ITEM 1. BUSINESS
GENERAL
Au Bon Pain Co., Inc. ("the Company") was formed in March 1981 with three Boston area bakeries and one cookie store serving croissants, breads and cookies. As of December 27, 1997, the Company had grown to 220 Company-operated and 115 franchised bakery cafes operating under two concepts: Au Bon Pain, with 160 Company-operated and 96 franchise-operated bakery cafes, and Saint Louis Bread Company ("Saint Louis Bread"), which also does business as "Panera Bread" outside of the Saint Louis area, with 60 Company-operated and 19 franchise-operated bakery cafes. Both concepts specialize in high quality food for breakfast and lunch, including fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other cafe beverages.
The Au Bon Pain bakery cafes are principally located in Boston, other New England cities, New York City, Connecticut, Washington, D.C., Chicago, Maryland, New Hampshire, New Jersey, California, Philadelphia, Pittsburgh, Rhode Island, Texas, Santiago, Chile, The Philippines, Indonesia, Sao Paulo, Brazil, Bangkok, Thailand and London, England (see "Properties"). System wide sales for Au Bon Pain, which include Company-operated and franchised restaurant sales, were approximately $199 million for the fiscal year ended December 27, 1997.
The Saint Louis Bread bakery cafes are principally located in St. Louis, Atlanta, Kansas, Detroit and Chicago (see "Properties"). System wide sales for Saint Louis Bread, were approximately $82 million for the fiscal year ended December 27, 1997. The Company believes that the acquisition of Saint Louis Bread has created a number of opportunities. The Saint Louis Bread suburban bakery cafe concept has proved to be well suited for suburban locations and offers the Company greater access to these markets, thereby enhancing the Company's long-term growth prospects.
CONCEPT AND STRATEGY
Target customers of Au Bon Pain and Saint Louis Bread include urban office employees, suburban dwellers, shoppers, travelers, students and other adults who are time sensitive, yet desire a higher quality breakfast and lunch experience than is typically found at quick service restaurants. The Company's strategy is to create distinctive food offerings at reasonable prices which are fresher, of higher quality and of greater variety than those offered by its competitors. In addition, the Company believes its operational excellence, speed of service and convenient locations further differentiate the Company from its competitors. Average
revenue per Company-operated bakery cafe open for the full fiscal year ended December 27, 1997 was approximately $1,014,211 for the Au Bon Pain concept and approximately $1,200,257 for the Saint Louis Bread concept.
The Company believes that excellence in execution is a key to success in the restaurant industry. The distinctive nature of the Company's menu offerings, the quality of its restaurant operations, the Company's high quality cafe design and the prime locations of its cafes are integral to the Company's success. The Company's operating strategy is to increase overall sales by offering new products that will expand the current business and increase afternoon sales, and by continuing to open new bakery cafes in existing and new markets on both Company-operated and franchise bases and to increase sales in existing bakery cafes through the continued introduction and promotion of distinctive, high quality menu items.
MENU
The menus of both concepts provide customers with popular food items which the Company believes are fresher, of higher quality and in greater variety than those offered by its competitors. The key menu groups are fresh baked goods, made-to-order sandwiches, soups and cafe beverages. Included within these menu groups are: a variety of freshly baked bagels, breads, croissants, muffins, scones, rolls and sweet goods; sandwiches made-to-order with specialty cheeses, smoked meats, roast beef, hot grilled chicken, albacore tuna and white meat chicken salads; hearty, unique soups; custom roasted coffees and cafe beverages such as espresso and cappuccino. A primary difference in menu between the two concepts is the significant emphasis within the Saint Louis Bread concept on sophisticated European and sourdough breads.
The Company regularly reviews and revises its menu offerings to satisfy changing customer preferences and to maintain customer interest. New menu items are developed in corporate test kitchens and then introduced in a limited number of the Company's bakery cafes to determine customer response and verify that preparation and operating procedures maintain consistency, high quality standards and profitability. If successful, they are introduced in all Au Bon Pain and/or Saint Louis Bread bakery cafes.
MARKETING
The Company believes it competes on the basis of quality food and service rather than price. Pricing is structured so that customers perceive good value at both Au Bon Pain and Saint Louis Bread (high quality food at reasonable prices). The average customer purchase is approximately $3.09 at Au Bon Pain and $4.92 at
Saint Louis Bread. Breakfast and lunch checks typically average $2.12 and $4.23, respectively, at Au Bon Pain and $3.51 and $5.84, respectively, at Saint Louis Bread. The Company attempts to increase its per location sales through menu development, promotions and by sponsorship of local community charitable events.
To date, the Company has not advertised extensively; rather, it relies on word of mouth, customer satisfaction and promotional programs to encourage trial by new customers and to make existing customers aware of new menu offerings.
CATERING
Au Bon Pain operates a catering program which offers a select group of delivered breakfast and luncheon food items appropriate for on-site consumption at corporate functions. Customers place orders by toll-free telephone with trained customer service representatives at the Company's Boston headquarters. Orders are immediately routed utilizing a computerized delivery support system to the most appropriate bakery cafe for preparation and delivery. In 1997, catering sales represented approximately 5.5% of the Au Bon Pain Company-operated restaurant sales. At present, Saint Louis Bread does not offer catering services. With the predominance of Saint Louis Bread cafes in suburban locations, the Company believes that the potential to develop significant catering business at Saint Louis Bread is lower than at Au Bon Pain.
SITE SELECTION
For both concepts, the Company seeks convenient locations in high-visibility, high-traffic, densely populated areas which are easily accessible to their respective target customers. The Company also operates in regional shopping malls, transportation centers, universities and hospitals. The Company believes that its concepts, menus, history of quality retail operations and bakery cafe designs enable the Company to access locations which may not be available to traditional quick service restaurants. Examples of Au Bon Pain bakery cafe locations include Copley Place, Brigham and Women's Hospital, South Station and Harvard Business School in Boston; the Empire State Building and World Financial Center in New York City; the Pittsburgh Airport in Pittsburgh; 2000 Pennsylvania Avenue in Washington, D.C.; and the Santiago Airport in Santiago, Chile. Examples of Saint Louis Bread bakery cafe locations include the Galleria Mall in St. Louis and the Lenox Square Mall in Atlanta. However, the Saint Louis Bread locations are predominantly sited in strip center suburban retail locations in the markets in which they operate.
In 1997 the Company opened one Au Bon Pain bakery cafe in an existing market, and franchised 11 of its existing Au Bon Pain bakery
cafes in the Philadelphia market. The Company's Au Bon Pain franchisees also opened 38 new bakery cafes domestically and in Chile, the Philippines, Indonesia, Thailand, Brazil and England.
During 1997, the Company expanded the number of Company-operated Saint Louis Bread bakery cafes by six to 60 locations in existing markets and in the new Saint Louis Bread markets of Boston and Detroit. The Saint Louis Bread franchise-operated locations expanded from 10 locations to 19 locations including new market openings in Tulsa, Oklahoma, Columbus, OH, Louisville, KY and Davenport, IA.
Both bakery cafe concepts rely on a substantial volume of repeat business. In evaluating a potential location, the Company studies the surrounding trade area, obtaining information and/or demographics within that area on quick service breakfast or lunch competitors. Management evaluates the Company's ability to establish a dominant presence within that area, in order to create entry barriers to other bakery cafe competitors. Based on this information, sales and return on investment are projected.
The Company uses sophisticated fixtures and materials in the bakery cafe design for both concepts. The design visually reinforces the distinctive difference between the Company's bakery cafes and other quick service restaurants serving breakfast and lunch. Many of the Company's cafes also feature outdoor cafe seating. The current estimated construction and equipment costs for a typical Au Bon Pain bakery cafe outside of New York City are approximately $475,000 before any landlord construction allowance. The estimated construction and equipment cost for a typical Au Bon Pain bakery cafe in New York City is approximately $830,000 before any landlord construction allowance. The current estimated construction and equipment cost for a typical Saint Louis Bread bakery cafe is approximately $590,000 before any landlord allowance.
The average bakery cafe size ranges between 2,500 and 4,000 square feet. Currently, all bakery cafes, including franchises, are in leased premises. Lease terms are typically ten years with one or two five-year renewal options periods thereafter. Leases typically have a minimum base occupancy charge, charges for a proportionate share of building operating expenses and real estate taxes, and contingent percentage rent based on sales above a stipulated sales level.
PRODUCTION
Frozen dough products are produced at two frozen dough facilities and are then distributed to Company operated bakery cafes and franchise for baking. Baked goods prepared from frozen dough products represent approximately 30% of the Au Bon Pain business unit's total bakery cafe sales and approximately 20% of the Saint
Louis Bread business unit's total bakery cafe sales. During 1996, the Company completed construction of the state of the art frozen dough production facility in Mexico, MO. The facility is 80,000 square feet and increased capacity three-fold over the level at the production facility in South Boston. Start-up costs incurred at the Mexico, MO plant significantly reduced 1996 results of operations. In addition, during 1997 the operating efficiencies of the new facility were not sufficient to fully offset the additional overhead costs associated with the facility.
On March 23, 1998 the Company sold the Mexico, MO production facility and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for approximately $13 million in cash. In conjunction with the sale, Au Bon Pain and Saint Louis Bread entered into five year supply agreements with Bunge for the supply of substantially all their frozen dough needs, excluding bagels, in their domestic bakery cafes. The Company expects the supply agreements will result in an improved operating margin of approximately .5% of total revenues, along with reduced interest expense. The net proceeds of the sale were used to reduce debt. In addition, approximately $2 million of related receivables at December 27, 1997 will be used to further reduce debt. The Company expects to recognize a pre-tax loss on the sale of the facility of approximately $700,000 in the Company's results of operations for the first quarter of 1998.
The sale of the frozen dough production facility provides economies of scale in plant production which are reflected in the economics of the five-year supply agreements and allows the Company to take advantage of Bunge's significant purchasing power. The five year supply agreements allow the bakery cafes to continue to offer consistently high quality fresh baked goods as the frozen dough products purchased from Bunge will be made on the same equipment, by the same management team, using the same proprietary processes and specifications as prior to the sale to Bunge.
The Company also operates a central commissary used for baking and for preparing certain other menu items, which are then delivered to a portion of the Company's Boston-area bakery cafes. During 1998, the Company expects to close the commissary located in Chelsea, Massachusetts and to consolidate certain of the functions currently performed there into the South Boston production facility, while also integrating certain other functions into the Boston-area bakery cafes. The Company does not expect to incur significant costs to close the commissary. Each of the Saint Louis Bread bakery cafes is supported by a regional commissary which daily provides principally unbaked sourdough products for baking and sale within the Saint Louis Bread bakery cafes.
MANAGEMENT INFORMATION SYSTEMS
Each Company-operated bakery cafe has computerized cash registers to collect point-of-sale transaction data, which are used to generate pertinent marketing information, including product mix and average check. All product prices are programmed into the system from the Company's corporate office.
The Company's in-store personal computer-based management support system is designed to assist in labor scheduling and food cost management, to provide corporate and retail operations management quick access to retail data and to reduce managers' administrative time. The system supplies sales, bank deposit and variance data to the Company's accounting department in Boston on a daily basis. The Company uses this data to generate weekly consolidated reports regarding sales and other key elements, as well as detailed profit and loss statements for each bakery cafe every four weeks. Additionally, the Company monitors the average check, customer count, product mix and other sales trends.
The Company has not completed its assessment of the impact of the Year 2000 issue. It is management's belief that the primary financial systems are Year 2000 compatible. Testing of those systems for compliance is expected to occur during 1998. Many secondary systems associated with the Company's retail operations will require modifications. It is the Company's belief that existing internal Company resources will be adequate to reprogram these Year 2000 modifications. It is expected that the most significant Year 2000 system issue for the Company is with POS systems used by the Au Bon Pain concept. The Company is in negotiations with several vendors to replace the existing POS systems with new state-of-the-art systems. The new systems are expected to be leased at a net incremental cost of approximately $400,000 annually. The incremental cost of the new system is expected to be substantially offset by labor efficiency savings associated with the new POS system.
DISTRIBUTION
The Company currently utilizes an independent distributor to distribute frozen dough products and other materials to Company-operated Au Bon Pain and Saint Louis Bread bakery cafes. By contracting with an independent distributor, the Company has been able to eliminate investment in distribution systems and to focus its managerial and financial resources on its retail operations. The distributor picks up frozen dough products throughout the week from the plants and delivers to the cafes. Virtually all other supplies for retail operations, including paper goods, coffee and small-wares, are contracted for by the Company and delivered by the vendors to the distributor for delivery to the bakery cafes. The
individual bakery cafes order directly from the distributor two to three times per week.
Franchised bakery cafes operate under individual contracts with either the Company's distributor or other regional distributors.
