these assets of $66.7 million, $65.9 million,
and $65.9 million for the fiscal years ended December 28,
2010, December 29, 2009, and December 28, 2008, respectively.
8. Goodwill
The following is a reconciliation of the beginning and ending balances of the Companys goodwill by
reportable segment at December 28, 2010 and December 29, 2009 (in thousands):
Company Bakery- | Franchise | Fresh Dough | ||||||||||||||
Cafe Operations | Operations | Operations | Total | |||||||||||||
Balance December 30, 2008 |
$ | 83,705 | $ | 1,934 | $ | 1,695 | $ | 87,334 | ||||||||
Goodwill arising from acquisitions |
147 | | | 147 | ||||||||||||
Balance as of December 29, 2009 |
$ | 83,852 | $ | 1,934 | $ | 1,695 | $ | 87,481 | ||||||||
Acquisition of Canada franchisee |
2,336 | | | 2,336 | ||||||||||||
Acquisition of New Jersey franchisee |
4,589 | | | 4,589 | ||||||||||||
Currency translation |
36 | | | 36 | ||||||||||||
Balance as of December 28, 2010 |
$ | 90,813 | $ | 1,934 | $ | 1,695 | $ | 94,442 | ||||||||
Goodwill accumulated amortization, recognized under the previous authoritative guidance for
accounting for goodwill, was $7.9
million at December 28, 2010 and December 29, 2009. The Company has never reported a goodwill
impairment charge.
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9. Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
December 28, 2010 | December 29, 2009 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||||||
Trademark |
$ | 5,610 | $ | (996 | ) | $ | 4,614 | $ | 5,610 | $ | (742 | ) | $ | 4,868 | ||||||||||
Re-acquired territory rights |
43,729 | (3,757 | ) | 39,972 | 14,629 | (2,357 | ) | 12,272 | ||||||||||||||||
Favorable leases |
4,836 | (1,020 | ) | 3,816 | 2,776 | (721 | ) | 2,055 | ||||||||||||||||
Total other intangible assets |
$ | 54,175 | $ | (5,773 | ) | $ | 48,402 | $ | 23,015 | $ | (3,820 | ) | $ | 19,195 | ||||||||||
Amortization expense on these intangible assets for the fiscal years ended December 28, 2010,
December 29, 2009, and December 30, 2008, was approximately: $2.0 million, $1.3 million, and $1.3
million respectively. Future amortization expense on these intangible assets as of December 28,
2010 is estimated to be approximately: $4.1 million in 2011, $4.0 million in 2012, $4.0 million in
2013, $3.9 million in 2014, $3.9 million in 2015 and $28.5 million thereafter.
10. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Unredeemed gift cards |
$ | 47,716 | $ | 37,454 | ||||
Compensation and related employment taxes |
43,788 | 33,416 | ||||||
Insurance |
20,212 | 15,934 | ||||||
Taxes, other than income tax |
16,281 | 11,072 | ||||||
Capital expenditures |
13,057 | 6,108 | ||||||
Advertising |
9,866 | 2,465 | ||||||
Litigation settlement (Note 13) |
7,125 | | ||||||
Rent |
7,084 | 5,019 | ||||||
Fresh dough operations |
5,071 | 5,263 | ||||||
Deferred purchase price |
5,040 | 2,264 | ||||||
Loyalty program |
4,280 | | ||||||
Utilities |
3,547 | 3,163 | ||||||
Deferred revenue |
1,962 | 1,334 | ||||||
Other |
19,141 | 12,350 | ||||||
$ | 204,170 | $ | 135,842 | |||||
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 28, 2010. 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 28, 2010 and 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 years ended December 28, 2010 and December 29, 2009. As of December 28, 2010 and
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.
12. Share Repurchase Authorization
On November 17, 2009, the Companys Board of Directors approved a three year share repurchase
authorization of up to $600.0 million of the Companys Class A common stock, pursuant to which
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 may be retired immediately and resume the status of authorized but unissued shares or they
may be held by us as treasury stock. The repurchase authorization may be modified, suspended, or
discontinued by the Board of Directors at any time. Under the share repurchase authorization the
Company repurchased a total of 1,905,540 shares of the Companys Class A common stock at a
weighted-average price of $78.72 per share for an aggregate purchase price of $150.0 million in
fiscal 2010. As of the date of this report, under the share repurchase authorization, the Company
has repurchased a total of 1,932,969 shares of its Class A common stock at a weighted-average price
of $78.51 per share for an aggregate purchase price of approximately $152.0 million. The Company
has approximately $448.0 million available under the existing $600.0 million repurchase
authorization.
