e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 4, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19253

Panera Bread Company

(Exact name of registrant as specified in its charter)


Delaware		04-2723701
(State or other jurisdiction		(I.R.S. Employer of
incorporation or organization)		Identification No.)

6710 Clayton Road, Richmond Heights, MO		63117
(Address of principal executive offices)		(Zip code)

(314) 633-7100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). þ Yes o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of November 7, 2005, 2005, 29,722,952 shares and 1,415,321 shares of the registrant’s Class A Common Stock and Class B Common Stock, respectively, par value $.0001 per share, were outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PANERA BREAD COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)


	October 4, 2005			December 25, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,264		$	29,639
Investments in government securities		31,318			2,022
Trade accounts receivable		12,398			11,714
Other accounts receivable		4,316			5,542
Inventories		5,870			5,398
Prepaid expenses		3,958			1,658
Deferred income taxes		3,788			2,247

Total current assets		103,912			58,220
Property and equipment, net		239,109			201,725
Other assets:
Investments in government securities		16,126			26,393
Goodwill		35,421			35,327
Deposits and other		5,481			3,007

Total other assets		57,028			64,727

Total assets	$	400,049		$	324,672

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,880		$	5,840
Accrued expenses		62,524			48,905
Current portion of deferred revenue		1,387			960

Total current liabilities		67,791			55,705
Deferred income taxes		9,095			5,647
Deferred rent		23,961			20,181
Other long-term liabilities		3,881			1,776

Total liabilities		104,728			83,309
Commitments and contingencies (Note G)
Stockholders’ equity:
Common stock, $.0001 par value:
Class A, 75,000,000 shares authorized; 29,811,009 issued and 29,702,009 outstanding in 2005; and 29,130,097 issued and 29,021,097 outstanding in 2004		3			3
Class B, 10,000,000 shares authorized; 1,415,321 issued and outstanding in 2005 and 1,451,647 in 2004		—			—
Treasury stock, carried at cost		(900	)		(900	)
Additional paid-in capital		153,635			130,970
Retained earnings		147,311			111,290
Unearned deferred compensation		(4,728	)		—

Total stockholders’ equity		295,321			241,363

Total liabilities and stockholders’ equity	$	400,049		$	324,672

The accompanying notes are an integral part of the consolidated financial statements.

PANERA BREAD COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share information)


	For the twelve weeks ended					For the forty weeks ended
				(as restated)					(as restated)
	October 4, 2005			October 2, 2004		October 4, 2005			October 2, 2004
Revenues:
Bakery-cafe sales	$	116,522		$	86,465	$	362,428		$	262,878
Franchise royalties and fees		12,629			10,297		40,155			32,534
Fresh dough sales to franchisees		19,475			17,010		64,363			53,581

Total revenue		148,626			113,772		466,946			348,993
Costs and expenses:
Bakery-cafe expenses:
Cost of food and paper products		34,190			24,315		103,761			74,296
Labor		35,310			25,865		110,831			80,931
Occupancy		8,705			6,575		27,669			19,601
Other operating expenses		16,930			13,048		51,859			39,474

Total bakery-cafe expenses		95,135			69,803		294,120			214,302
Fresh dough cost of sales to franchisees		16,502			15,412		55,893			48,808
Depreciation and amortization		7,947			6,072		24,481			18,701
General and administrative expenses		10,369			7,887		34,165			25,336
Pre-opening expenses		549			692		1,946			2,098

Total costs and expenses		130,502			99,866		410,605			309,245

Operating profit		18,124			13,906		56,341			39,748
Interest expense		9			4		37			20
Other (income) expense, net		(261	)		410		(422	)		1,086

Income before income taxes		18,376			13,492		56,726			38,642
Income taxes		6,707			4,924		20,705			14,105

Net income	$	11,669		$	8,568	$	36,021		$	24,537


Net income per share:
Basic	$	0.38		$	0.28	$	1.17		$	0.81

Diluted	$	0.37		$	0.28	$	1.14		$	0.80


Weighted average shares used in computation:
Basic		30,997			30,226		30,807			30,118

Diluted		31,679			30,796		31,574			30,740

The accompanying notes are an integral part of the consolidated financial statements.