JOINT VENTURES
The Company currently operates 15 Au Bon Pain bakery cafes in New York City, which are owned under a joint venture agreement between the Company and an independent investor group. Under the terms of this agreement, the Company has an obligation to offer the group up to 49% of the equity in each bakery cafe opened in the metropolitan tri-state area of New York City (New York City, Long Island, Westchester County (NY), Bergen County (NJ), and Fairfield County (CT)). The equity participation percentage is based on the cost of the initial construction upon opening of the bakery cafe. This equity percentage is fixed prior to the date of the respective bakery cafe openings. The group has no obligation to participate in any bakery cafe, and the percentage participation must be elected by the group prior to the opening of the bakery cafe. Each joint venture bakery cafe must purchase all of its frozen dough products from the Company and is operated by the Company under a management agreement under which the Company receives a management fee of 6% of sales of each joint venture bakery cafe. The Company has agreed to provide a guaranty to one or more institutional lenders acceptable to the Company to assist the group in financing its acquisition of up to 5% of the equity in new bakery cafes opened after January 1, 1993. As of December 27, 1997, approximately $83,062 is outstanding under this arrangement.
The Company also has a 75% interest in Pain Francais, Inc., which owns the bakery cafe located in the GE Building at Rockefeller Center, New York. The other 25% is held by the same joint venture partner. This bakery cafe operates under a management agreement similar to the agreement under which the joint venture bakery cafes are operated.
FRANCHISES
Au Bon Pain Domestic
The Company currently has domestic franchising agreements with thirteen organizations: Northern Bakers, Inc., CA One, ABP Southern California, Wayne ABP, Inc., R.C. Menzer, Romallso, Inc., The Lauren Group, Inc., FGR Food Group, Host Marriott Corp., Boston Concessions Group, Inc., Crowne Plaza Ravinia, ABP Delaware Valley, LLC and DoubleTree Hotels. In general, the Company has two sources of revenue from its domestic Au Bon Pain franchisees: fees for new
locations and royalties on sales by franchisees. New domestic locations, other than airport locations, to be developed by franchisees typically require a $25,000 initial franchise fee per location and a 5% royalty. Airport franchise fees range between $10,000 and $50,000, depending upon passenger traffic and the Company's assistance in obtaining the concession. All domestic franchisees are obligated to use Company-approved ingredients, including Au Bon Pain-approved frozen dough products.
In 1997, the Company sold 11 bakery cafes to ABP Delaware Valley for $2.6 million, in connection with the execution of a franchise area development agreement covering certain portions of Pennsylvania, New Jersey and Delaware. The purchase price was funded via a ten-year note with the Company which accrues interest at 8.25% per annum. Under terms of the area development agreement, the franchisee must open 17 new bakery cafes according to a minimum opening schedule in order to maintain development exclusivity in the territory and has the right to open either Au Bon Pain or Saint Louis Bread bakery cafes within the specified territory.
International
The Company currently has international franchise development agreements with developers in Chile, Argentina, Brazil and certain other South American countries, Thailand, Indonesia, the Philippines, Malaysia, Singapore, England, the Caribbean and the Canary Islands. Bakery cafes have been opened to date in Chile, Indonesia, the Philippines, Thailand, Brazil and England. Under these agreements, the Company has granted exclusive development rights to franchise and operate Au Bon Pain bakery cafes in the respective country or countries. The agreements generally require the payment of up front development fees, which have ranged from $250,000 to $750,000, a franchise fee, typically from $10,000 to $30,000 for each Au Bon Pain bakery cafe opened, depending upon the size of the location, and royalties from the sale of products from each bakery cafe of 5% of sales. The developer is, in most instances, required to open bakery cafes according to a specific minimum schedule. The Company may also agree to provide advice, consultation and training for the development of a frozen dough plant. Currently, the Company considers international franchising and licensing arrangements as a means of business expansion for its Au Bon Pain concept and is actively pursuing additional international franchising relationships.
Saint Louis Bread Company
In connection with the Saint Louis Bread acquisition in 1993, the Company assumed two area development agreements pursuant to which Saint Louis Bread granted exclusive development rights to two franchisees. One area development agreement covers the cities of Kansas City, St. Joseph and Topeka, Kansas and Kansas City,
Missouri. The second area development agreement covers various counties in Missouri and includes the City of Springfield.
In 1996, the Company began a broad-based franchising program. The Company is actively seeking to extend its Saint Louis Bread franchise relationships beyond its current franchisees. The Saint Louis Bread unit franchise agreements typically require the payment of an up-front franchise fee of $35,000 and continuing royalties of 4% to 5% on sales from each bakery cafe. The franchisees are required to purchase all of their dough products from sources approved by Saint Louis Bread.
As of December 27, 1997 the Company has entered into franchise development agreements for a total of 356 bakery cafes to be located in specific sections of the Tulsa, Oklahoma, Columbus, Ohio, Cincinnati, Ohio, Cleveland, Ohio, Iowa, Louisville, Kentucky, Orlando, Florida, Jacksonville, Florida, Massachusetts, Dallas, Texas, Pittsburgh, PA, Tampa, Florida, Illinois, Minnesota, Colorado, Wisconsin and Tennessee markets.
EMPLOYEES
The Company has approximately 1,378 full-time employees, of whom approximately 170 are employed in general or administrative functions principally at or from the Company's executive offices in Boston, Massachusetts; approximately 84 are employed at the Boston frozen dough plant and the commissary; approximately 61 are employed in the Saint Louis Bread corporate office in St. Louis, MO; approximately 91 are employed in the Saint Louis Bread production facilities in St. Louis, MO, Chicago, IL, Detroit, MI, and Atlanta, GA; and approximately 684 and 288 are employed in the Au Bon Pain and Saint Louis Bread retail operations, respectively. The Company also has approximately 4,141 part-time employees, of whom 2,665 and 1,476 are employed in the Au Bon Pain and Saint Louis Bread bakery cafes, respectively. These totals include employees of Pain Francais, Inc. and at the joint venture locations in New York City. There are no collective bargaining agreements. The Company considers its employee relations to be excellent.
TRADEMARKS
The "Au Bon Pain" and "Au Bon Pain The Bakery Cafe" names are of material importance to the Company and are trademarks registered with the United States Patent and Trademark Office and in certain foreign countries. In addition, the name "Saint Louis Bread Company" and "Panera Bread" are of material importance to the Company. "Saint Louis Bread Company" is registered with the United States Patent and Trademark Office. In addition, "Saint Louis Bread Company and design" and "Panera Bread" and "Panera Bread and design"
and various other marks of lesser importance have been filed with the United States Patent and Trademark Office.
GOVERNMENT REGULATION
Each Company-operated and franchised bakery cafe is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire, alcoholic beverage control and other departments. Difficulties or failures in obtaining the required licensing or approval could result in delays or cancellations in the opening of restaurants.
The Company is also subject to federal and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee. The Company does not believe that current or potential future regulations of franchises have or will have any material impact on the Company's operations. The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wages, overtime and other working conditions.
The Company's Boston frozen dough plant, commissary and Saint Louis Bread dough plants are subject to various federal, state and local environmental regulations. Compliance with applicable environmental regulations is not believed to have any material effect on capital expenditures, earnings or competitive position of the Company. Estimated capital expenditures for environmental compliance matters are not material.
The Americans With Disabilities Act prohibits discrimination in employment and public accommodations on the basis of disability. Under the Americans With Disabilities Act, the Company could be required to expend funds to modify its bakery cafes to provide service to, or make reasonable accommodations for the employment of, disabled persons. The Company believes that compliance with the requirements of the Americans With Disabilities Act will not have a material adverse effect on its financial condition, business or operations.
ITEM 2.
ITEM 2. PROPERTIES
All Company-operated bakery cafes are located in leased premises with lease terms typically for ten years with one or two five-year renewal option periods thereafter. Leases typically have a minimum base occupancy charge, charges for a proportionate share of building operating expenses and real estate taxes and contingent percentage rent based on sales above a stipulated sales level. The
joint venture bakery cafes operate in leased premises under similar lease arrangements.
In 1983, Au Bon Pain built its plant and headquarters in South Boston, Massachusetts. The executive offices occupy approximately 24,000 square feet. The Company owns the original building plus additions and leases the land on which these improvements are located from the City of Boston under a long term ground lease. The annual rent is approximately $150,000. The lease expires, assuming exercise of renewal options, in 2017.
In 1997, the Company leased short-term office space in Waltham, MA to house its Accounting and Development functions.
In 1996, the Company completed construction of a central production facility on a 20 acre tract of land in Mexico, MO to increase the Company's production capacity. The new facility cost approximately $9 million and began operation in mid-1996. The cost of the facility was financed primarily by an $8.6 million industrial development bond issued by the City of Mexico, Missouri in July 1995, secured by an $8.7 million letter of credit with a commercial bank through July, 2000, and by equipment lease financing. On March 23, 1998 the Company sold the Mexico, MO production facility to Bunge Foods Corp. See "Production".
Au Bon Pain operates its commissary in leased premises in Chelsea, Massachusetts under a ten year lease expiring in 1998, with an option to extend for an additional five years. Management intends to close this facility in 1998 upon lease expiration. See "Production".
In 1997, Saint Louis Bread leased new office space in Webster Grove, Mo for its corporate offices. The space occupies approximately 10,300 square feet. The annual rent is approximately $69,500. The lease expires, assuming exercise of renewal options, in 2007.
The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are used.