On November 27, 2007, in connection with a share repurchase authorization 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 authorization. See Note 11 for further information with respect to the credit
facility. Under the share repurchase authorization, 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 authorization. Shares repurchased under the
authorization 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 authorization 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 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 authorizations. See Note 16 for further information with
respect to the Companys repurchase of the shares.
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13. Commitments and Contingent Liabilities
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 28, 2010, were as follows (in thousands):
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||
$ | 93,303 |
94,444 | 94,566 | 92,959 | 91,013 | 540,065 | $ | 1,006,350 |
Rental expense under operating leases was approximately $87.4 million, $79.9 million, and $77.9
million, in fiscal 2010, fiscal 2009, and fiscal 2008, respectively, which included contingent
(i.e. percentage rent) expense of $1.1 million, $0.8 million, and $1.1 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 28, 2010 and December 29, 2009 was $5.2 million and $4.3 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 2010, the Company, settled two leases, and made a decision to open one
bakery-cafe resulting in a decrease in the reserve of approximately $0.4 million, offset by an
increase of $0.2 million related to a revised sublet factor for a specified cafe. No other
significant changes were made to the accrual throughout fiscal 2010. As of December 28, 2010, the
Company had approximately $0.6 million accrued in its Consolidated Balance Sheets relating to the
termination of these specific leases. 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.
In connection with the Companys relocation of its St. Louis, Missouri support center in the third
quarter of fiscal 2010, it simultaneously entered into a capital lease of $1.5 million for certain
personal property and purchased municipal industrial revenue bonds of a similar amount from St.
Louis County, Missouri.
Lease Guarantees
As of December 28, 2010, the Company guaranteed operating leases of 27 franchisee or affiliate
bakery-cafes and one location 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 December 31, 2010 to December 31, 2023 and
have a potential amount of future rental payments of approximately $24.3 million as of December 28,
2010. 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 28,
2010, future commitments under these leases were as follows (in thousands):
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | |||||||||||||||||||
$ | 3,304 |
3,084 | 3,068 | 2,937 | 2,149 | 9,736 | $ | 24,278 |
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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 28, 2010, the total amount potentially
owed employees under these Non-Compete Agreements was $12.8 million.
Related Party Credit Agreement
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 and franchise agreements with
Millennium Bread Inc., (Millennium), as borrower, and certain of Millenniums present and future
subsidiaries (the Franchisee Guarantors), pursuant to which Millennium would operate three Panera
Bread bakery-cafes in Ontario, Canada. On April 7, 2009, Millennium requested a Cdn. $3.5 million
advance under the credit agreement for payment of the costs to develop the bakery-cafes, which was
included in other accounts receivable in the Consolidated Balance Sheet as of December 29, 2009.
The proceeds from the credit facility were used by Millennium to pay costs to develop and construct
the Franchisee Guarantors bakery-cafes and for their day-to-day operating requirements. On March
31, 2010, the credit facility was terminated through a separate transaction with Millennium, as
described in Note 4.
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. 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. On
August 10, 2009, the Company filed a new 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. On March 16, 2010, the Court granted in part and denied in part the Companys motion for
summary judgment. On April 5, 2010, the Court granted a joint motion by the parties to stay the
case through July 6, 2010, which stay was subsequently extended by the Court until July 30, 2010,
pending an attempt by the parties to resolve through mediation. On August 30, 2010 the Company
answered the complaint. On December 3, 2010, the parties filed a joint motion to stay the case
pending the submission of a stipulation of settlement and the plaintiffs motion for preliminary
approval, to be filed on or before January 28, 2011, which stay was extended until February 11,
2011. On February 11, 2011, the parties filed with the Court a Stipulation of Settlement regarding
the class action lawsuit. Under the terms of the Stipulation of Settlement, the Companys primary
directors and officers liability insurer will deposit $5.7 million into a settlement fund for
payment to class members, plaintiffs attorneys fees and costs of administering the settlement.
The settlement must be approved by the Court before becoming effective. The Stipulation of
Settlement contains no admission of wrongdoing. The Company and the other defendants have
maintained and continue to deny liability and wrongdoing of any kind with respect to the claims
made in the class action lawsuit. However, given the potential cost and burden of continued
litigation, the Company believes the settlement is in its best interests and the best interests of
its stockholders. On February 22, 2011, the Court preliminarily approved the settlement and scheduled
a settlement hearing on June 22, 2011. If the Court grants final approval of the Stipulation of Settlement, the Court
will dismiss the class action lawsuit with prejudice and the plaintiff will be deemed to have
released all claims against the Company relating to the allegations in the class action. The
Company can provide no assurance that the Court will approve the Stipulation of Settlement. If the
Court does not approve the Stipulation of Settlement, the Company will continue to defend against
these claims, which could have a material adverse effect on its financial condition and business.