PANERA BREAD COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	For the forty weeks ended
				(as restated)
	October 4, 2005			October 2, 2004
Cash flows from operations:
Net income	$	36,021		$	24,537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,481			18,701
Tax benefit from exercise of stock options		7,686			2,250
Deferred income taxes		1,907			4,295
Other		520			397
Changes in operating assets and liabilities:
Trade and other accounts receivable		542			(2,725	)
Inventories		(472	)		(556	)
Prepaid expenses		(2,300	)		(1,885	)
Accounts payable		(1,960	)		(3,064	)
Accrued expenses		9,377			2,217
Deferred revenue		427			(129	)
Deferred rent		3,780			3,717
Other		1,597			—

Net cash provided by operating activities		81,606			47,755

Cash flows from investing activities:
Additions to property and equipment		(57,449	)		(56,767	)
Purchase of investments		(20,025	)		(28,792	)
Investment maturities proceeds		900			9,300
Other		(2,579	)		2,478

Net cash used in investing activities		(79,153	)		(73,781	)

Cash flows from financing activities:
Exercise of employee stock options		9,356			2,312
Proceeds from issuance of common stock under employee benefit plans		816			781
Increase in deferred financing fees		—			(40	)
Investments by minority interest owners		—			643

Net cash provided by financing activities		10,172			3,696

Net increase (decrease) in cash and cash equivalents		12,625			(22,330	)
Cash and cash equivalents at beginning of period		29,639			42,402

Cash and cash equivalents at end of period	$	42,264		$	20,072

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Panera Bread Company and its subsidiaries (the “Company”) have been prepared in accordance with instructions to Form 10-Q, and therefore do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States. They should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the fiscal year ended December 25, 2004.

The consolidated financial statements consist of the accounts of Panera Bread Company, its wholly owned subsidiaries Panera, LLC and Pumpernickel, Inc., and its indirect consolidated subsidiaries Pumpernickel Associates, LLC, Panera Enterprises, Inc., Asiago Bread, LLC, Atlanta JV, LLC, and Artisan Bread, LLC. On October 30, 2004, Cap City Bread, LLC became a wholly owned subsidiary of Artisan Bread, LLC. Prior to October 30, 2004, Artisan Bread, LLC held a majority interest in Cap City Bread, LLC, which then operated 36 bakery-cafes. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) that management considers necessary for a fair statement of its financial position and results of operations for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the entire year.

Certain reclassifications have been made to conform previously reported data to the current presentation.

As previously reported, following disclosure by several restaurant companies late in calendar 2004 and in connection with performing its 2004 year-end reporting control processes, the Company performed a comprehensive review of its lease accounting practices. Historically, the Company recorded rent expense on a straight-line basis over the initial non-cancelable term commencing upon location opening. The Company concluded that its calculation of straight-line rent should be based on the reasonably assured lease term as defined in SFAS 98, “Accounting for Leases,” which in most cases exceeds the initial non-cancelable lease term. The Company further concluded that any construction period and other rent holidays should also be included in its determination of straight-line rent expense. Additionally, the Company reassessed the depreciable lives of leasehold improvements at all locations to be the shorter of their estimated useful life or the reasonably assured lease term at the inception of the lease. The Company also concluded that landlord allowances for normal tenant improvements, which had previously been recorded as a reduction to related leasehold improvements, should be reflected as deferred rent and amortized over the reasonably assured lease term as a reduction to rent expense rather than depreciation. The Company reflected these changes in a restatement in its Annual Report on Form 10-K for the year ended December 25, 2004.

As a result of the restatement, bakery-cafe occupancy expenses for the twelve and forty weeks ended October 2, 2004 increased by $0.4 million and $1.1 million, respectively, bakery-cafe cost of food and paper products for the same periods increased by $0.1 million and $0.3 million respectively, while depreciation and amortization for the same periods decreased by $0.6 million and $1.6 million, respectively; operating profit for the twelve and forty weeks ended October 2, 2004 increased by $0.05 million and $0.14 million, respectively, and net income for the same periods increased by $0.03 million and $0.09 million, respectively. The restatement did not change previously reported diluted earnings per share for the twelve or forty weeks ended October 2, 2004. In addition, the restatement did not impact the Company’s previously reported net cash flows, revenues, or comparable bakery-cafe sales, or compliance with revolving line of credit covenants.