BAKERY CAFE LOCATIONS
Au Bon Pain Bakery Cafes: - -------------------------
Company-Operated: 160 total as of December 27, 1997 - ----------------
Boston Market Area: 46 - ----------------------- 101 Merrimac Street Filene's 1100 Massachusetts Avenue Fleet Bank 15 Harvard Street Harvard Business School 176 Federal Street Harvard Square 431 Boylston Street Hynes Auditorium 53 State Street International Place 684 Massachusetts Avenue Kendall Square 745 Boylston Street Longwood Galleria 75-101 Federal Street Milk Street Arlington Center MIT Beacon Hill Natick Mall Bowdoin Square New England Medical Center Brattle Street North Shore Shopping Center Brigham & Women's Hospital Northeastern University Burlington Mall One Newton Place Cambridgeside Galleria Park Plaza Children's Hospital South Shore Plaza Church Park South Station Coolidge Corner Square One Mall Copley Place Tower Records Davis Square Wellesley Center Design Center South Boston Winter Street Fanueil Hall Market Place Woburn Business Center
Other New England: 14 - ---------------------- Avon Marketplace, Avon, CT Rockingham Mall, Salem, NH City Place, Hartford, CT Rhode Island Hospital, Providence, RI Fleet Center, Providence, RI St. Francis Hospital, Hartford, CT Hartford Civic Center, Hartford, CT Thayer Street, Providence, RI Mall of New Hampshire, Warwick Mall, Warwick, RI Manchester, NH One Broadway, New Haven, CT West Farms Malls, West Hartford, CT Pheasant Lane Mall, Nashua, NH Worcester Commons, Worcester, MA
California Market Area: 1 - -------------------------- 353 Sacramento Street, San Francisco
Pittsburgh Market Area: 8 - -------------------------- Fifth Avenue Place Pittsburgh Airport-Landside Oliver Building Ross Park Mall Oxford Center Two PPG Place Pittsburgh Airport-Airside USX Tower
Washington, D.C. - Baltimore Market Area: 24 - -------------------------------------------- 10 North Calvert 800 North Capitol Street 1001 Pennsylvania Avenue, NW Commerce Place 1101 Vermont Avenue, NW Crystal City 1401 Eye Street Gallery at Harbor Place 1615 L Street, NW International Square 1701 Pennsylvania Avenue, NW L'Enfant Plaza 1724 L Street, NW National Place 1801 L Street Pentagon City 1850 M Street Springfield Mall 2000 Pennsylvania Avenue, NW Towson Town Center 601 Indiana Avenue Union Station 700 13th Street, NW Warner Building
Greater New York Area: 41 - -------------------------- 101 Hudson Street Empire State Building 16 East 44th Street Exxon Building 222 Broadway JFK Airport-Cart 300 Madison Avenue JFK Airport-American Airlines 420 Fifth Avenue Laguardia Airport 425 Lexington Avenue Long Island Jewish Medical Center 444 Madison Avenue Manhattan Mall 54 East 8th Street Nanuet Mall 6 Union Square East One Metrotech Center 60 Broad Street Port Authority 600 Lexington Avenue Riverside Square 600 Third Avenue Rockefeller Center/GE Building 684 Broadway Rockefeller Center/Time Warner 73 Fifth Avenue Rutgers University 80 Pine Street Short Hills Mall 875 Third Avenue-Down State Street Plaza 875 Third Avenue-Up Westchester Mall 95 Wall Street World Financial-Down Celanese Building World Financial-Up Chanin Building World Trade Center Daily News Building
Midwest Market Area: 26 - ------------------------ 122 South Michigan Avenue, Chicago Amoco Building, Chicago 123 North Wacker Drive, Chicago BP Building, Cleveland 125 South Wacker Drive, Chicago Carew Tower, Cincinnati 161 North Clark Street, Chicago Columbus City Center, Columbus 180 North Michigan Avenue, Chicago Federal Reserve, Chicago 181 West Madison, Chicago Grand Avenue, Milwaukee 200 West Adams, Chicago IBM Building, Minneapolis 222 North LaSalle Street, Chicago IDS Center, Minneapolis 30 North LaSalle Street, Chicago Illinois Center, Chicago 33 North Dearborn, Chicago Merchandise Mart, Chicago 3rd & Broad, Columbus St. Paul Center, Minneapolis 500 West Monroe, Chicago Tower City, Cleveland 600 Superior Avenue, Cleveland Woodfield Mall, Schaumburg, IL
Franchise-Operated/Domestic: 59 total as of December 27, 1997
Northern Bakers, Inc.: 8 - ------------------------- Big D Supermarket, Shrewsbury, MA Dartmouth-Hitchcock Medical Center, Lebanon, NH Cape Cod Mall, Hyannis, MA Fox Run Mall, Newington, NH Carousel Mall, Syracuse, NY Maine Mall, South Portland, ME Crossgates Mall, Albany, NY Silver City Galleria, Taunton, MA
Host Marriott: 2 - ----------------- Hartsfield Airport, Concourse B, Hartsfield Airport, Concourse D, Atlanta, GA Atlanta, GA
Fortunoff (Wayne ABP, Inc.): 1 Wayne Town Center, Wayne, NJ
R.C. Menzer: 2 - --------------- South Hills Village, Westmoreland Mall, Pittsburgh, PA Greensburg, PA
Romallso, Inc.: 1 - ------------------ Roosevelt Field Mall, Garden City, NY
The Lauren Group, Inc.: 2 - -------------------------- Choices, Tannersville, PA Crossing Factory Store, Tannersville, PA
DoubleTree Hotels: 14 - --------------------- Austin, TX Louisville, KY III Boise, ID Miami Lakes, FL Hartsfield International Airport, Norwalk, CT Atlanta, GA Jacksonville, FL O'Hare, Chicago, IL Largo, MD Philadelphia, PA Louisville, KY I San Antonio, TX Louisville, KY II Tyson's Corner, VA
ABP Southern California, LLC: 5 - -------------------------------- Brea Mall, Brea, North County Fair, Escondido Laguna Hills Mall, Laguna Hills South Lake Avenue, Pasadena Montclair Plaza, Montclair
Boston Concessions Group: 1 - --------------------------- Logan International Airport, Terminal C, Boston
CA One Services, Inc.: 7 - ------------------------- Ft. Lauderdale Airport, Newark International Airport, Ft Lauderdale, FL Newark, NJ Greater Cincinnati Airport, San Jose International Airport, Hebron, KY San Jose, CA Hancock International Airport, West Palm Beach International Syracuse, NY Airport, West Palm Beach, FL Logan International Airport, Boston, MA
Crowne Plaza Ravinia: 1 - ----------------------- Crowne Plaza, Atlanta
ABP Delaware Valley: 11 - ------------------------ 30th Street Station, Philadelphia Mellon Building, Philadelphia Commerce Square Montgomery Mall, Philadelphia Exton Square Mall, Exton, PA Ten Penn Center, Philadelphia Graham Building, Philadelphia Two Logan Square, Philadelphia King of Prussia, PA Two Penn Center, Philadelphia Liberty Place, Philadelphia
FGR Food Corp.: 4 - ------------------ Dallas-Fort Worth Airport I Dallas-Fort Worth Airport III Dallas-Fort Worth Airport II Dallas-Fort Worth Airport IV
Franchise-Operated/International: 37 total as of December 27, 1997
ABP Alimentos y Servicios, Chile: 17 - ------------------------------------- Apoquindo/Hendaya Museum of Pre-Columbian Art Bandera New Providencia El Bosque Norte Providencia El Bosque Sud Ripley Food Garden Santiago Airport-Cart Gimnasio Santiago Airport-Counter Homecenter Las Condes Santiago Airport-Duty Free La Dehasa World Trade Center Miraflores
GS&P Foods, Inc., The Philippines: 6 - ------------------------------------- EDSA/Shangri-La Mall, Ortegas Taipan Building, Ortegas Megamall, Ortegas Tektite Building, Manila PCI Tower, Makati Zeta Building, Manila
PT Ayodhia Pina Pangan, Indonesia: 7 - ------------------------------------- BNI Building, Jakarta Plaza Senayan, Jakarta BRI Building, Jakarta Setia-Budi Atrium, Jakarta Kunigan Plaza, Jakarta Stock Exchange (BEJ), Jakarta Landmark Building, Jakarta
Royal ABP Co., Ltd, Thailand: 3 - -------------------------------- Lake Rajarda Sindhorn SCB Plaza
BV Hospitality UK Ltd, United Kingdom: 2 - ----------------------------------------- 225 The Strand, London Cheapside, London
ABP Brasil Ltda, Brazil: 2 - --------------------------- Alameda Santos/Citibank, Sao Paulo Birmman Building, Sao Paulo
Saint Louis Bread Company Bakery Cafes: - ---------------------------------------
Company-Operated Bakery Cafes: 60 total as of December 27, 1997
Greater St. Louis Market Area: 32 - ---------------------------------- Ballas, Creve Coeur, MO Gateway One, St. Louis, MO Baxter, Ballwin, MO Grand, St. Louis, MO Bogey Hills, St. Charles, MO Kirkwood, MO Brentwood, St. Louis, MO Main, St. Charles, MO Capriccio, Richmond Heights, MO Market, St. Louis, MO Cape Girardeau, MO Pine, St. Louis, MO Carondelot, Clayton, MO Rendezvous Cafe, Richmond Heights, MO Central West End, St. Louis, MO Soulard, St. Louis, MO Chesterfield Mall, Chesterfield, MO South 9th Street, Columbia, MO City Museum, St. Louis South Central, Clayton, MO Columbia Mall, Columbia, MO Surrey Plaza, Florissant, MO Crestwood Plaza, St. Louis, MO Telegraph Road, St. Louis, MO Delmar, University City, MO Tesson, St. Louis, MO Esquire, Clayton, MO West County, Des Peres, MO Four Seasons, Chesterfield, MO Westport Plaza, Maryland Heights., MO Galleria, Richmond Heights, MO Winchester, MO
Atlanta Market Area: 9 - ----------------------- Briarcliff, Atlanta, GA Lenox Square, Atlanta, GA Dunwoody, GA Peachtree, Atlanta, GA Emory Village, Atlanta, GA Sandy Springs, Atlanta, GA Gwinnett Place, Deluth, GA Town Center, Kennesaw, GA Haywood Mall, Greenville, SC
Chicago Market Area: 15 - ------------------------ Belleville, IL Park Ridge, IL Diversey, Chicago, IL St. Clair Square, Fairview Heights, IL Evanston, IL Stratford Square Mall, IL Fox Valley, Aurora, IL Vernon Hills, IL Golf & Meachum, Schaumberg, IL Wheaton, IL Halsted, Chicago, IL Wilmette, IL LaGrange Park, IL Winnetka, IL Orland Square Mall, Orland Park, IL
Massachusetts Market Area: 1 - ----------------------------- Vinnin Square, Swampscott, MA
Michigan Market Area: 3 - ------------------------ City Center, Novi, MI Orchard Mall, West Bloomfield, MI Lathrope Village, Bloomfield, MI
Franchise-Operated Bakery Cafes: 19 total as of December 27, 1997
Traditional Bakery, Inc.: 6 - ---------------------------- 1570 East Battlefield, 2401 East 32nd Street, Springfield, MO Joplin, MO 500 South National, East Sunshine, Springfield, MO Springfield, MO 3265 Falls Parkway, 3800 East 51st Street, Tulsa, OK Branson, MO
Original Bread, Inc.: 6 - ------------------------ 11022 Metcalf, Overland Park, KS 520 West 23rd Street, Lawrence, KS 11319 West 95th St., 1605 North Rock Road, Wichita, KS Overland Park, KS 8300 Mission Road, Westport, Kansas City, KS Prairie Village, KS
SLB of Iowa: 1 - --------------- Elmore Crossing, Davenport, IA
Breads of the World: 2 - ----------------------- Festival at Sawmill, Dublin, OH Olentangy Plaza, Columbus, OH
Breads Unlimited: 1 - -------------------- Tuttle Crossing Mall, Columbus, OH
SLB of Central Illinois: 1 - --------------------------- 510 East John Street, Champaign, IL
St.LB Inc.: 1 - -------------- Mall of St. Matthews, Louisville, KY
Ozark Breads, Inc.: 1 - ---------------------- 2510 Missouri, Jefferson City, MO
The following table sets forth Company-operated and franchise operated bakery cafes open at the dates indicated:
Dec. 25 Dec. 31, Dec. 30, Dec. 28, Dec. 27, 1993 1994 1995 1996 1997 ------- -------- -------- -------- --------
Company-operated Au Bon Pain 137 182 192 177 160 Saint Louis Bread 19 31 52 54 60 --- --- --- --- --- 156 213 244 231 220
Franchise-operated Au Bon Pain 39 25 29 48 96 Saint Louis Bread 1 6 8 10 19 --- --- --- --- --- 40 31 37 58 115
Total Au Bon Pain 176 207 221 225 256 Saint Louis Bread 20 37 60 64 79 --- --- --- --- --- 196 244 281 289 335
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of security holders during the fourth quarter of the fiscal year ended December 27, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS.
(a) Market Information. -------------------
The Company's Class A Common Stock is traded on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol ABPCA. The following table sets forth the high and low sale prices as reported by NASDAQ for the fiscal periods indicated.
1996 High Low - ---- ------ ----- First quarter .............................. 9-5/16 6-3/4 Second quarter ............................. 9 6-7/8 Third quarter .............................. 7-1/4 6-1/8 Fourth quarter ............................. 8-1/4 5-1/2
- ---- First quarter .............................. 8-7/16 5-7/8 Second quarter ............................. 7-3/8 6 Third quarter .............................. 10-1/4 7 Fourth quarter ............................. 9-13/16 7-1/4
On March 17, 1998, the last sale price for the Class A Common Stock, as reported on the NASDAQ National Market System, was $8 5/16.
(b) Holders. --------
On March 17, 1998, the Company had approximately 1,455 holders of record of its Class A Common Stock and approximately 91 holders of its Class B Common Stock.
(c) Dividends. ----------
The Company has never paid cash dividends on its capital stock and has no intention of paying cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
1 Fiscal 1994 included 53 weeks. The 1994 restaurant sales used in this computation have been adjusted downward to be comparable to fiscal 1993 and fiscal 1995.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenues of certain items included in the Company's consolidated statements of operations for the periods indicated:
For the fiscal years ended --------------------------------------- Dec. 30, Dec. 28, Dec. 27, 1995 1996 1997 -------- -------- -------- Revenues: Restaurant sales 95.6% 95.2% 93.0% Franchise sales and other revenues 4.4 4.8 7.0 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Costs and expenses: Cost of food and paper products 34.1% 36.1% 36.0% Restaurant operating expenses 49.5 48.7 47.7 Depreciation and amortization 6.6 6.8 6.7 General and administrative 5.7 6.3 6.5 Non-recurring charge 3.7 1.9 - ----- ----- ----- 99.6 99.8 96.9 ----- ----- ----- Operating margin 0.4 0.2 3.1 Interest expense, net 1.5 2.2 2.9 Other expense, net 0.9 1.0 0.1
Minority interest -- -- -- ----- ----- ----- Income(loss) before (benefit) from income taxes (2.0) (3.0) 0.1 Benefit from income taxes (1.3) (1.2) (0.6) ----- ----- ----- Net income(loss) (0.7)% (1.8)% 0.7% ===== ===== =====
General
The Company's revenues are derived from restaurant sales and franchise sales and other revenues. Franchise sales and other revenues include sales of frozen dough products to franchisees and others, royalty income and franchise fees. Certain expenses (cost of food and paper products, restaurant operating expenses and depreciation and amortization) relate primarily to restaurant sales, while general and administrative expenses relate to all areas of revenue generation.