If these matters were concluded in a manner adverse to the Company, it could be required to pay
substantially more in damages than the amount provided for in the Stipulation of Settlement. In
addition, the costs to the Company of defending any litigation or other proceeding, even if
resolved in its favor, could be substantial. Such litigation could also substantially divert the
attention of its management and resources in general. The amount to be deposited by the
Companys primary directors and officers liability insurer into the settlement fund of
$5.7 million is included in other accounts receivable and accrued expenses in the
Companys 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.
On July 18, 2008, the Company filed a motion to dismiss all of the claims in this lawsuit, which,
on December 14, 2009, the Court denied. The Company filed an answer to the complaint on January
27, 2010 and the case subsequently moved into the discovery. On July 28, 2010, the Company filed a
motion for summary judgment. The Court held a hearing on the motion for summary judgment on
November 19, 2010. On December 20, 2010, the parties filed a joint motion requesting that the
Court defer its ruling on the motion for summary judgment pending the finalization of a settlement
agreement. On January 18, 2011, the parties advised the Court in a status conference that they
intended to submit a stipulation of settlement and plaintiffs motion for preliminary approval by
February 14, 2011. On February 22, 2011, the parties filed with the Court a Stipulation of
Settlement regarding the shareholder derivative lawsuit. Under the terms of the Stipulation of
Settlement, the Company agreed, among other things, to implement and maintain certain corporate
governance additions, modifications and/or formalizations, and its insurer will pay plaintiffs
attorneys fees and expenses of $1.4 million. The Stipulation of Settlement contains no admission
of wrongdoing. The Company and the other defendants have maintained and continue to deny liability
and wrongdoing of any kind with respect to the claims made in the shareholder derivative action.
However, given the potential cost and burden of continued litigation, the Company believes the
settlement is in its best interests and the best interests of our stockholders. On February 22, 2011, the
Court preliminarily approved the settlement and scheduled a settlement hearing on April 8, 2011. If the Court
grants final approval of the Stipulation of Settlement, the Court will dismiss the shareholder
derivative lawsuit with prejudice and the plaintiff will be deemed to have released all claims
against the Company relating to the allegations in the derivative action. The Company can provide
no assurance that the Court will approve the Stipulation of Settlement. If the Court does not
approve the Stipulation of Settlement, it will continue to defend against these claims, which could
have a material adverse effect on our financial condition and business. If these matters were
concluded in a manner adverse to the Company, it could be required to pay substantially more in
damages than the amount provided for in the Stipulation of Settlement. In addition, the costs to
the Company of defending any litigation or other proceeding, even if resolved in its favor, could
be substantial. Such litigation could also substantially divert the attention of its management
and resources in general. The amount to be deposited by the
Companys primary directors and officers liability insurer into the settlement fund of
$1.4 million is included in other accounts receivable and accrued expenses in the
Companys Consolidated Balance Sheets.
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 Consolidated Balance Sheets.
On December 16, 2010, a purported class action lawsuit was filed against the Company by Denarius
Lewis and Corey Weiner, former employees of one of the Companys subsidiaries, and Caroll Ruiz, an
employee of one of the Companys franchisees. The lawsuit was filed in the United States District
Court for Middle District of Florida. The complaint alleges, among other things, violations of the
Fair Labor Standards Act. 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
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.
