Panera Bread 2005 Annual Report Download

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Panera Bread Company
2005 Annual Report to Stockholders

Table of contents

  • Page 1
    Panera Bread Company 2005 Annual Report to Stockholders

  • Page 2

  • Page 3
    ... to the traditions of handcrafted, artisan bread, something special is created. As we say here at Panera, it's our Product, Environment, and Great Service (PEGS) that we count on to deliver our success -year in and year out. More than ever before, customers today care deeply about the origin and...

  • Page 4
    ... 877 bakery-cafes (311 Company-owned and 566 franchise-operated) were Wi-Fi hot spots, making Panera Bread one of the nation's leading providers of managed, free Wi-Fi Internet access. We are proud that these efforts have made us the only major restaurant business distinguished as a "2005 Technology...

  • Page 5
    ... progresses. In conclusion, I would like to extend a special thank you to our Board of Directors, to our support center team members, and especially our Company operators, joint venture operators, and franchisees. You have been the people behind Panera's success for the last ten years, and you will...

  • Page 6
    ...Company and franchise bakery-cafe openings and continued successful operation of bakery-cafes; failure to comply with government regulations; loss of a member of senior management; failure or inability to protect our brand, trademarks, or other proprietary rights; competition; rising insurance costs...

  • Page 7
    ... Panera Bread Company (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6710 Clayton Rd., Richmond Heights, MO (Address of principal executive offices) (314) 633-7100 (Registrant's telephone number, including area code...

  • Page 8
    ...-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other cafe beverages, and targets suburban dwellers and workers by offering a premium specialty bakery and cafe experience with a neighborhood emphasis. We operate as three business segments, the Company-owned...

  • Page 9
    ... special dining experience than that offered by traditional fast food. Our goal is to make Panera Bread a leading national brand. Our menu, prototype, operating systems, design, and real estate strategy allow us to compete successfully in several segments of the restaurant business: breakfast, lunch...

  • Page 10
    ... visits. We perform extensive market research, including utilizing focus groups, to determine customer food and drink preferences and price points. We attempt to increase our per location sales through menu development, product merchandising, and promotions at every day prices and by sponsorship...

  • Page 11
    ...based on customers' needs for breakfast, lunch, PM "chill-out," lunch in the evening, and take home bread sales. The competitive factors include location, environment, customer service, price, and quality of products. We compete for leased space in desirable locations. Certain of our competitors may...

  • Page 12
    ... profit and loss statements for each Company-owned bakery-cafe. Additionally, we monitor the average check, customer count, product mix, and other sales trends. We also use this retail data in our "exception-based reporting" tools to safeguard our cash, protects our assets, and train our employees...

  • Page 13
    ... statements made in this Form 10-K or presented elsewhere by management from time to time. Our growth strategy, our business and our ability to increase our revenue and operating profits could be adversely affected if we are unable to execute our growth strategy. Our growth strategy consists of new...

  • Page 14
    ... including business, health, fire and safety codes. Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, accommodation and working conditions, benefits, citizenship requirements, insurance matters, workers' compensation...

  • Page 15
    ... retail businesses for quality site locations and hourly employees. If we are unable to successfully compete in our markets, we may be unable to sustain or increase our revenues and profitability. Additionally, competition could cause us to modify or evolve our products, designs or strategies. If...

  • Page 16
    ... employers to provide health insurance to employees, could negatively impact our operating results. Disruptions in our supply chain or increases in ingredient, product and other supply costs could adversely affect our profitability and operating results. Our Company-owned and franchise-operated...

  • Page 17
    ... in our operating costs; labor availability and wages of management and associates; increases and decreases in average weekly sales and comparable bakery-cafe sales, including as a result of the introduction of new menu items; profitability of new bakery-cafes, especially in new markets; • 11

  • Page 18
    ...a proportionate share of building and common area operating expenses and real estate taxes, and a contingent percentage rent based on sales above a stipulated sales level. Certain of our lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at...