The Company's fiscal year ends on the last Saturday in December. The fiscal years from 1995 through 1997 ended on December 30, 1995, December 28, 1996 and December 27, 1997 and included 52, 52 and 52 weeks, respectively. The Company's fiscal year normally consists of 13 four-week periods, with the first, second and third quarters ending 16 weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
Results of Operations
1997 Compared to 1996 ---------------------
Total restaurant sales from Company-operated bakery cafes increased 3.1% to $233 million in 1997 from $226 million in 1996 due to several factors. Incremental sales were generated from the opening of 6 new Saint Louis Bread Company-operated bakery cafes opened throughout 1997 and 3 Au Bon Pain and 2 Saint Louis Bread Company-operated bakery cafes opened throughout 1996. In addition, comparable restaurant sales increases in Saint Louis Bread and Au Bon Pain contributed to the sales growth. Restaurant sales increased 18.3% in the Saint Louis Bread business due to the store openings and strong comparable restaurant sales of 9.3%, which were slightly offset by the sale of one Saint Louis Bread Company-operated restaurant in connection with the execution of a franchise area development agreement. Sales from Company-owned restaurants in the Au Bon Pain business unit declined 1.7% as the sales from new Company-operated restaurants and an increase in comparable restaurant of 1.6% sales were more than offset by the effect of the disposition throughout 1997 of a number of underperforming bakery cafes.
Other revenues increased to $17.7 million in 1997 from $11.3 million in 1996, principally from growth in wholesale sales to $8.0 million in 1997, from $5.7 million in 1996 and an increase in franchise revenue to $9.4 million in 1997, from $5.5 million in 1996. The wholesale sales increase was due to additional customers and distribution. The franchise revenue increase was driven by the execution of new franchise area development agreements, fees from opening new franchise locations and higher royalty income.
Operating income increased to $7.7 million in 1997 from $330,000 in 1996. Operating income in 1996 included a non-recurring charge recorded by the Company of $4.4 million ($3.8 million after-tax), related principally to the write-down of certain assets under FAS #121. Before the non-recurring charge, operating income increased 61% in 1997 to $2.9 million above 1996, driven by increased sales and contribution, especially in the Saint Louis Bread division, where a significant increase in franchise contribution combined with sales growth and operational efficiencies drove Saint Louis Bread's operating income to nearly double versus 1996. In addition, manufacturing contribution
improved versus 1996, as the new production facility opened in 1996 in Mexico, MO stabilized its operating performance.
Operating margin in the Au Bon Pain business unit declined by .5 points in 1997 versus 1996, due to higher food and paper costs of 1.2 points caused by higher commodity costs for butter and less than full capacity in the manufacturing facility in Mexico, Missouri. Restaurant operating expenses decreased by .7 points as sales growth and the closing of unprofitable restaurants provided leverage against occupancy and store overhead costs. Depreciation and amortization and general and administrative expenses as a percentage of revenue remained flat with the prior year.
Operating margin in the Saint Louis Bread business unit increased by 4.3 points versus the prior year, as higher sales leveraged the fixed costs within the operational expenses and significantly higher franchise contribution increased operating margin. Food and paper costs were .4 points lower in 1997 versus 1996, as operational efficiencies offset commodity cost increases. Restaurant operating expenses as a percentage of revenue declined by 1.3 points with the sales improvement providing leverage against occupancy costs, which declined by .5 points, overhead costs, which declined by .1 points and labor, which declined by .6 points. Franchise contribution grew by over 700%, increasing margin by 1.5 points in 1997 versus 1996, as the broad-based franchise program initiated in 1996 for Saint Louis Bread successfully expanded the number of committed stores to 356 total stores.
1996 Compared to 1995 ---------------------
Restaurant sales from Company-operated bakery cafes increased 4.2% to $226 million in 1996 from $216 million in 1995, due principally to several factors: incremental sales in 1996 over 1995 from the 15 Au Bon Pain and 20 Saint Louis Bread Company-operated bakery cafes opened throughout 1995, strong comparable restaurant sales in the Saint Louis Bread business unit and sales from the 3 Au Bon Pain and 2 Saint Louis Bread Company-operated bakery cafes opened throughout 1996. Company-operated restaurant sales decreased 2.9% in the Au Bon Pain business unit, as additional sales stemming from the new Company-operated bakery cafes opened in 1995 and 1996 were more than offset by the effect on sales of the disposition throughout 1996 of a series of underperforming bakery cafes under an initiative begun in late 1995. Company-operated restaurant sales increased 33.6% in the Saint Louis Bread business unit in 1996 over 1995, due to sales stemming from the new Company-operated bakery cafes opened in 1995 and 1996 and from strong comparable restaurant sales. Comparable restaurant sales in 1996 decreased 1.3%, or $1.96 million, in the Au Bon Pain business unit. In the Saint Louis Bread business unit comparable restaurant sales increased 10.2%, or $3.32 million, in 1996 over the previous year driven by a highly successful bagel product line introduction.
Operating income declined to $330,000 in 1996 from $858,000 in 1995. Operating income was significantly affected by separate non-recurring charges recorded by the Company of $4.4 million ($3.7 million after-tax) in 1996 and of $8.5 million ($5.3 million after-tax) in 1995. The non-recurring charge recorded in 1996 related principally to the write-down of certain assets in accordance with FAS #121. The non-recurring charge recorded in 1995 related principally to the closure of certain under-performing bakery cafes. Before the non-recurring charges, operating margin decreased in 1996 to 2.0% from 4.1% in 1995, as operating margin improvements at the Saint Louis Bread business unit were more than offset by lower operating margins in the Au Bon Pain business unit, driven primarily by costs associated with the start-up of a new frozen dough manufacturing facility opened during 1996 in Mexico, Missouri.
Operating margin in the Au Bon Pain business unit declined by 4.3 points in 1996 versus 1995, due principally to start-up costs and inefficiencies related to the opening of the new manufacturing facility and significantly higher commodity costs for butter and flour in 1996 versus the previous year. In total, these manufacturing related costs constituted the majority of the 2.6 point increase to cost of food and paper costs as a percentage of revenues in the Au Bon Pain business unit compared to the prior year. Restaurant operating expenses increased by .4 points in 1996 versus 1995, as percentage increases in occupancy costs due to negative leverage stemming from the slight comparable restaurant sales decline more than offset percentage improvements in both labor costs and controllable expenses at the retail store level. Depreciation and amortization expense as a percentage of revenues increased by .4 points in 1996 due to incremental depreciation related to the new Missouri manufacturing facility and the negative leverage associated with the comparable restaurant sales decline. General and administrative expenses as a percentage of revenues increased by .9 points in 1996 versus 1995 due primarily to greater investment in infrastructure in the international franchise area, information systems and other overhead areas.
At Saint Louis Bread, operating margin improved by 4.8 points in 1996 versus 1995, as the new management team established at the end of 1995 improved operational focus and control throughout 1996 and the significantly positive comparable restaurant sales increase in 1996 leveraged many of the largely fixed costs within the operations. Percentage food and paper costs decreased by .4 points in 1996 compared to 1995, despite higher allocated costs associated with frozen dough provided by the new manufacturing facility opened during the year. Percentage restaurant operating expenses decreased by 4.2 points driven by improved management controls surrounding labor costs and store-level controllable expenses. Depreciation and amortization expense and general and administrative expenses each decreased by .2 points versus the previous year due to leverage from the significantly higher sales in 1996.
Benefit from Income Taxes
The Company had a benefit from income taxes of $2.8 million, $2.9 million and $1.5 million for the years ended December 30, 1995, December 28, 1996 and December 27, 1997, respectively, due to federal and state net operating loss carryforwards, tax credit carryforwards and the fact that the Company has incurred net losses. As of December 27, 1997, the Company had federal and state net operating loss carryforwards of approximately $40.0 million, as well as approximately $3.1 million of tax credit carryforwards available for income tax purposes. Approximately $13.1 million of these carryforwards expire in the years 2000-2002, while the remaining $26.9 million expires in the years 2010-2012. For the year ended December 31, 1997, the Company provided a valuation allowance of $1.3 million to reduce its deferred tax asset to a level which, more likely than not, will be realized. The valuation allowance is primarily attributable to the potential expiration of charitable contribution deduction carryforwards and certain state net operating loss carryforwards. The Company reevaluates the positive and negative evidence impacting the realizability of its deferred tax assets on an annual basis.
Net income (loss)
Higher operating income in 1997 versus 1996 and deferred tax assets generated during 1997 from federal net operating loss carryforwards and tax credit carryforwards (see "Benefit from Income Taxes"), partially offset by higher interest costs incurred in 1997, produced a significant increase in net income for the year ended December 27, 1997 versus a net loss of $4.3 million for the year ended December 28, 1996, which included a non-recurring charge of $3.8 million.
The lower operating income in 1996 versus 1995, combined with higher interest expense and other expense, net resulted in a net loss of $4.4 million in 1996, as compared with a net loss of $1.6 million in 1995. The higher interest expense was due primarily to higher average long-term debt outstanding, as higher average interest rate due to the issuance of $15 million senior subordinated debentures in July, 1996 which carry a significantly higher coupon rate than the other outstanding long-term debt.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $853,000 at December 27, 1997 from $2.6 million at December 28, 1996. The Company's principal requirements for cash are capital expenditures for constructing and equipping new bakery cafes and maintaining or remodeling existing bakery cafes and working capital. To date, the
Company has met its requirements for capital with cash from operations, proceeds from the sale of equity and debt securities and bank borrowings.
Net cash provided by net income plus depreciation was $17.3 million in 1997 versus $10.3 million in 1996. A total of $13.5 million was provided by operating activities in 1997 compared to $14.8 million in 1996. In 1997, funds provided by operating activities were primarily the result of an increase in accrued expenses, offset by growth in accounts receivable and a decrease in accounts payable. In 1996, funds provided by operating activities were primarily the result of an increase in accounts payable and accrued expenses, offset by growth in accounts receivable and inventories.
The Company utilized $7.7 million and $21.8 million for investing activities in 1997 and 1996, respectively. The investing activities in 1997 resulted primarily from three transactions. In the third quarter of 1997, the Company sold its interest in Peet's Coffee and Teas, Incorporated back to Peet's for $2 million in cash, resulting in a pre-tax gain of $930,000. Also in the third quarter of 1997, the Company sold a Saint Louis Bread cafe for $1.1 million in cash in conjunction with the execution of a franchise area development agreement, resulting in a pre-tax gain of $325,000. In the fourth quarter of 1997 the Company sold its Woburn, MA office building for $4.9 million in cash, resulting in a gain of $660,000. The pre-tax gains on these transactions were recognized as a component of other expense, net in the Company's consolidated financial statements for the year ended December 27, 1997. The Company used the proceeds of $3.3 million from these transactions to reduce debt during 1997.
Total capital expenditures in 1997 of $14.7 million were related primarily to the opening of one Au Bon Pain and six Saint Louis Bread new Company-operated bakery cafes and to the construction of four new local Saint Louis Bread commissaries. The expenditures were mainly funded by net cash from operating activities of $13.5 million and cash proceeds from the non-operating transaction described above.
The Company utilized $7.5 million and generated $3.2 million from financing activities in 1997 and 1996, respectively. The financing activities in 1997 and 1996 resulted primarily from proceeds from and principal payments on long-term debt, and the issuance of common stock under the Company's employee stock option and employee stock purchase plans.
In 1998, the Company expects to spend approximately $22.0 million for capital expenditures, principally for the opening of new
bakery cafes. The Company expects to fund these expenditures substantially through internally generated cash flow.
On July 24, 1996, the Company issued $15 million senior subordinated debentures maturing in July, 2000. The debentures accrue interest at increasing fixed rates over the four year term, ranging between 11.25% and 14.0%. In connection with the private placement, warrants with an exercise price of $5.62 per share were issued to purchase between 400,000 and 580,000 shares of the Company's Class A common stock, depending on the term which the debentures remain outstanding and certain future events. The net proceeds of the financing were used to reduce the amount outstanding under the Company's bank revolving line of credit. With the Company's existing revolving line of credit, management believes it has the capital resources necessary to meet its growth goals through 1999.
The Company has a $28.0 million unsecured revolving line of credit which bears interest at either the commercial bank's prime rate or LIBOR plus 3.0%, at the Company's option. At December 27, 1997, $18.3 million was outstanding under the line of credit and an additional $1,200,000 of the remaining availability was utilized by outstanding letters of credit issued by the bank on behalf of the Company. The revolving line of credit matures on September 30, 1999.
On March 23, 1998 the Company sold the Mexico, MO production facility and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for approximately $13 million in cash. In conjunction with the sale, Au Bon Pain and Saint Louis Bread entered into five year supply agreements with Bunge for the supply of substantially all their frozen dough needs, excluding bagels, in their domestic bakery cafes. The Company expects the supply agreements will result in an improved operating margin of approximately .5% of total revenues, along with reduced interest expense. The net proceeds of the sale were used to reduce the $7.9 million outstanding for the Industrial Revenue Bond and $4.9 million for a permanent reduction to the revolving credit line. This reduction of the revolving credit line reduced the total commitment of the Banks in the Credit Agreement so that the amount available under the revolving credit line decreased to $23.1 million from $28 million (see Note 8). In addition, approximately $2 million of related receivables at December 27, 1997 will be used to further reduce debt. The Company expects to recognize a pre-tax loss on the sale of the facility of approximately $700,000 in the Company's results of operations for the first quarter of 1998. There were no gains or losses associated with the early retirement of the Industrial Revenue Bond or the partial repayment of the revolving credit line.