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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 consolidated 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
United States |
$ | 180,458 | $ | 139,005 | $ | 110,220 | ||||||
Canada |
(296 | ) | 919 | (3 | ) | |||||||
Income before income taxes |
$ | 180,162 | $ | 139,924 | $ | 110,217 | ||||||
The provision for income taxes consisted of the following for the periods indicated (in thousands):
For the fiscal year ended | ||||||||||||
December 28, 2010 | December 29, 2009 | December 30, 2008 (1) | ||||||||||
Current: |
||||||||||||
Federal |
$ | 64,471 | $ | 24,428 | $ | 37,188 | ||||||
State |
8,919 | 5,390 | 8,192 | |||||||||
Foreign |
(167 | ) | 304 | | ||||||||
73,223 | 30,122 | 45,380 | ||||||||||
Deferred: |
||||||||||||
Federal |
(4,306 | ) | 20,006 | (3,589 | ) | |||||||
State |
(354 | ) | 2,945 | (519 | ) | |||||||
Foreign |
| | | |||||||||
(4,660 | ) | 22,951 | (4,108 | ) | ||||||||
Tax Provision |
$ | 68,563 | $ | 53,073 | $ | 41,272 | ||||||
(1) | The Company developed its first bakery-cafes in Canada in fiscal 2008. Fiscal 2008 current and
deferred income taxes consisted primarily of U.S. 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Statutory rate provision |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes |
5.0 | 4.7 | 4.4 | |||||||||
Other |
(1.9 | ) | (1.8 | ) | (2.0 | ) | ||||||
38.1 | % | 37.9 | % | 37.4 | % | |||||||
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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 28, 2010 | December 29, 2009 | |||||||
Deferred tax assets: |
||||||||
Accrued expenses |
$ | 59,952 | $ | 42,029 | ||||
Stock-based compensation |
2,405 | 2,531 | ||||||
Other |
287 | 15 | ||||||
Total deferred tax assets |
$ | 62,644 | $ | 44,575 | ||||
Deferred tax liabilities: |
||||||||
Property and equipment |
$ | (51,437 | ) | $ | (39,433 | ) | ||
Goodwill and other intangibles |
(16,675 | ) | (15,270 | ) | ||||
Total deferred tax liabilities |
$ | (68,112 | ) | $ | (54,703 | ) | ||
Net deferred tax liability |
$ | (5,468 | ) | $ | (10,128 | ) | ||
Net deferred current tax asset |
$ | 24,796 | $ | 18,685 | ||||
Net deferred non-current tax liability |
$ | (30,264 | ) | $ | (28,813 | ) | ||
The following is a roll-forward of the Companys total gross unrecognized tax benefit liabilities
for the periods indicated (in thousands):
December 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Beginning Balance |
$ | 3,357 | $ | 3,598 | $ | 2,299 | ||||||
Tax positions related to the current year: |
||||||||||||
Additions |
477 | 617 | 281 | |||||||||
Tax positions related to prior years: |
||||||||||||
Additions |
724 | | 4,963 | |||||||||
Reductions |
(700 | ) | (110 | ) | (3,440 | ) | ||||||
Settlements |
(373 | ) | (645 | ) | (425 | ) | ||||||
Expiration of statutes of limitations |
(589 | ) | (103 | ) | (80 | ) | ||||||
Ending Balance |
$ | 2,896 | $ | 3,357 | $ | 3,598 | ||||||
As of December 28, 2010 and December 29, 2009, the amount of unrecognized tax benefits that,
if recognized in full, would be recorded as a reduction of income tax expense was $2.9 million and
$3.4 million, net of federal tax benefits, respectively. The Company believes that it is
reasonably possible that a decrease of up to $1.0 million of unrecognized tax benefits principally
related to state tax filing positions and previously deducted expenses may occur within twelve
months of December 28, 2010 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 2006, as
well as certain returns in 2005 and 2006, 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
during fiscal 2010, fiscal 2009, and fiscal 2008, respectively. Accrued interest and penalties were
$1.3 million and $1.0 million as of December 28, 2010 and December 29, 2009, respectively.
15. Deposits and Other
Deposits and other consisted of the following (in thousands):
December 28, 2010 | December 29, 2009 | |||||||
Deposits |
$ | 5,032 | $ | 3,800 | ||||
Deferred financing costs |
561 | 821 | ||||||
Investment in municipal revenue bonds |
1,365 | | ||||||
Total deposits and other |
$ | 6,958 | $ | 4,621 | ||||
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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 28, 2010, the Company had reserved 2,735,881 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 28, 2010, 94.3 percent of the Class B common stock is owned by the Companys Executive
Chairman of the Board (Chairman). Certain holders of Class B common stock, including the
Chairman, 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 2010 and 2009.
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 44,002 shares of Class
A common stock at a weighted-average cost of $77.99 per share during fiscal 2010, 32,135 shares of
Class A common stock at a weighted-average cost of $53.66 per share during fiscal 2009, and 20,378
shares of Class A common stock at a weighted-average cost of $49.87 per share during fiscal 2008,
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 authorizations. The shares surrendered to the
Company by participants and repurchased by the Company are currently held by the Company as
treasury stock.