  • Page 19
    ......Georgia ...Iowa ...Illinois ...Indiana ...Kansas...Kentucky...Massachusetts ...Maryland...Maine ...Michigan ...Minnesota ...Missouri ...North Carolina ...Nebraska ...Nevada ...New Hampshire ...New Jersey...New York ...Ohio ...Oklahoma...Pennsylvania ...Rhode Island ...South Carolina ...Tennessee...

  • Page 20
    ..., claims and litigation in the ordinary course of our business. We believe all such claims and proceedings currently pending against us will not have a material adverse effect on our financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...

  • Page 21
    ... PURCHASES OF EQUITY SECURITIES Our Class A Common Stock is quoted on The Nasdaq National Market under the symbol "PNRA." There is no established public trading market for our Class B Common Stock. The following table sets forth the high and low sale prices for our Class A Common Stock as reported...

  • Page 22
    ...cumulative effect of accounting change ...Cumulative effect of accounting changes(3) ...Net income ...Weighted average shares of common stock outstanding: Basic...Diluted...Consolidated balance sheet data: Cash and cash equivalents ...Investments in government securities ...Total assets...Other long...

  • Page 23
    ..., as reported by franchisees. System-wide sales is a non-GAAP financial measure that includes sales at all Company-owned and franchise-operated bakery-cafes. Management uses system-wide sales and franchisee revenue information internally in connection with store development decisions, planning, and...

  • Page 24
    ... share with the following system-wide performance on key metrics: 139 new bakery-cafes opened in fiscal 2005, including 66 new Company-owned bakery-cafes and 73 new franchise-operated bakery-cafes, comparable bakery-cafe sales growth of 7.8%, average weekly sales of $38,318, and operating weeks...

  • Page 25
    ...the Via Panera® catering business which began in 2004, sales from strengthened new product development in 2004, the implementation of several Company initiatives by the franchise-operated bakery-cafes in 2004 related to increased staffing, quality, and speed of customer service, and price increases...

  • Page 26
    ... sales exclude closed locations and are based on sales for bakery-cafes that have been in operation and owned for at least 18 months. New stores typically experience an opening "honey-moon" whereby they generate higher average weekly sales during the first 12 to 16 weeks they are open as customers...

  • Page 27
    ...open 80 to 85 new franchise-operated bakery-cafes. The ADA requires a franchisee to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations or develop...

  • Page 28
    ... primarily due to the opening of 143 new bakery-cafes in 2004 as well as increases in system-wide comparable bakery-cafe sales of 2.7% for the fiscal year ended December 25, 2004. The system-wide average weekly sales per bakery-cafe and the related number of operating weeks for the fiscal year ended...

  • Page 29
    ... the Fiscal Year Ended December 27, December 25, 2003 2004 Percentage Increase Company-owned average weekly sales ...Company-owned number of operating weeks ... $ 35,620 10,166 $ 35,198 7,555 1.2% 34.6% Franchise royalties and fees rose 22.7% to $44.4 million for the fiscal year ended December...

  • Page 30
    ... The costs associated with the fresh dough operations that sell fresh dough products to the franchise-operated bakery-cafes are excluded and are shown separately as fresh dough cost of sales to franchisees in the Consolidated Statements of Operations. The cost of food and paper products increased to...

  • Page 31
    ... and we have to perform no other service to earn this fee. The remaining $30,000 is paid at the time an individual franchise agreement is signed and is recognized as revenue upon the commencement of franchise operations of the bakery-cafes. Royalties are paid weekly based on a percentage of...

  • Page 32
    ... goodwill. We perform our impairment assessment by comparing discounted cash flows from acquired businesses with the carrying value of the underlying net assets inclusive of goodwill. In performing this analysis, management considers such factors as current results, trends, future prospects and...

  • Page 33
    ...by operating activities for all three fiscal years primarily resulted from net income, depreciation and amortization, tax benefit from exercise of stock options, deferred rent, and accrued expenses, partially offset by increased trade and other accounts receivable. Investing Activities Total capital...