Assuming there is no significant change in the Company's business, the Company believes that the existing cash and cash equivalents as well as cash flows from operations will be sufficient to meet its working capital requirements for at least the next twelve months.
Certain Factors Affecting Future Operating Results
Statements made or incorporated in this Form 10-K include a number of 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. Forward-looking statements include, without limitation, statements containing the words "estimates," "projects," "anticipates," "believes," "expects," "intends," "future," and words of similar import which express management's belief, expectations or intentions regarding the Company's future performance. The forward-looking statements involve known and unknown risks and uncertainties. The Company's actual results could differ materially from those set forth in the forward-looking statements. The amount of cost to the Company under the new Supply Agreements is dependent upon market fluctuations in commodities prices, particularly flour and butter. Additionally, the Company's operating results may be affected by many factors, including but not limited to, variations in the number and timing of bakery cafe openings and public acceptance of new bakery cafes, competition and other factors that may affect retailers in general.
The Company has not completed its assessment of the impact of the Year 2000 issue. It is management's belief that the primary financial systems are Year 2000 compatible. Testing of those systems for compliance is expected to occur during 1998. Many secondary systems associated with the Company's retail operations will require modifications. It is the Company's belief that existing internal Company resources will be adequate to reprogram these Year 2000 modifications. It is expected that the most significant Year 2000 system issue for the Company is with POS systems used by the Au Bon Pain concept. The Company is in negotiations with several vendors to replace the existing POS systems with new state-of-the-art systems. The new systems are expected to be leased at a net incremental cost of approximately $400,000 annually. The incremental cost of the new system is expected to be substantially offset by labor efficiency savings associated with the new POS system.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB"), issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for annual periods beginning after December 15, 1997 and the Company will adopt its provisions in fiscal 1998. Reclassifications for earlier periods is required for comprehensive purposes. Management does not expect the statement to have an impact on its financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of Accounting standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the manner in which public companies report information about their operating segments. SFAS No 131 which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the geographic locations in which the entity holds assets and reports revenues. Management is currently evaluating the effects of this change on its reporting of segment information. The company will adopt SFAS No. 131 for its fiscal year ending December 26, 1998.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following described consolidated financial statements of the Company are included in response to this item:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 28, 1996 and December 27, 1997.
Consolidated Statements of Operations for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Stockholders' Equity for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Notes to Consolidated Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Au Bon Pain Co., Inc.:
We have audited the accompanying consolidated financial statements and the financial statement schedules of Au Bon Pain Co., Inc. as of December 27, 1997 and December 28, 1996, and for each of the three fiscal years in the period ended December 27, 1997. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Au Bon Pain Co., Inc. as of December 27, 1997 and December 28, 1996, and the consolidated results of its operations and cash flows for each of the three fiscal years in the period ended December 27, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included herein.
/s/ Coopers & Lybrand L.L.P. ----------------------------- Coopers & Lybrand L.L.P.
Boston, Massachusetts February 13, 1998, except for Note 17, as to which the date is March 23, 1998.
AU BON PAIN CO., INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share amounts)
for the fiscal years ended ---------------------------------- Dec. 30, Dec. 28, Dec. 27, 1995 1996 1997 -------- -------- --------
Revenues: Restaurant sales................ $216,411 $225,625 $233,212 Franchise sales and other revenues...................... 10,055 11,309 17,678 -------- -------- -------- 226,466 236,934 250,890
Costs and expenses: Cost of food and paper products. 77,250 85,631 90,385 Restaurant operating expenses: Labor......................... 57,860 60,266 63,593 Occupancy..................... 26,709 28,529 28,514 Other......................... 27,592 26,569 27,430 -------- -------- -------- 112,161 115,364 119,537 Depreciation and amortization... 14,879 16,195 16,861 General and administrative...... 12,818 14,979 16,418 Non-recurring charge (Note 6)... 8,500 4,435 - -------- -------- -------- 225,608 236,604 243,201 -------- -------- -------- Operating income.................. 858 330 7,689 Interest expense, net............. 3,363 5,140 7,204 Other expense, net (Notes 4, 12 and 15)......................... 2,016 2,513 212 Minority interest (income)........ (94) (40) (42) -------- -------- -------- Income (loss) before benefit from income taxes............... (4,427) (7,283) 315 Benefit from income taxes (Note 11)................. (2,813) (2,918) (1,492) -------- -------- -------- Net income (loss) ................ $ (1,614) $ (4,365) $ 1,807 ======== ======== ========
Net income (loss) per common share - basic $ (.14) $ (.37) $ .15 ======== ======== ======== Net income (loss) per common share - diluted $ (.14) $ (.37) $ .15 ======== ======== ======== Weighted average number of shares outstanding - basic.............. 11,621 11,705 11,766 ======== ======== ======== Weighted average number of shares outstanding - diluted............ 11,621 11,705 11,913 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
for the fiscal years ended ---------------------------------- Dec. 30, Dec. 28, Dec. 27, 1995 1996 1997 -------- -------- -------- Cash flows from operations: Net income (loss)................... $ (1,614) $ (4,365) $ 1,807 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..... 14,879 16,195 16,861 Amortization of deferred financing costs................. 77 308 619 Provision for losses on accounts receivable............. 73 44 49 Minority interest................. (94) (40) (42) Deferred income taxes............. (4,234) (430) (1,883) Non-recurring charge.............. 7,770 4,435 - Gain on sale of investment........ - - (930) Gain on sale of property and equipment....................... - - (986) Loss on disposal of property and equipment....................... 31 - 308 Changes in operating assets and liabilities: Accounts receivable............... 119 (1,178) (1,747) Inventories....................... (1,779) (1,221) (294) Prepaid expenses.................. (355) 343 1,514 Refundable income taxes........... 289 (1,423) 1,521 Accounts payable.................. (154) 820 (4,070) Accrued expenses.................. 771 1,287 769 -------- -------- -------- Net cash provided by operating activities.................... 15,779 14,775 13,496 -------- -------- --------
Cash flows from investing activities: Additions to property and equipment....................... (38,650) (17,062) (14,681) Proceeds from sale of property and equipment................... - - 6,044 Proceeds from sale of investment.. - - 2,000 Payments received on notes receivable...................... 59 82 139 Increase in intangible assets..... (50) (73) (122) Decrease (increase) in deposits and other....................... 1,450 (4,321) (1,058) Increase in notes receivable...... (951) (475) - -------- -------- -------- Net cash used in investing activities.................... (38,142) (21,849) (7,678) -------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements.
for the fiscal years ended --------------------------------- Dec. 30, Dec. 28, Dec. 27, 1995 1996 1997 -------- -------- --------
Cash flows from financing activities: Exercise of employee stock options......................... 241 184 168 Issuance of warrants.............. - 679 - Proceeds from long-term debt issuance........................ 115,418 87,561 57,530 Principal payments on long-term debt.................. (87,713) (83,958) (65,003) Proceeds from issuance of common stock.................... 346 320 243 Increase in deferred financing costs................. (152) (1,211) (189) Decrease in minority interest..... (349) (342) (293) -------- -------- -------- Net cash provided by (used in) financing activities...... 27,791 3,233 (7,544)
Net increase (decrease) in cash and cash equivalents................ 5,428 (3,841) (1,726) Cash and cash equivalents, at beginning of period................. 992 6,420 2,579 -------- -------- -------- Cash and cash equivalents, at end of period....................... $ 6,420 $ 2,579 $ 853 ======== ======== ========
Supplemental cash flow information: Cash paid during the period for: Interest..................... $ 4,097 $ 4,637 $ 6,602 Income taxes................. $ 1,543 $ 370 $ 700 Satisfaction of Notes Receivable in exchange for PP&E......... $ - $ 356 $ - Note received from sale of property and equipment.......... $ - $ - $ 2,591
The accompanying notes are an integral part of the consolidated financial statements.
AU BON PAIN CO., INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997 (in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
AU BON PAIN CO. INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
Au Bon Pain Co., Inc. and its subsidiaries operate two retail bakery cafe businesses and two franchising businesses under the concept names "Au Bon Pain" and "Saint Louis Bread Company". Certain Saint Louis Bread Company stores began operating under the name "Panera Bread" during 1997. Included in franchise sales and other revenues are sales of product to franchisees and others of $7.4 million, $8.3 million and $11.7 million for the fiscal years ended December 30, 1995, December 28, 1996 and December 27,1997, respectively. Included in costs and expenses are charges related to franchise sales of approximately $1.3 million, $1.9 million and $2.6 million for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997, respectively.
2. Summary of Accounting Policies
Principles of Consolidation
The consolidated statements include the accounts of Au Bon Pain Co., Inc., ABP Holdings, Inc., a wholly owned subsidiary, Saint Louis Bread Company, Inc. ("Saint Louis Bread"), a wholly owned subsidiary, ABP Midwest Manufacturing, a wholly owned subsidiary, and investments in joint ventures in which a majority interest is held (the "Company"). All intercompany balances and transactions have been eliminated.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items in the prior year financial statements have been reclassified to conform to current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity at the time of purchase of three months or less to be cash equivalents.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Upon retirement or sale, the cost of assets disposed of and their related accumulated depreciation are removed from the accounts. Any resulting gain or loss is credited or charged to operations. Maintenance and repairs are charged to expense when incurred, while betterments are capitalized. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the terms of the leases (including available option periods) or over their useful lives, whichever is shorter. The estimated useful lives used for financial statement purposes are:
Machinery and equipment................. 3-10 years Furniture and fixtures.................. 3-10 years Leasehold improvements.................. 10-23 years Signs................................... 10 years
Interest is capitalized in connection with the construction of new locations or facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest amounted to $792,000, $581,000 and $70,780 in 1995, 1996 and 1997 respectively.
Intangible Assets
Intangible assets consist of goodwill arising from the excess cost over the value of net assets of joint ventures, businesses and stores acquired, as well as the original acquisition of the Company. Goodwill is amortized on a straight-line basis over periods ranging from twenty-five to forty years. Periodically management assesses, based on undiscounted cash flows, if there has been a permanent impairment in the carrying value of its intangible assets and, if so, the amount of any such impairment, by comparing anticipated discounted future operating income from acquired businesses with the carrying value of the related intangibles. In performing this analysis, management considers such factors as current results, trends, future prospects and other economic factors.
Income Taxes
The provision for income taxes is determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred taxes are determined based on the difference between the financial statements and the tax bases of assets and liabilities using enacted income tax rates in effect in the years in which the differences are expected to reverse.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's temporary differences consist primarily of depreciation and amortization and reserves.
Deferred Financing Costs
Costs incurred in connection with obtaining debt financing are amortized over the terms of the related debt.
Franchise and Development Fees
Franchise fees are the result of sales of area development rights and the sale of individual franchise locations to third parties, both domestically and internationally. Fees from the sale of area development rights are 100% recognized as revenue upon completion of all commitments related to the agreements. Fees from the sale of individual franchise locations are 100% recognized as revenue upon the commencement of franchise operations.
Capitalization of Certain Development Costs
The Company capitalizes certain expenses associated with the development and construction of new store locations. Capitalized costs of $2.4 million and $2.7 million as of December 28, 1996 and December 27, 1997, respectively, are recorded as part of the asset to which they relate and are amortized over the asset's useful life.
Advertising Costs
Advertising costs are expensed when incurred.
Pre-Opening Costs
All pre-opening costs associated with the opening of new retail locations are expensed when incurred.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December. Fiscal years for the consolidated financial statements included herein include 52 weeks for the fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Income Per Share Data
Earnings per share is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect, if any, for common stock equivalents, including stock options, warrants and preferred stock. Statement of Financial Accounting Standards No. 128, "Earnings Per Share," requires dual presentation of basic and diluted EPS. SFAS 128 has been adopted in the Company's 1997 financial statements with comparable disclosures for the prior year.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
The carrying amount of the Company's long term debt, including current maturities, approximates fair value because the interest rates on these instruments change with market interest rates. The carrying amounts for accounts receivable and accounts payable approximate their fair values due to the short maturity of these instruments.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB"), issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for annual periods beginning after December 15, 1997 and the Company will adopt its provisions in fiscal 1998. Reclassifications for earlier periods is required for comprehensive purposes. Management does not expect the statement to have a material impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the manner in which public companies report information about their operating segments. SFAS No. 131 which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the geographic locations in which the entity holds assets and reports revenues. Management is currently evaluating the effects of this change on its reporting of segment information. The company will adopt SFAS No. 131 for its fiscal year ending December 26, 1998.