Share Repurchase Authorization
During fiscal 2010, fiscal 2009, and fiscal 2008, the Company purchased shares of Class A common
stock under authorized share repurchase authorizations. Repurchased shares may be retired
immediately and resume the status of authorized but unissued shares or may be held by the Company
as treasury stock. See Note 12 for further information with respect to the Companys share
repurchase authorizations.
17. Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements in accordance with the
accounting standard for share-based payments 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 28, 2010, 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).
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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 provided 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. Effective May 13, 2010, the Plan was amended to
increase the number of the Companys Class A common stock shares available to grant to 2,300,000.
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 2010, fiscal 2009 and fiscal
2008, compensation expense related to performance awards, restricted stock, and deferred annual
bonus match was $19.3 million, $12.1 million, and $6.9 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. However, the actual award payment will be adjusted, based on the Companys
performance over a three-consecutive fiscal year measurement period, and any other factors as
determined by the Committee. The actual award payment for the performance award component could
double the individuals targeted award payment, if the Company achieves maximum performance in all
of its performance metrics, subject to any adjustments as determined by the Committee. 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 2010, fiscal 2009,
and fiscal 2008, compensation expense related to the performance awards was $10.2 million, $5.3
million, and $2.1 million, respectively.
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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 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 28, 2010, there was $26.3 million of total unrecognized compensation cost related to
restricted stock included in additional paid-in capital in the Consolidated Balance Sheets, and is
expected to be recognized over a weighted-average period of approximately 3.7 years. For fiscal
2010, fiscal 2009, and fiscal 2008, restricted stock expense was $7.1 million, $5.4 million and
$3.8 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 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 | |||||
Granted |
160 | 76.22 | ||||||
Vested |
(136 | ) | 48.84 | |||||
Forfeited |
(27 | ) | 53.26 | |||||
Non-vested at December 28, 2010 |
566 | $ | 58.07 | |||||
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 provided the participant is still employed by the Company. For fiscal 2010,
fiscal 2009, and fiscal 2008, compensation expense related to the deferred annual bonus match award
was $2.0 million, $1.4 million, and $1.0 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 28, 2010, the total unrecognized compensation cost related to non-vested
options was $1.2 million, which is net of a $0.3 million forfeiture estimate, and is expected to be
recognized over a weighted-average period of approximately 1.9 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Charged to general and administrative expenses (1) |
$ | 1,510 | $ | 2,154 | $ | 3,212 | ||||||
Income tax benefit |
(575 | ) | (821 | ) | (1,205 | ) | ||||||
Total stock-based compensation expense, net of tax |
$ | 935 | $ | 1,333 | $ | 2,007 | ||||||
Effect on basic earnings per share |
0.03 | 0.04 | 0.07 | |||||||||
Effect on diluted earnings per share |
0.03 | 0.04 | 0.07 | |||||||||
(1) | Net of less than $0.1 million, $0.1 million, and $0.2 million of capitalized compensation
cost related to the acquisition, development, design, and construction of new bakery-cafe
locations and fresh dough facilities for fiscal 2010, fiscal 2009, and fiscal 2008,
respectively. |
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The following table summarizes the Companys stock option activity under its stock-based
compensation plans during fiscal 2010, fiscal 2009, and fiscal 2008:
Weighted Average | Aggregate | |||||||||||||||
Weighted | Contractual Term | Intrinsic | ||||||||||||||
Shares | Average | Remaining | Value (1) | |||||||||||||
(in thousands) | Exercise Price | (Years) | (in thousands) | |||||||||||||
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 | |||||||||||||
Granted |
4 | 67.94 | ||||||||||||||
Exercised |
(598 | ) | 42.68 | 20,867 | ||||||||||||
Cancelled |
(4 | ) | 49.63 | |||||||||||||
Outstanding at December 28, 2010 |
216 | $ | 48.17 | 2.6 | 11,662 | |||||||||||
Exercisable at December 28, 2010 |
83 | $ | 51.66 | 2.3 | $ | 4,206 |
(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 2010 of $102.11 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 2010, fiscal 2009, and fiscal 2008 was
$25.6 million, $22.8 million, and $17.6 million respectively. Windfall tax benefits realized from
exercised stock options in fiscal 2010, fiscal 2009, and fiscal 2008 were $3.6 million, $5.1
million, and $3.4 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 28, 2010:
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 | |||||||||||||||
$36.57 $40.35 |
15 | 3.1 | $ | 37.66 | 11 | $ | 36.70 | |||||||||||||
$40.36 $44.41 |
88 | 2.8 | 43.14 | 15 | 43.18 | |||||||||||||||
$44.42 $48.02 |
33 | 1.7 | 47.95 | 13 | 47.95 | |||||||||||||||
$48.03 $52.24 |
51 | 3.4 | 50.93 | 17 | 51.11 | |||||||||||||||
$52.25 $60.07 |
12 | 1.5 | 56.23 | 10 | 55.70 | |||||||||||||||
$60.08 $72.58 |
17 | 2.0 | 69.41 | 17 | 69.44 | |||||||||||||||
216 | 2.6 | $ | 48.17 | 83 | $ | 51.66 | ||||||||||||||
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 28,
2010, the total unrecognized compensation cost related to non-vested SSARs was $0.4 million, which
is net of a $0.2 million forfeiture estimate, and is expected to be recognized over a
weighted-average period of approximately 4.0 years. The Company uses historical data to estimate
pre-vesting forfeiture rates. For fiscal 2010 and 2009, stock-based compensation expense related
to SSARs was less than $0.1 million, and was charged to general and administrative expenses in the
Consolidated Statements of Operations.