  • Page 34
    ... Consolidated Statements of Operations March 29, 2005 For the Thirteen Weeks Ended June 28, September 27, December 27, 2005 2005 2005 (in thousands, except per share amounts) Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees...Total revenue...Costs and...

  • Page 35
    ...Panera Bread Company Pro Forma Consolidated Statements of Operations Margin Analysis March 29, 2005 For the Thirteen Weeks Ended June 28, September 27, December 27, 2005 2005 2005 Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees...Total revenue...Costs...

  • Page 36
    ... share of real estate taxes, insurance, common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts. Certain of our lease agreements provide for scheduled rent increases during...

  • Page 37
    ..., and management does not anticipate any related future significant reductions in gross profit margins. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment" ("SFAS...

  • Page 38
    ... to this item: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Stockholders' Equity Notes to the Consolidated Financial Statements Schedule II - Valuation and...

  • Page 39
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Panera Bread Company: We have completed integrated audits of Panera Bread Company's 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December...

  • Page 40
    PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) December 27, 2005 December 25, 2004 ASSETS : Current assets: Cash and cash equivalents ...Investments in government securities ...Trade accounts receivable...Other accounts receivable ......

  • Page 41
    ... BREAD COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) For the Fiscal Years Ended December 25, December 27, December 27, 2004 2003 2005 Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees...Total revenue...Costs...

  • Page 42
    PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Fiscal Years Ended December 25, December 27, December 27, 2004 2003 2005 Cash flows from operations: Net income ...Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of...

  • Page 43
    ...of year ...Treasury Stock, at cost: Balance, beginning of year ...Balance, end of year ...Additional Paid In Capital: Balance, beginning of year ...Exercise of employee stock options...Issuance of common stock ...Income tax benefit related to stock option plan ...Issuance of restricted stock (net of...

  • Page 44
    .... The Company specializes in meeting consumer dining needs by providing high quality food, including fresh baked goods, made-toorder sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other cafe beverages, and targets suburban dwellers and workers by offering a premium...

  • Page 45
    ... impaired. When appropriate, the Company performs its impairment assessment by comparing discounted cash flows from acquired businesses with the carrying value of the underlying net assets inclusive of goodwill. The Company completed annual impairment tests as of the first day of the fourth quarter...

  • Page 46
    ...comparing anticipated discounted cash flows from the related long-lived assets of a bakery-cafe or a fresh dough facility with their respective carrying values. In performing this analysis, management considers such factors as current results, trends, future prospects, and other economic factors. No...

  • Page 47
    ...Pre-Opening Costs All pre-opening costs directly associated with the opening of new bakery-cafe locations, which consists primarily of labor and food costs incurred during in-store training and preparation for opening, but exclude manager training costs which are included in other operating expenses...

  • Page 48
    ... by dividing net income by the weighted average number of shares of common stock outstanding and dilutive securities outstanding during the year. Fair Value of Financial Instruments The carrying amount of the Company's accounts receivable and accounts payable approximate their fair values due...

  • Page 49
    ...to, among other things, measure employee stock-based compensation awards where applicable using a fair value method and record related expense in the Company's consolidated financial statements. The provisions of SFAS 123R are effective for public companies for annual periods beginning after June 15...

  • Page 50
    ...On February 1, 2003, the Company purchased from a franchisee substantially all of the assets of one operating bakery-cafe, the furniture, fixtures, and equipment of two closed locations, and the area development rights for the Dallas market for a cash purchase price of $1.3 million with a commitment...

  • Page 51
    ... 9, 2003, the Company purchased from a franchisee substantially all of the assets of four operating bakery-cafes as well as the area development rights for the Louisville and Lexington, Kentucky markets for a purchase price of $5.5 million. Of the purchase price, $5.0 million was paid in cash at the...

  • Page 52
    ... share of real estate taxes, insurance, common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts. Certain of the Company's lease agreements provide for scheduled rent increases...