3. Inventories
Inventories consist of the following (in thousands):
December 28, December 27, 1996 1997 ------------ ------------ Production....................... $ 3,071 $ 3,389 Retail stores.................... 1,762 1,680 Paper goods...................... 456 392 Smallwares....................... 3,161 3,008 Other............................ 547 648 -------- -------- $ 8,997 $ 9,117 ======== ========
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Property and Equipment
Major classes of property and equipment consist of the following (in thousands):
December 28, December 27, 1996 1997 ------------ ------------ Leasehold improvements........... $ 91,161 $101,619 Machinery and equipment.......... 59,414 63,319 Furniture and fixtures........... 19,063 18,603 Construction in progress......... 19,585 1,083 Signage.......................... 3,634 3,515 -------- -------- 192,857 188,139 Less accumulated depreciation and amortization............... 71,124 75,907 -------- -------- Property and equipment, net...... $121,733 $112,232 ======== ========
In the fourth quarter of 1997 the Company sold its Woburn, MA office building for $4.9 million in cash, resulting in a gain of $660,000. The gain was recognized as a component of other expense, net.
In the third quarter of 1997, the Company sold a Saint Louis Bread cafe for $1.1 million in cash in conjunction with the execution of a franchise area development agreement, resulting in a pre-tax gain of $325,000. The gain was recognized as a component of other expense, net.
The Company recorded depreciation expense related to these assets of $13.4 million, $14.7 million and $15.4 million in 1995, 1996 and 1997, respectively.
5. Notes Receivable
Notes receivable relate to the sale of certain retail locations and to the funding for the opening of new locations of a franchisee. In the third quarter of fiscal 1997 the Company franchised 11 of its existing ABP stores in the Philadelphia market to ABP Delaware Valley LLC. As part of the sale the Company received a note receivable in the amount of $2.6 million which bears interest at the rate of 8.25% per annum. There was no gain or loss recognized on the transaction. The note requires monthly principal and interest payments of $28,765 commencing in November 1997 which reflect an interest rate of 6.00%. The difference of 2.25% interest shall accrue with respect to the outstanding principal amount of this note. Commencing November 4, 1999, ABP Delaware Valley LLC will make the scheduled payment plus any accrued interest until it is paid in full. The note matures August 11, 2007.
In addition, the Company holds five additional notes receivable with two other franchisees with an outstanding principal balance of $2.2 million at December 27, 1997. These notes bear interest at between 8.00% and 9.25%. Two of these notes require monthly payments while the remaining three notes require payments of interest with a balloon payment of $1.4 million due in 2004. The notes mature between 2003 and 2004.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Non-recurring Charges
During the third quarter of fiscal 1996, the Company recorded a non-recurring charge of $4.4 million principally to reflect a write-down under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of". SFAS 121, adopted at the beginning of fiscal year 1996, establishes accounting standards for recognizing and measuring the impairment of long-lived assets and requires reducing the carrying amount of any impaired asset to fair value. The charge was taken as a result of continued less than expected performance results at certain Au Bon Pain restaurants. The $4.4 million non-cash charge included a $1.4 million goodwill write-down, a $0.6 million fixed asset write-down and a $1.4 million write-down of an office building held for resale. The charge represented a reduction of the carrying amounts of the assets to their estimated fair values as determined by using discounted estimated future cash flows. In addition, the $4.4 million charge included a $1.0 million charge to write-down the book value of six restaurants whose leases expired in 1997 and which were not renewed. For the fifty-two weeks ended December 28, 1996 and December 27, 1997 the restaurants included in the reserve had sales of $3,096,000 and $1,559,000, respectively and a pre-tax loss of $578,000 and $313,000, respectively.
During the third quarter of fiscal 1995, the Company recorded a non-recurring pre-tax charge of $8.5 million principally to cover the expected costs of closing certain under-performing restaurants. The components of the non-recurring charge included cash costs of approximately $2.1 million for lease obligations, professional and consulting services, employee relocation and termination costs and non-cash charges of approximately $6.4 million related to fixed asset disposals. The store closures were completed in fiscal 1996 for a total cost of approximately $221,000. For the fifty-two weeks ended December 28, 1996 and December 27, 1997 the stores included in the reserve had sales of $4,247,000 and $0, respectively and a pre-tax loss of $946,000 and $209,000, respectively.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 28, December 27, 1996 1997 ------------ ------------ Accrued insurance.................... $ 1,310 $ 1,384 Rent................................. 3,503 3,799 Payroll and related taxes............ 2,554 2,182 Interest............................. 1,319 1,390 Other................................ 4,649 $ 5,162 ------- ------- $13,335 $13,917 ======= =======
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-term Debt
Long-term debt consists of the following (in thousands):
December 28, December 27, 1996 1997 ------------ ------------ Revolving credit line at prime + .5% (9.00% at December 27, 1997)......... $22,000 $18,326 Term loan - variable rate................ 3,533 - Industrial development bond for Mexico, Missouri plant at weekly floating rate (4.25% at December 27, 1997)................... 8,300 7,900 Loan with Cigna Insurance at prime less .75% (7.75% at December 27, 1997)..... 2,000 2,000 Term loan at 7.0% payable in annual installments of $50,000 including interest, due January 2001................................. 205 169 Senior Subordinated Debenture (13.00% at December 27, 1997)................ 14,400 14,570 ------- ------- Total debt............................. 50,438 42,965 Less current maturities................ 702 438 ------- ------- Total long-term debt................... $49,736 $42,527 ======= =======
As of both December 28, 1996 and December 27, 1997, the Company had a $28 million unsecured revolving line of credit. The revolving credit agreement contains restrictions relating to future indebtedness, liens, investments, distributions, the merger, acquisition or sale of assets and certain leasing transactions. The agreement also requires the maintenance of certain financial ratios and covenants, the most restrictive being a debt to net worth ratio. There is a fee of 3/8% of the unused portion of the revolving line of credit. Available unused borrowings totaled approximately $5.1 million at December 28, 1996 and $8.5 million at December 27, 1997. At December 28, 1996 and December 27, 1997 the Company had outstanding letters of credit against the revolving line of credit aggregating $0.9 million and $1.2 million, respectively. Interest is calculated on the $3.5 million term loan at the lower of prime plus .5% or LIBOR plus an amount ranging from 1.25% to 3.0% depending on certain financial tests. Interest-only payments are due under the revolving credit line monthly, in arrears, with principal balance payable at maturity September 30, 1999.
In March 1995, the Company signed a note for the purpose of purchasing a building in Woburn, MA. The Company had originally planned to move their corporate offices to this location. Principal and interest on the note were paid quarterly, with interest being calculated based on the applicable Eurodollar rate plus .75%. Under the term loan, the Company had the right, at its election, to repay the outstanding amount as a whole or in part, at any time without penalty or premium. The Company sold the building in December of 1997 and retired the note which had a balance of $3.2 million.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July, 1995 the Company obtained an industrial development bond issued by the City of Mexico, Missouri, secured by a $8.7 million letter of credit with a commercial bank. The bond matures in July, 2000 and interest is payable monthly at a weekly floating rate, which was 4.25% on December 27, 1997.
On July 24, 1996, the Company issued $15 million senior subordinated debentures maturing in July, 2000. The debentures accrue interest at varying fixed rates over the four year term, ranging from 11.25% to 14.0%. In connection with the private placement, warrants with an exercise price of $5.62 per share were issued to purchase between 400,000 and 580,000 shares of the Company's Class A Common Stock, depending on the term which the debentures remain outstanding and certain future events. At December 27, 1997, 400,000 warrants were issued and outstanding, all of which were vested.
The Company has recognized interest expense of $3.4 million, $5.1 million and $7.2 million as of December 30, 1995, December 28, 1996, and December 27, 1997, respectively.
Maturities of debt outstanding at December 27, 1997 are as follows (in thousands):
1998........................... $ 438 1999........................... 20,867 2000........................... 15,013 2001........................... 447 2002........................... 500 Thereafter..................... 5,700 ------- $42,965 =======
9. Convertible Subordinated Notes
In December 1993, the Company issued $30.0 million of its unsecured 4.75% Convertible Subordinated Notes due 2001 ("1993 Notes"). The 1993 Notes are convertible at the holders' option into shares of the Company's Class A Common Stock at $25.50 per share. In December 1997, the Company could have, at its option, redeemed all or a part of the outstanding 1993 Notes upon payment of a premium. The Company did not redeem all or part of the outstanding notes. The note agreement requires the Company to maintain minimum permanent capital, as therein defined.
10. Commitments
The Company is obligated under noncancelable operating leases for a production facility, a commissary and retail stores. Lease terms are generally for ten years with renewal options at certain locations and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area and other operating costs. Substantially all store leases provide for contingent rental payments based on sales in excess of specified amounts.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate minimum requirements under these leases are, as of December 27, 1997, approximately as follows (in thousands):
1998........................... $ 20,047 1999........................... 18,473 2000........................... 17,217 2001........................... 15,010 2002........................... 12,914 Thereafter..................... 40,907 -------- $124,568 ========
Rental expense under long-term leases was approximately $22.3 million, $29.3 million and $24.5 million in 1995, 1996 and 1997, respectively, which included contingent rentals of approximately $2.9 million, $3.0 million and $3.0 million, respectively.
11. Income Taxes Payable
The benefit from income taxes in the consolidated statements of operations is comprised of the following (in thousands):
December 30, December 28, December 27, 1995 1996 1997 ------------ ------------ ------------ Current: Federal............... $ 1,202 $(1,650) $ 259 State................. 219 (838) 132 ------- ------- ------- 1,421 (2,488) 391 ------- ------- -------
Deferred: Federal............... (3,597) (365) (1,433) State................. (637) (65) (450) ------- ------- ------- (4,234) (430) (1,883) ------- ------- ------- Total benefit from income taxes.......... $(2,813) $(2,918) $(1,492) ======= ======= =======
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1995 1996 1997 ------ ------ ------ Statutory rate (benefit)........... (34.0)% (34.0)% 34.0% State income taxes, net of federal tax benefit.............. (4.0) 2.2 (432.8) Utilization of tax credits......... (2.8) - - Charitable contributions........... (4.0) (3.7) (89.9) Company-owned Life Insurance (See Note 12)...................... (28.8) (15.4) (451.0) Non-deductible goodwill and meals and entertainment................ 5.7 9.1 51.0 Other, net......................... 4.3 1.8 (.4) Change in valuation allowance...... - - 415.4 ----- ----- ------ (63.6)% (40.0)% (473.7)% ===== ===== ======
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of the significant temporary differences which comprise the deferred tax assets are as follows (in thousands):
1996 1997 -------- ------ Current assets: Receivables Reserve............. $ 42 $ 56 Accrued Expenses................ 368 544 Other reserves................... 78 - ----- ------ 488 600 Non-current assets/liabilities: Property, plant and equipment.... 799 443 Accrued expenses................. 1,073 1,135 Goodwill......................... (1,325) (1,648) Tax credit carried forward....... 2,862 3,368 Net operating loss carried forward........................ 1,363 4,484 Charitable contribution carried forward ....................... 219 296 Other reserves................... - (8) ------ ------ 4,991 8,070
Total Deferred Tax Asset....... 5,479 8,670 Valuation Allowance............ - (1,308) ------ ------ Total net deferred tax asset....... $5,479 $7,362 ====== ======
A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The valuation allowance is primarily attributable to the potential expiration of charitable contribution deduction carryforwards and certain state net operating loss carryforwards. The Company estimates that after filing its federal income tax returns for the year ended December 27, 1997, it will have net operating losses of $5,844,000 which can be carried forward from thirteen to fifteen years to offset Federal taxable income. The Company also estimates that after filing its state income tax returns for the year ended December 27, 1997 it will have state net operating losses of $13,142,000 which can be carried forward from three to five years and $20,693,000 which can be carried forward from thirteen to fifteen years to offset state taxable income. The Company has Federal jobs tax credit carryforwards of approximately $594,000 which expire in twelve to thirteen years. In addition, the Company has Federal alternative minimum tax credit carryforwards of approximately $2,499,000 which are available to reduce future regular Federal income taxes over an indefinite period. The Company reevaluates the positive and negative evidence impacting the realizability of its deferred income tax assets on an annual basis.
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Deposits and Other
During fiscal 1997, the Company established a $4.3 million deposit with its distributor. This financial arrangement allows the Company to receive lower distribution costs. The savings exceed the carrying value of the deposit. The deposit is flexible and the Company may at times decrease the amount on deposit, at its discretion.
In the third quarter of 1997, the Company sold its interest in Peet's Coffee and Teas, Incorporated back to Peet's for $2 million in cash, resulting in a pre-tax gain of $930,000. The gain was recognized as a component of other expense, net.
During fiscal year 1994, the Company established a company-owned life insurance program ("COLI") covering a substantial portion of its employees. At December 27, 1997, the cash surrender value and prepaid premiums of $75.9 million and the insurance policy loans of $74.8 million were netted and included in other assets on the consolidated balance sheet. The loans are collateralized by the cash values of the underlying life insurance policies and require interest payments at a rate of 10.3%. Tax law changes adopted as part of the Health Insurance Portability and Accountability Act significantly reduced the level of tax benefits recognized under the Company's COLI program in the third quarter of 1996. The Company included $.5 million of expenses in other (income) expense, net, relating to COLI in 1997.