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The following table summarizes the Companys SSAR activity under its stock-based compensation plan
during fiscal 2010:
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 | ||||||||||
Granted |
8 | 75.80 | ||||||||||||||
Converted |
| | ||||||||||||||
Cancelled |
| | ||||||||||||||
Outstanding at December 28, 2010 |
30 | $ | 60.90 | 4.9 | $ | 1,244 | ||||||||||
Convertible at December 28, 2010 |
| $ | | | $ | | ||||||||||
(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 2010 of $102.11 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 28, 2010 have a conversion price ranging from $55.20 to $75.80
and are expected to be recognized over a weighted-average period of approximately 4.9 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Fair value per option awards |
$ | 27.97 | $ | 21.70 | $ | 15.54 | ||||||
Assumptions: |
||||||||||||
Expected term (years) |
5.0 | 5.0 | 4.5 | |||||||||
Expected volatility |
41.0 | % | 41.8 | % | 36.5 | % | ||||||
Risk-free interest rate |
1.8 | % | 2.4 | % | 2.5 | % | ||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
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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.
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.
1992 Employee Stock Purchase Plan
The Company maintains a 1992 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 28,000, 36,000, and 44,000 shares purchased with a
weighted-average fair value of purchase rights of $11.41, $7.95, and $6.41 during fiscal 2010,
fiscal 2009, and fiscal 2008, respectively. For fiscal 2010, fiscal 2009, and fiscal 2008, the
Company recognized expense of approximately $0.3 million in each of the respective years related to
stock purchase plan discounts. Effective May 13, 2010, the Plan was amended to increase the number
of the Companys Class A common stock shares authorized for issuance 925,000. Cumulatively, there
were approximately 820,000 shares issued under this plan as of December 28, 2010, 790,000 shares
issued under this plan as of December 29, 2009, and 754,000 shares issued under this plan as of
December 30, 2008.
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 $1.4 million, $1.3 million, and $1.1 million to the
Plan in fiscal 2010, fiscal 2009, and fiscal 2008, 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 and Other Product Operations segment supplies fresh dough, produce, tuna, cream
cheese, and indirectly supplies proprietary sweet goods items through a contract manufacturing
arrangement, to 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Revenues: |
||||||||||||
Company bakery-cafe operations |
$ | 1,321,162 | $ | 1,153,255 | $ | 1,106,295 | ||||||
Franchise operations |
86,195 | 78,367 | 74,800 | |||||||||
Fresh dough and other product operations |
252,045 | 216,116 | 213,620 | |||||||||
Intercompany sales eliminations |
(116,913 | ) | (94,244 | ) | (95,862 | ) | ||||||
Total revenues |
$ | 1,542,489 | $ | 1,353,494 | $ | 1,298,853 | ||||||
Segment profit: |
||||||||||||
Company bakery-cafe operations |
$ | 249,177 | $ | 193,669 | $ | 183,713 | ||||||
Franchise operations |
80,397 | 72,381 | 65,005 | |||||||||
Fresh dough and other product operations |
24,146 | 21,643 | 9,185 | |||||||||
Total segment profit |
$ | 353,720 | $ | 287,693 | $ | 257,903 | ||||||
Depreciation and amortization |
68,673 | 67,162 | 67,225 | |||||||||
Unallocated general and administrative expenses |
95,696 | 77,183 | 74,598 | |||||||||
Pre-opening expenses |
4,282 | 2,451 | 3,374 | |||||||||
Interest expense |
675 | 700 | 1,606 | |||||||||
Other expense, net |
4,232 | 273 | 883 | |||||||||
Income before income taxes |
$ | 180,162 | $ | 139,924 | $ | 110,217 | ||||||
Depreciation and amortization: |
||||||||||||
Company bakery-cafe operations |
$ | 57,031 | $ | 55,726 | $ | 54,814 | ||||||
Fresh dough and other product operations |
7,495 | 7,620 | 8,072 | |||||||||
Corporate administration |