  • Page 53
    ... in fiscal 2003, the Company executed Confidential and Proprietary Information and Non-Competition Agreements (Agreements) with certain employees. These Agreements contain a provision whereby employees would be due a certain number of weeks of their salary if their employment was terminated by the...

  • Page 54
    ... during 2005. 11. Deposits and Other The Company established a company-owned life insurance ("COLI") program covering a substantial portion of its employees to help manage long-term employee benefit cost and to obtain tax deductions on interest payments on insurance policy loans. However, due to tax...

  • Page 55
    ... an average cost of $8.25 per share. 13. Stock-Based Compensation The Company's equity compensation plans consist of the 1992 Equity Incentive Plan, the Formula Stock Option Plan for Independent Directors, and the 2001 Employee, Director, and Consultant Stock Option Plan. Long-Term Incentive Program...

  • Page 56
    ...compensation plan for independent directors which, consistent with the Company's LTIP, compensates directors at a fixed dollar amount, with payment made through a combination of cash, stock options, and restricted stock. 2001 Employee, Director, and Consultant Stock Option Plan At the annual meeting...

  • Page 57
    ... Contribution Benefit Plan The Panera Bread Company Savings Plan (the "Plan") was formed under Section 401(k) of the Code. The Plan covers substantially all employees who meet certain service requirements. Participating employees may elect to defer on a pre-tax basis up to 15% of his or her salary...

  • Page 58
    ... goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other complementary products through on-premise sales, as well as Via Panera® catering. The Franchise Operations segment is comprised of the operating activities of the franchise business unit which...

  • Page 59
    ... and interest receivable, "unallocated property and equipment" relates primarily to corporate fixed assets, "unallocated deposits and other" relates primarily to company-owned life insurance program, and "other unallocated assets" relates primarily to cash and cash equivalents and investments. 53

  • Page 60
    ... tax...Net income...Weighted average number of shares outstanding - basic ...Effect of dilutive securities: Employee stock options ...LTIP ...Weighted average number of shares outstanding - diluted ...Basic earnings per common share: Before cumulative effect of accounting change...Cumulative effect...

  • Page 61
    ...Financial Statements, the Company restated its consolidated statements of operations correcting the computation of straight-line rent expense and related leasehold improvement depreciation expense and the classification of landlord allowances. The effect of the restatement increased operating profit...

  • Page 62
    ... of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes...

  • Page 63
    ... executive, financial and accounting officers, and its directors and employees. The Company has posted the Standards of Business Conduct on its Internet website at www.panerabread.com under the "Financial Reports" section of the "About Us - Investor Relations" webpage. The Company intends to make...

  • Page 64
    PART IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements The following described consolidated financial statements of the Company are included in this report: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 27, 2005 ...

  • Page 65
    ... M. SHAICH Ronald M. Shaich Chairman and Chief Executive Officer Director Director Director Director Executive Vice President, Chief Administrative Officer Senior Vice President, Chief Financial Officer Vice President, Controller, Chief Accounting Officer March 9, 2006 March 9, 2006 March 9, 2006...

  • Page 66
    ... 2005.†Panera Bread Company 2001 Employee, Director and Consultant Stock Option Plan. Incorporated by reference to Appendix A to the Company's Proxy Statement dated April 21, 2005 filed on Schedule 14A with the Commission on April 21, 2005.†Panera Bread Company 2005 Long-Term Incentive Program...

  • Page 67
    ...Independent Registered Public Accounting Firm.* Certification by Chief Executive Officer.* Certification by Chief Financial Officer.* ...Act of 2002, by Chief Executive Officer and Chief Financial Officer.* * Filed herewith. †Management contract or compensatory plan required to be filed as...

  • Page 68
    ... Senior Managing Director, Mill Road Capital Ronald M. Shaich Chairman of the Board and Chief Executive Officer, Panera Bread Company Corporate Information Transfer Agent and Registrar Computershare P.O. Box 219045 Kansas City, MO 64121-9045 www.computershare.com 2006 Annual Meeting of Stockholders...

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