13. Stockholders' Equity
Class B Preferred Stock
In April 1994, the Company issued 20,000 shares of Class B Preferred Stock (Series 1) as part of the ABP Midwest acquisition. In 1997 these shares were converted to Class A Common Stock.
Common Stock
Each share of Class B Common Stock has the same dividend and liquidation rights as each share of Class A Common Stock. The holders of Class B Common Stock are entitled to three votes for each share owned. The holders of Class A Common Stock are entitled to one vote for each share owned. Each share of Class B Common Stock is convertible, at the shareholder's option, into Class A Common Stock on a one-for-one basis. The Company had reserved at December 27, 1997, 7,589,719 shares of its Class A Common Stock for issuance upon conversion of Class B Common Stock and exercise of awards granted under the Company's 1992 Equity Incentive Plan, Formula Stock Option Plan for Independent Directors and conversion of the 1993 Notes (see Note 9).
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Registration Rights
Certain holders of Class A and Class B Common Stock, pursuant to stock subscription agreements, can require the Company, under certain circumstances, to register their shares under the Securities Act of 1933 or have included in certain registrations all or part of such shares, at the Company's expense.
1992 Equity Incentive Plan
In May 1992, the Company adopted its Equity Incentive Plan ("Equity Plan") to replace its Non-Qualified Incentive Stock Option Plan. Under the Equity Plan, a total of 950,000 shares of Class A Common Stock was initially reserved for awards under the Equity Plan. The Equity Plan was amended by the Board of Directors and the stockholders in May 1994 and June 1997 to increase the number of shares available thereunder from 950,000 to 2,500,000, and from 2,500,000 to 4,300,000 respectively. Awards under the Equity Plan can be in the form of stock options (both qualified and non-qualified), stock appreciation rights, performance shares, restricted stock or stock units.
Activity under the Equity Plan and its predecessor is summarized below:
Weighted Average Shares Exercise Price ---------- ---------------- Outstanding at December 31, 1994 1,407,313 $18.50 Granted....................... 1,543,052 $ 7.47 Exercised..................... (45,425) $ 5.30 Canceled...................... (1,473,503) $17.88 ---------- ------ Outstanding at December 30, 1995 1,431,437 $ 7.32 Granted....................... 742,345 $ 7.67 Exercised..................... (30,200) $ 4.87 Canceled...................... (211,548) $ 7.92 ---------- ------ Outstanding at December 28, 1996 1,932,034 $ 7.42 Granted....................... 1,226,169 $ 7.49 Exercised..................... (23,148) $ 6.56 Canceled...................... (143,537) $ 8.05 ---------- ------ Outstanding at December 27, 1997 2,991,518 $ 7.44 ========== ======
Options vest over a five year period and must be exercised within ten years from the date of the grant. Of the options at December 27, 1997, 1,168,134 were vested and exercisable.
Formula Stock Option Plan for Independent Directors
On January 27, 1994, the Company's Board of Directors authorized the Formula Stock Option Plan for Independent Directors, as defined in the agreement. This plan authorized a one-time grant of an option to purchase 10,000 shares of the Company's Class A Common Stock at its closing price on January 26, 1994. The plan also allows for independent
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
directors elected after that time to receive a similar option at the closing price for the day immediately preceding the individual's election to the board.
Each independent director who is first elected as such after the effective date of the Directors' Plan shall receive, as of the date he or she is so elected, a one-time grant of an option to purchase 5,000 shares of Class A Common Stock at a price per share equal to the closing price of the Class A Common Stock as reported by the NASDAQ/National Market System for the trading day immediately preceding the date of the person's election to the board.
In addition, all independent directors serving in such capacity as of the last day of each fiscal year commencing with the fiscal year ending December 31, 1994 receive an option to purchase 5,000 shares of Class A Common Stock at the closing price for the prior day.
Each option granted is fully vested at the grant date, and is exercisable, either in whole or in part, for 10 years following the grant date. The Company has granted 113,248 options under this plan as of December 27, 1997.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", which is effective for the Company's financial statements for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to either account for stock-based compensation under the new provisions of SFAS 123 or under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", but requires pro-forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. The Company has elected the disclosure-only alternative and, accordingly, no compensation costs have been recognized for the stock option plans. Had compensation costs for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1995 and 1996 consistent with the provisions of SFAS 123, the Company's net income (loss) for the years ended December 28, 1996 and December 27, 1997 would have been increased to the pro forma amounts indicated below:
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of applying SFAS 123 in this pro-forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated.
The fair value of the options granted during 1995, 1996 and 1997 is $3.20 per share, $3.46 per share and $3.69 per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility of 35% in 1995 and 1996 and 40% in 1997, risk-free interest rate of 6.14% in 1995, 5.99% in 1996 and 6.38% in 1997, and an expected life of 6 years.
The following table summarizes information concerning currently outstanding and exercisable options:
Options Options Outstanding Exercisable -------------------------------- ---------------------- Weighted Average Range of Remaining Weighted Weighted Exercise Number Contractual Average Number Average Price Outstanding Life Price Exercisable Price - ------------ ----------- ----------- -------- ----------- -------- $ 4.50- 6.75 259,013 6.13 $ 6.16 141,780 $ 6.04 $ 6.75-10.13 2,711,240 8.20 $ 7.51 1,020,003 $ 7.32 $10.13-15.19 20,089 8.36 $13.07 5,812 $12.91 $15.19-21.25 1,176 6.92 $21.25 539 $23.16 --------- ---- ------ --------- ------ 2,991,518 7.93 $ 7.44 1,168,134 $ 7.20
1992 Employee Stock Purchase Plan
In May 1992, the Company adopted its 1992 Employee Stock Purchase Plan ("1992 Purchase Plan") to replace its Employee Stock Purchase Plan. The 1992 Purchase Plan was amended in June 1997 by the Board of Directors and Stockholders to increase the number of shares of Class A Common Stock reserved for issuance from 150,000 to 350,000. The 1992 Purchase Plan gives eligible employees the option to purchase Class A Common Stock (total purchases in a year may not exceed 10% of an employee's prior year compensation) at 85% of the fair market value of the Class A Common Stock at the date of purchase.
14. Employee Benefit Plans
Employee Savings Plan
The Au Bon Pain Employee 401(k) Plan ("Savings Plan") was adopted by the Company in 1991 under Section 401(k) of the Internal Revenue Code of 1986, as amended. All employees of the Company, including executive officers, are eligible to participate in the Savings Plan. A participating employee may elect to defer on a pre-tax basis up to 15% of his or her salary. This amount is contributed to the Savings Plan. All amounts vest immediately and are invested in various funds as directed by the participant. The full amount in a participant's account will be distributed to a participant upon termination of employment, retirement,
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
disability or death. The Company does not currently contribute to the Savings Plan.
The Saint Louis Bread Company Employee 401(k) Plan ("Saint Louis Bread Savings Plan") adopted by the former Saint Louis Bread Company in 1993 under Section 401(k) of the Internal Revenue Code of 1986, as amended. In 1997 the "Saint Louis Bread Savings Plan" was merged into the Au Bon Pain "Savings Plan". Plan participants of the "Saint Louis Bread Savings Plan" retained the matching contributions made through 1996 with a vesting schedule of seven years. There has been no further matching as of December 27, 1997.
15. Litigation Settlement
During the third quarter of 1997, the Company entered into a definitive agreement to settle a lawsuit filed by a former vendor of the Company. The Company recognized a charge of $675,000 in the third quarter of 1997 as a component of other expense(income), net, to cover the settlement and other expenses incurred in connection therewith.
16. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
For the fiscal years ended --------------------------------------- Dec. 30, Dec. 28, Dec. 27, 1995 1996 1997 -------- -------- --------
Net income (loss) used in net income (loss) per common share - basic $ (1,614) $ (4,365) $ 1,807 Net income (loss) used in net income (loss) per common share - diluted $ (1,614) $ (4,365) $ 1,807
Weighted average number of shares outstanding - basic 11,621 11,705 11,766 Effect of dilutive securities: Employee stock options -- -- 42 Stock warrants -- -- 105 -------- -------- -------- Weighted average number of shares outstanding - diluted 11,621 11,705 11,913 Net income (loss) per common share - basic $ (0.14) $ (0.37) $ 0.15 Net income (loss) per common share - diluted $ (0.14) $ (0.37) $ 0.15
During 1995, 1996 and 1997, options to purchase 1,176,000 shares of common stock at $25.50 per share were outstanding in conjunction with the
AU BON PAIN CO., INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issuance of $30 million of convertible subordinated notes (see Note 9). These shares were not included in the computation of diluted earnings per share for the fiscal years ended December 30, 1995, December 28, 1996 or December 27, 1997 because the addition of interest expense, after the effect of income taxes, of $855,000 to net income (loss) would have been antidilutive.
During 1995 and 1996, options to purchase 422,080 and 248,450 shares of common stock at an average price of $6.69 and $5.77 per share, respectively, and warrants to purchase 0 and 96,000 shares of common stock at $5.62 per share were outstanding but were not included in the computation of diluted earnings per share for the fiscal years ended December 30, 1995 or December 28, 1996 because the effect would have been antidilutive.
17. Subsequent Event
On March 23, 1998 the Company sold the Mexico, MO production facility and its wholesale frozen dough business to Bunge Foods Corporation ("Bunge") for approximately $13 million in cash. In conjunction with the sale, Au Bon Pain and Saint Louis Bread entered into five year supply agreements with Bunge for the supply of substantially all their frozen dough needs, excluding bagels, in their domestic bakery cafes. The Company expects the supply agreements will result in an improved operating margin of approximately .5% of total revenues, along with reduced interest expense. The net proceeds of the sale were used to reduce the $7.9 million outstanding for the Industrial Revenue Bond and $4.9 million for a permanent reduction to the revolving credit line. This reduction of the revolving credit line reduced the total commitment of the Banks in the Credit Agreement so that the amount available under the revolving credit line decreased to $23.1 million from $28 million (see Note 8). In addition, approximately $2 million of related receivables at December 27, 1997 will be used to further reduce debt. The Company expects to recognize a pre-tax loss on the sale of the facility of approximately $700,000 in the Company's results of operations for the first quarter of 1998. There were no gains or losses associated with the early retirement of the Industrial Revenue Bond or the partial repayment of the revolving credit line.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Information required by Part III (Items 10 through 13) is incorporated by reference to the Company's definitive proxy statement for its 1998 annual meeting of stockholders which will be filed with the Securities and Exchange Commission on or before April 27, 1998. If for any reason such a statement is not filed within such period, this Report will be appropriately amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following described consolidated financial statements of the Company are included in this report:
Report of Independent Accountants.
Consolidated Balance Sheets at December 28, 1996 and December 27, 1997.
Consolidated Statements of Operations for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Stockholders' Equity for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENTS SCHEDULE. -----------------------------
The following financial statement schedule for the Company is filed herewith:
Schedule II - Valuations and Qualifying Accounts.
Schedule II
AU BON PAIN CO., INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
================================================================================ Balance at Balance beginning at end Description: of period Additions Deductions of period - -------------------------------------------------------------------------------- Allowance for Doubtful Accounts
Fiscal Year ended Dec. 30, 1995 $ 76 $ 73 $89 $ 60 Fiscal Year ended Dec. 28, 1996 $ 60 $ 69 $25 $ 104 Fiscal Year ended Dec. 27, 1997 $104 $ 49 $19 $ 134
Valuation Allowance
Fiscal Year ended Dec. 27, 1997 $ 0 $1,308 $ 0 $1,308
All other schedules are omitted because not applicable or not required by Regulation S-X.
3. EXHIBITS. --------
Exhibit NUMBER DESCRIPTION - ------- ----------- 2.1 Asset Purchase Agreement by and among Au Bon Pain Co., Inc., ABP Midwest Manufacturing Co., Inc. and Bunge Foods Corporation dated as of February 11, 1998; Amendment to Asset Purchase Agreement, dated as of March 23, 1998.*
3.1 Certificate of Incorporation of Registrant, as amended to June 2, 1991. Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.1 Certificate of Amendment to Certificate of Incorporation, dated and filed June 3, 1991. Incorporated by reference to Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.2 Certificate of Amendment to the Certificate of Incorporation filed on June 2, 1994. Incorporated by reference to Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.3 Certificate of Designations, Preferences and Rights of the Class B Preferred Stock (Series 1), filed November 30, 1994. Incorporated by reference to Exhibit 3.1.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.2 Bylaws of Registrant, as amended to date. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 3.2.