4,147 | 3,816 | 4,339 | |||||||||
Total depreciation and amortization |
$ | 68,673 | $ | 67,162 | $ | 67,225 | ||||||
Capital expenditures: |
||||||||||||
Company bakery-cafe operations |
$ | 66,961 | $ | 46,408 | $ | 56,477 | ||||||
Fresh dough and other product operations |
6,452 | 3,681 | 3,872 | |||||||||
Corporate administration |
8,813 | 4,595 | 2,814 | |||||||||
Total capital expenditures |
$ | 82,226 | $ | 54,684 | $ | 63,163 | ||||||
December 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Segment assets: |
||||||||||||
Company bakery-cafe operations |
$ | 581,193 | $ | 498,806 | $ | 503,928 | ||||||
Franchise operations |
6,679 | 3,850 | 5,951 | |||||||||
Fresh dough and other product operations |
48,393 | 48,616 | 50,699 | |||||||||
Total segment assets |
$ | 636,265 | $ | 551,272 | $ | 560,578 | ||||||
Unallocated trade and other accounts receivable |
9,409 | 2,267 | 2,435 | |||||||||
Unallocated property and equipment |
19,798 | 14,437 | 13,673 | |||||||||
Unallocated deposits and other |
4,549 | 4,104 | 5,109 | |||||||||
Other unallocated assets |
254,560 | 265,085 | 92,122 | |||||||||
Total assets |
$ | 924,581 | $ | 837,165 | $ | 673,917 | ||||||
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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Amounts used for basic and diluted per share calculations: |
||||||||||||
Net income attributable to Panera Bread Company |
$ | 111,866 | $ | 86,050 | $ | 67,436 | ||||||
Weighted average number of shares outstanding basic |
30,614 | 30,667 | 30,059 | |||||||||
Effect of dilutive stock-based employee compensation awards |
308 | 312 | 363 | |||||||||
Weighted average number of shares outstanding diluted |
30,922 | 30,979 | 30,422 | |||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||
Basic |
$ | 3.65 | $ | 2.81 | $ | 2.24 | ||||||
Diluted |
$ | 3.62 | $ | 2.78 | $ | 2.22 | ||||||
For the fiscal years ended December 28, 2010, December 29, 2009, and December 30, 2008,
weighted-average outstanding stock options, restricted stock and stock-settled appreciation rights
of zero, 0.2 million, and 0.6 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 28, 2010 | December 29, 2009 | December 30, 2008 | ||||||||||
Cash paid during the year for (in thousands): |
||||||||||||
Interest |
$ | 379 | $ | 380 | $ | 1,748 | ||||||
Income taxes |
68,263 | 26,947 | 37,328 | |||||||||
Non-cash investing and financing activities (in thousands): |
||||||||||||
Accrued property and equipment purchases |
$ | 13,057 | $ | 6,108 | $ | 6,448 | ||||||
Accrued purchase price of noncontrolling interest |
764 | 2,264 | | |||||||||
Accrued purchase price of New Jersey acquisition |
2,755 | | | |||||||||
Canada note receivable |
3,333 | | | |||||||||
Investment in municipal industrial revenue bonds |
1,517 | | |
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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 2010 - quarters ended (1) | ||||||||||||||||
March 30 | June 29 | September 28 | December 28 | |||||||||||||
Revenues |
$ | 364,210 | $ | 378,124 | $ | 371,994 | $ | 428,161 | ||||||||
Operating profit |
42,161 | 46,103 | 35,996 | 60,809 | ||||||||||||
Net income |
25,845 | 26,655 | 22,715 | 36,384 | ||||||||||||
Net income attributable to Panera Bread Company |
25,845 | 26,704 | 22,797 | 36,520 | ||||||||||||
Earnings per common share attributable to Panera Bread Company: |
||||||||||||||||
Basic |
$ | 0.83 | $ | 0.86 | $ | 0.75 | $ | 1.22 | ||||||||
Diluted |
$ | 0.82 | $ | 0.85 | $ | 0.75 | $ | 1.21 | ||||||||
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 | ||||||||
(1) | Fiscal quarters may not sum to the fiscal year reported amounts due to rounding. |
The second quarter of fiscal 2010 results included a favorable impact of $0.01 per diluted share
from the repurchase of 897,556 shares under its $600.0 million share repurchase authorization which
was offset by a $2.5 million charge, or $0.05 per diluted share related to an on-going unclaimed
property audit.