The following table shows the impact of these changes on the consolidated statement of operations for the twelve and forty weeks ended October 2, 2004 (in thousands, except per share data):


	As Previously
	Reported		Adjustments			As Restated
Twelve Weeks Ended October 2, 2004
Consolidated Statement of Operations
Cost of food and paper products	$	24,215	$	100		$	24,315
Occupancy		6,167		408			6,575
Total bakery-cafe expenses		69,295		508			69,803
Depreciation and amortization		6,630		(558	)		6,072
Total costs and expenses		99,916		(50	)		99,866
Operating profit		13,856		50			13,906
Income before income taxes		13,442		50			13,492
Income taxes		4,906		18			4,924
Net income	$	8,536	$	32		$	8,568

Earnings per common share:
Basic	$	0.28	$	—		$	0.28
Diluted	$	0.28	$	—		$	0.28

Forty Weeks Ended October 2, 2004
Consolidated Statement of Operations
Cost of food and paper products	$	74,016	$	280		$	74,296
Occupancy		18,461		1,140			19,601
Total bakery-cafe expenses		212,882		1,420			214,302
Depreciation and amortization		20,262		(1,561	)		18,701
Total costs and expenses		309,386		(141	)		309,245
Operating profit		39,607		141			39,748
Income before income taxes		38,501		141			38,642
Income taxes		14,053		52			14,105
Net income	$	24,448	$	89		$	24,537

Earnings per common share:
Basic	$	0.81	$	—		$	0.81
Diluted	$	0.80	$	—		$	0.80

NOTE B — STOCK-BASED COMPENSATION

In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS 123,” the Company elected to follow the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and provide the required pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. Accordingly, no compensation costs have been recognized in the Consolidated Statements of Operations for the stock option plans as the exercise price of stock options equals the market price of the underlying stock on the grant date. Had compensation costs for the Company’s stock option plans been determined under the fair value based method and recognition provisions of SFAS 123 at the grant date, the Company’s net income and earnings per share for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 would have been as follows (in thousands, except per share amounts):


	For the twelve weeks ended						For the forty weeks ended
				(as restated)						(as restated)
	October 4, 2005			October 2, 2004			October 4, 2005			October 2, 2004
Net income, as reported	$	11,669		$	8,568		$	36,021		$	24,537
Deduct:
Compensation expense determined using Black-Scholes, net of tax		(1,249	)		(820	)		(4,190	)		(3,251	)

Pro forma net income	$	10,420		$	7,748		$	31,831		$	21,286

Net income per share:
Basic, as reported	$	0.38		$	0.28		$	1.17		$	0.81
Basic, pro forma	$	0.34		$	0.26		$	1.03		$	0.71
Diluted, as reported	$	0.37		$	0.28		$	1.14		$	0.80
Diluted, pro forma	$	0.34		$	0.26		$	1.03		$	0.71

NOTE C — INVESTMENT IN GOVERNMENT SECURITIES

Investments of $47.4 million and $28.4 million at October 4, 2005 and December 25, 2004, respectively, consist of United States treasury notes and government agency securities. During the first three quarters of fiscal 2005, $20.0 million of investments were purchased by the Company and $0.9 million matured. The Company’s investments are classified as short-term or long-term in the accompanying consolidated balance sheets based upon their stated maturity dates which range from October 2005 to April 2007.

Management designates the appropriate classification of its investments at the time of purchase based upon its intended holding period. At October 4, 2005, all investments are classified as held-to-maturity as the Company has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums to maturity using the effective interest method, which approximates fair value at October 4, 2005.

NOTE D-INVENTORIES

Inventories consist of the following (in thousands):


	October 4,		December 25,
	2005		2004
Food:
Fresh dough facilities:
Raw materials	$	1,669	$	1,733
Finished goods		318		362
Bakery-cafes:
Finished goods		2,979		2,520
Paper goods		713		595
Retail merchandise		191		188

	$	5,870	$	5,398

NOTE E — ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):


	October 4, 2005		December 25, 2004
Compensation and employment related taxes	$	14,872	$	12,540
Capital expenditures		13,307		9,066
Rent		1,620		3,443
Advertising		2,265		—
Unredeemed gift cards and certificates		5,344		8,044
Insurance		8,829		3,642
Taxes, other than income tax		2,927		1,680
Income taxes		802		3,606
Other		12,558		6,884

	$	62,524	$	48,905

NOTE F — LONG-TERM INCENTIVE PROGRAM

In the third quarter of 2005, the Company adopted a Long-Term Incentive Program (LTIP) as a sub-plan under the Company’s 2001 Employee, Director, and Consultant Stock Option Plan (“2001 Plan”) and the Company’s 1992 Equity Incentive Plan (“1992 Plan”) under which certain directors, officers, employees, and consultants, subject to approval by the Company’s Compensation and Stock Option Committee, may be selected as participants eligible to receive a percentage of their annual salary in future years, subject to the terms of the 2001 Plan and the 1992 Plan. This percentage is based on the participant’s level in the Company. In addition, the payment of this incentive can be made in several forms based on the participant’s level including performance awards (payable in cash or common stock), restricted stock, choice awards of restricted stock or stock options, or deferred annual bonus match awards. For the twelve and forty weeks ended October 5, 2005, compensation expense related to this LTIP was $0.8 million.