4.1.1 Amended and Restated Revolving Credit Agreement dated as of February 13, 1998 among the Issuer, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., BankBoston, N.A., USTrust and BankBoston N.A. as Agent.*
4.1.2 Amended and Restated Revolving Credit Note dated as of February 13, 1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing Co., Inc. in favor of BankBoston, N.A.*
4.1.3 Amended and Restated Revolving Credit Note dated as of February 13, 1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing Co., Inc. in favor of USTrust.*
4.2 Form of 4.75% Convertible Subordinated Note due 2001. Incorporated by reference to Registrant's Form 8-K filed December 22, 1993, Exhibit 4.
4.3.1 Investment Agreement dated as of July 24, 1996 by and between Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 4.3.1 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.2 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,600,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation. Incorporated by reference to Exhibit 4.3.2 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.3 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $7,500,000 to Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 4.3.3 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.4 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,900,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation II. Incorporated by reference to Exhibit 4.3.4 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.1 Distribution Service Agreement between the Registrant and the SYGMA Network, Inc., dated December 2, 1994. Incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.2 Lease from Economic Development and Industrial Corporation to the Registrant, dated December 14, 1982, as amended August 1, 1984 and July 1, 1985. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.8.
10.3.1 Registrant's Non-Qualified Stock Option Plan For Employees and forms of option agreements thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.10.
10.3.2 Registrant's 1992 Equity Incentive Plan and form of non-qualified option agreement thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.13.
10.3.3 Registrant's 1992 Employee Stock Purchase Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.3.4 Registrant's Formula Stock Option Plan for Independent Directors and form of option agreement thereunder, as amended. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.4 Amended and Restated Coffee Supply Agreement by and among Registrant and Peet's Companies, Inc., Peet's Coffee and Tea, Inc., and Peet's Trademark Company, dated as of the 26th day of October, 1994. Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.5 Indenture of Trust dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and Mark Twain Bank, as Trustee. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.5.1 Loan Agreement dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and ABP Midwest Manufacturing Co., Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.5.2 Promissory Note issued by ABP Midwest Manufacturing Co., Inc. in the face amount of $8,741,370. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.6.1 Employment Agreement between the Registrant and Richard Postle. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.+
10.6.2 Employment Agreement between the Registrant and Robert Taft. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.6.3 Employment Agreement between the Registrant and Maxwell Abbott. Incorporated by reference to Exhibit 10.6.3 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.6.4 Employment Letter between the Registrant and Samuel Yong. Incorporated by reference to Exhibit 10.6.4 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.7.1 Form of Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 10.7.1 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.2 Form of Contingent Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II and Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 10.7.2 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.3 Form of Stock Purchase Warrant from Au Bon Pain Co, Inc. to Princes Gate Investors, L.P., Acorn Partnership I L.P., PG Investments Limited, PGI Sweden AB and Gregor Von Open. Incorporated by reference to Exhibit 10.7.3 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.4 Registration Rights Agreement dated as of July 24, 1996 among Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, Gregor Von Open and Au Bon Pain Co., Inc., Incorporated by reference to Exhibit 10.7.4 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.8.4 Form of Rights Agreement, dated as of October 21, 1996 between the Registrant and State Street Bank and Trust Company. Incorporated by reference to the Registrant's Registration Statement on Form 8-A (File No. 000-19253).
10.9 Bakery Product Supply Agreement by and between Bunge Foods Corporation and Saint Louis Bread Company, Inc. dated as of March 23, 1998.*
10.10 Bakery Product Supply Agreement by and between Bunge Foods Corporation and Au Bon Pain Co., Inc. dated as of March 23, 1998.*
21 Registrant's Subsidiaries. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
23.1 Consent of Coopers & Lybrand L.L.P.*
27 Financial Data Schedule.*
- -------------------------- * Filed herewith. + Management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(b) Reports on Form 8-K.
During the last quarter of the fiscal year covered by this report, the Company filed no report on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AU BON PAIN CO., INC.
By: /S/ LOUIS I. KANE --------------------------------------------- Louis I. Kane Co-Chairman
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - --------- ----- ----
/S/ LOUIS I. KANE Co-Chairman March 25, 1998 - -------------------------- Louis I. Kane
/S/ RONALD M. SHAICH Co-Chairman and March 25, 1998 - -------------------------- Principal Executive Ronald M. Shaich Officer
/S/ FRANCIS W. HATCH Director March 25, 1998 - -------------------------- Francis W. Hatch
/s/ GEORGE E. KANE Director March 27, 1998 - -------------------------- George E. Kane
Director _________________ - -------------------------- James R. McManus
/S/ HENRY J. NASELLA Director March 25, 1998 - -------------------------- Henry J. Nasella
/S/ JOSEPH P. SHAICH Director March 25, 1998 - -------------------------- Joseph P. Shaich
/S/ ANTHONY J. CARROLL Senior Vice President, March 25, 1998 - --------------------------- Treasurer and Principal Anthony J. Carroll Accounting Officer
Exhibit Index
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following described consolidated financial statements of the Company are included in this report:
Report of Independent Accountants.
Consolidated Balance Sheets at December 28, 1996 and December 27, 1997.
Consolidated Statements of Operations for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Consolidated Statements of Stockholders' Equity for the years ended December 30, 1995, December 28, 1996 and December 27, 1997.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENTS SCHEDULE. -----------------------------
The following financial statement schedule for the Company is filed herewith:
Schedule II - Valuations and Qualifying Accounts.
Schedule II
AU BON PAIN CO., INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
================================================================================ Balance at Balance beginning at end Description: of period Additions Deductions of period - -------------------------------------------------------------------------------- Allowance for Doubtful Accounts
Fiscal Year ended Dec. 30, 1995 $ 76 $ 73 $89 $ 60 Fiscal Year ended Dec. 28, 1996 $ 60 $ 69 $25 $ 104 Fiscal Year ended Dec. 27, 1997 $104 $ 49 $19 $ 134
Valuation Allowance
Fiscal Year ended Dec. 27, 1997 $ 0 $1,308 $ 0 $1,308
All other schedules are omitted because not applicable or not required by Regulation S-X.
3. EXHIBITS. --------
Exhibit NUMBER DESCRIPTION - ------- ----------- 2.1 Asset Purchase Agreement by and among Au Bon Pain Co., Inc., ABP Midwest Manufacturing Co., Inc. and Bunge Foods Corporation dated as of February 11, 1998; Amendment to Asset Purchase Agreement, dated as of March 23, 1998.*
3.1 Certificate of Incorporation of Registrant, as amended to June 2, 1991. Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.1 Certificate of Amendment to Certificate of Incorporation, dated and filed June 3, 1991. Incorporated by reference to Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.2 Certificate of Amendment to the Certificate of Incorporation filed on June 2, 1994. Incorporated by reference to Exhibit 3.1.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1.3 Certificate of Designations, Preferences and Rights of the Class B Preferred Stock (Series 1), filed November 30, 1994. Incorporated by reference to Exhibit 3.1.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.2 Bylaws of Registrant, as amended to date. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 3.2.
4.1.1 Amended and Restated Revolving Credit Agreement dated as of February 13, 1998 among the Issuer, Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., BankBoston, N.A., USTrust and BankBoston N.A. as Agent.*
4.1.2 Amended and Restated Revolving Credit Note dated as of February 13, 1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing Co., Inc. in favor of BankBoston, N.A.*
4.1.3 Amended and Restated Revolving Credit Note dated as of February 13, 1998 of the Issuer, Saint Louis Bread Company, Inc. and ABP Midwest Manufacturing Co., Inc. in favor of USTrust.*
4.2 Form of 4.75% Convertible Subordinated Note due 2001. Incorporated by reference to Registrant's Form 8-K filed December 22, 1993, Exhibit 4.
4.3.1 Investment Agreement dated as of July 24, 1996 by and between Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., ABP Midwest Manufacturing Co., Inc., Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 4.3.1 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.2 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,600,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation. Incorporated by reference to Exhibit 4.3.2 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.3 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $7,500,000 to Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 4.3.3 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
4.3.4 Senior Subordinated Debenture dated as of July 24, 1996 in the amount of $3,900,000 from Au Bon Pain Co., Inc., Saint Louis Bread Company, Inc., and ABP Midwest Manufacturing Co., Inc. payable to Allied Capital Corporation II. Incorporated by reference to Exhibit 4.3.4 of Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.1 Distribution Service Agreement between the Registrant and the SYGMA Network, Inc., dated December 2, 1994. Incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.2 Lease from Economic Development and Industrial Corporation to the Registrant, dated December 14, 1982, as amended August 1, 1984 and July 1, 1985. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.8.
10.3.1 Registrant's Non-Qualified Stock Option Plan For Employees and forms of option agreements thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.10.
10.3.2 Registrant's 1992 Equity Incentive Plan and form of non-qualified option agreement thereunder. Incorporated by reference to Registrant's registration statement on Form S-1 (File No. 33-40153), Exhibit 10.13.
10.3.3 Registrant's 1992 Employee Stock Purchase Plan. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.3.4 Registrant's Formula Stock Option Plan for Independent Directors and form of option agreement thereunder, as amended. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.4 Amended and Restated Coffee Supply Agreement by and among Registrant and Peet's Companies, Inc., Peet's Coffee and Tea, Inc., and Peet's Trademark Company, dated as of the 26th day of October, 1994. Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.5 Indenture of Trust dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and Mark Twain Bank, as Trustee. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.5.1 Loan Agreement dated as of July 1, 1995 by and between the Industrial Development Authority of the City of Mexico, Missouri and ABP Midwest Manufacturing Co., Inc. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.5.2 Promissory Note issued by ABP Midwest Manufacturing Co., Inc. in the face amount of $8,741,370. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.
10.6.1 Employment Agreement between the Registrant and Richard Postle. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995.+
10.6.2 Employment Agreement between the Registrant and Robert Taft. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.6.3 Employment Agreement between the Registrant and Maxwell Abbott. Incorporated by reference to Exhibit 10.6.3 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.6.4 Employment Letter between the Registrant and Samuel Yong. Incorporated by reference to Exhibit 10.6.4 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.+
10.7.1 Form of Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II, and Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 10.7.1 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.2 Form of Contingent Stock Purchase Warrant from Au Bon Pain Co., Inc. to Allied Capital Corporation, Allied Capital Corporation II and Capital Trust Investments, Ltd. Incorporated by reference to Exhibit 10.7.2 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.3 Form of Stock Purchase Warrant from Au Bon Pain Co, Inc. to Princes Gate Investors, L.P., Acorn Partnership I L.P., PG Investments Limited, PGI Sweden AB and Gregor Von Open. Incorporated by reference to Exhibit 10.7.3 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.7.4 Registration Rights Agreement dated as of July 24, 1996 among Allied Capital Corporation, Allied Capital Corporation II, Capital Trust Investments, Ltd., Princes Gate Investors, L.P., Acorn Partnership I, L.P., PGI Investments Limited, PGI Sweden AB, Gregor Von Open and Au Bon Pain Co., Inc., Incorporated by reference to Exhibit 10.7.4 of the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
10.8.4 Form of Rights Agreement, dated as of October 21, 1996 between the Registrant and State Street Bank and Trust Company. Incorporated by reference to the Registrant's Registration Statement on Form 8-A (File No. 000-19253).
10.9 Bakery Product Supply Agreement by and between Bunge Foods Corporation and Saint Louis Bread Company, Inc. dated as of March 23, 1998.*
10.10 Bakery Product Supply Agreement by and between Bunge Foods Corporation and Au Bon Pain Co., Inc. dated as of March 23, 1998.*
21 Registrant's Subsidiaries. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1996.
23.1 Consent of Coopers & Lybrand L.L.P.*
27 Financial Data Schedule.*
- -------------------------- * Filed herewith. + Management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c).
(b) Reports on Form 8-K.
During the last quarter of the fiscal year covered by this report, the Company filed no report on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AU BON PAIN CO., INC.
By: /S/ LOUIS I. KANE --------------------------------------------- Louis I. Kane Co-Chairman
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated:
Signature Title Date - --------- ----- ----
/S/ LOUIS I. KANE Co-Chairman March 25, 1998 - -------------------------- Louis I. Kane
/S/ RONALD M. SHAICH Co-Chairman and March 25, 1998 - -------------------------- Principal Executive Ronald M. Shaich Officer
/S/ FRANCIS W. HATCH Director March 25, 1998 - -------------------------- Francis W. Hatch
/s/ GEORGE E. KANE Director March 27, 1998 - -------------------------- George E. Kane
Director _________________ - -------------------------- James R. McManus
/S/ HENRY J. NASELLA Director March 25, 1998 - -------------------------- Henry J. Nasella
/S/ JOSEPH P. SHAICH Director March 25, 1998 - -------------------------- Joseph P. Shaich
/S/ ANTHONY J. CARROLL Senior Vice President, March 25, 1998 - --------------------------- Treasurer and Principal Anthony J. Carroll Accounting Officer
Exhibit Index