The third quarter of fiscal 2010 results included a favorable impact of $0.01 per diluted share
from the repurchase of 1,007,984 shares under the Companys $600.0 million share repurchase
authorization.
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, 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.
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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 28, 2010. 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 28, 2010, 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 28, 2010 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 28, 2010. 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 28, 2010, 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 2011 Annual
Meeting of Stockholders, which the Company intends to file with the SEC 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 2011 Annual
Meeting of Stockholders, which the Company intends to file with the SEC 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 2011 Annual
Meeting of Stockholders, which the Company intends to file with the SEC 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 2011 Annual
Meeting of Stockholders, which the Company intends to file with the SEC 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 2011 Annual
Meeting of Stockholders, which the Company intends to file with the SEC 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 28, 2010 and December 29, 2009
Consolidated Statements of OperationsFiscal years ended December 28, 2010, December 29,
2009, and December 30, 2008
Consolidated Statements of Cash FlowsFiscal years ended December 28, 2010, December 29,
2009, and December 30, 2008
Consolidated Statements of Stockholders EquityFiscal years ended December 28, 2010,
December 29, 2009, and December 30, 2008
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 30, 2008 |
$ | 68 | $ | 153 | $ | (32 | ) | $ | 189 | |||||||
Fiscal year ended December 29, 2009 |
$ | 189 | $ | 28 | $ | (92 | ) | $ | 125 | |||||||
Fiscal year ended December 28, 2010 |
$ | 125 | $ | 161 | $ | (44 | ) | $ | 242 | |||||||
Self-insurance reserves: |
||||||||||||||||
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 | |||||||
Fiscal year ended December 28, 2010 |
$ | 15,934 | $ | 35,622 | $ | (31,344 | ) | $ | 20,212 |
(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/ WILLIAM W. MORETON | |||
William W. Moreton | ||||
President, Chief Executive Officer | ||||
Date: February 22, 2011 |
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
|
Executive Chairman | February 22, 2011 | ||
/s/ DOMENIC COLASACCO
|
Director | February 22, 2011 | ||
/s/ CHARLES J. CHAPMAN III
|
Director | February 22, 2011 | ||
/s/ FRED K. FOULKES
|
Director | February 22, 2011 | ||
/s/ LARRY J. FRANKLIN
|
Director | February 22, 2011 | ||
/s/ THOMAS E. LYNCH
|
Director | February 22, 2011 | ||
/s/ WILLIAM W. MORETON
|
President, Chief Executive Officer, Director | February 22, 2011 | ||
/s/ JEFFREY W. KIP
|
Senior Vice President, Chief Financial Officer | February 22, 2011 | ||
/s/ AMY L. KUZDOWICZ
|
Vice President, Controller | February 22, 2011 | ||
/s/ MARK D. WOOLDRIDGE
|
Assistant Controller, Chief Accounting Officer | February 22, 2011 |
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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 12, 2010 (File No.
0-19253), as filed with the Commission on April 12, 2010 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, as amended (filed as Exhibit A to the Registrants
Proxy Statement on Schedule 14A dated April 12, 2010 (File No. 0-19253), as
filed with the Commission on April 12, 2010 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 on 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). |
|||
10.19 | Severance Agreement dated as of May 13, 2010 by and between Panera Bread
Company and Ronald M. Shaich (filed as Exhibit 10.1 to the Registrants Current
Report on Form 8-K (File No. 19253), as filed with the Commission on May 18,
2010 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. |
||
101.INS | ** | XBRL Instance Document |
||
101.SCH | ** | XBRL Taxonomy Extension Schema Document |
||
101.CAL | ** | XBRL Taxonomy Extension Calculation Linkbase Document |
||
101.LAB | ** | XBRL Taxonomy Extension Label Linkbase Document |
||
101.PRE | ** | XBRL Taxonomy Extension Presentation Linkbase Document |
||
101.DEF | ** | XBRL Taxonomy Extension Definition Linkbase Document |
* | Filed herewith. |
|
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual
Report on Form 10-K shall be deemed to be furnished and not filed. |
|
| Management contract or compensatory plan required to be filed as an exhibit hereto pursuant to
Item 15(a) of Form 10-K. |
80