Stock options under this LTIP are granted with an exercise price equal to the quoted market value of the Company’s common stock on the date of grant. In addition, stock options vest over five years and must be exercised within six years from date of grant.

Restricted stock of the Company under this LTIP may be granted at no cost to participants. Plan participants are generally entitled to cash dividends on restricted stock, although the Company does not currently pay a dividend, and voting rights for their respective shares. For awards of restricted stock to date under the LTIP, restrictions limit the sale or transfer of these shares during a five year period whereby the restrictions lapse on 25% of these shares after two years and thereafter 25% each year for the next three years. Upon issuance of restricted stock under the LTIP, unearned compensation equivalent to the market value at the date of grant is charged to stockholders’ equity and subsequently amortized to expense over the five year restriction period. For the twelve and forty weeks ended October 4, 2005, the Company granted approximately 91,000 restricted shares. As of October 4, 2005 the Company had recorded $4.7 million in unearned deferred compensation related to restricted stock.

NOTE G — COMMITMENTS AND CONTINGENCIES

The Company is a prime tenant or guarantor for certain operating leases of 12 franchisee locations and 33 locations of the former Au Bon Pain Division, or its franchisees. The leases have terms expiring on various dates from October 2005 to December 2018, and the guarantees have a potential amount of future rental payments of approximately $31.1 million. The obligation from leases or guarantees will continue to decrease over time as these operating leases expire. As the guarantees were initiated prior to December 31, 2002, the Company has not recorded a liability for these leases or guarantees pursuant to the provisions of FASB Interpretation Number (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements For Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” Also, the Company has not had to make any payments related to the leases or guarantees. Au Bon Pain and the respective franchisees continue to have primary liability for these operating leases.

NOTE H — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for per share data):


	For the twelve weeks ended				For the forty weeks ended
			(as restated)				(as restated)
	October 4, 2005		October 2, 2004		October 4, 2005		October 2, 2004
Amounts used for basic and diluted per share calculations:
Net income	$	11,669	$	8,568	$	36,021	$	24,537


Weighted average number of shares outstanding — basic		30,997		30,226		30,807		30,118
Effect of dilutive securities:
Employee stock options		682		570		767		622


Weighted average number of shares outstanding — diluted		31,679		30,796		31,574		30,740


Basic earnings per common share:
Net income	$	0.38	$	0.28	$	1.17	$	0.81


Diluted earnings per common share:
Net income	$	0.37	$	0.28	$	1.14	$	0.80

For the twelve weeks ended October 4, 2005 and October 2, 2004, options for 0.06 million shares and 0.8 million shares, respectively, were excluded in calculating diluted earnings per share, as the exercise price exceeded fair market value and inclusion would have been antidilutive. For the forty weeks ended October 4, 2005 and October 2, 2004, options for 0.03 shares and 0.4 million shares, respectively, were excluded in calculating diluted earnings per share, as the exercise price exceeded fair market value and inclusion would have been antidilutive.

NOTE I — BUSINESS SEGMENT INFORMATION

The Company operates three business segments. The Company Bakery-Cafe Operations segment is comprised of the operating activities of the bakery-cafes owned by the Company. The Company-owned bakery-cafes conduct business under the Panera Bread ® or Saint Louis Bread Co.® names. These bakery-cafes sell fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other complementary products through on-premise sales, as well as Via Panera ® catering.

The Franchise Operations segment is comprised of the operating activities of the franchise business unit which licenses qualified operators to conduct business under the Panera Bread® name and also of the costs to monitor the operations of these bakery-cafes. Under the terms of the agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Panera Bread® name.

The Fresh Dough Operations segment supplies fresh dough items and indirectly supplies proprietary sweet good items through a contract manufacturing arrangement to both Company-owned and franchise-owned bakery-cafes. The fresh dough is sold to both Company-owned and franchised bakery-cafes at a delivered cost not to exceed 27% of the retail value of the product. The sales and related costs to the franchise bakery-cafes are separately stated line items in the Consolidated Statements of Operations. The operating profit related to the sales to Company-owned bakery-cafes is classified as a reduction of the costs in the food and paper products line item on the Consolidated Statements of Operations.

Segment information related to the Company’s three business segments follows (in thousands):


	For the twelve weeks ended						For the forty weeks ended
				(as restated)						(as restated)
	October 4, 2005			October 2, 2004			October 4, 2005			October 2, 2004
	(in thousands)						(in thousands)
Revenues:
Company bakery-cafe operations	$	116,522		$	86,465		$	362,428		$	262,878
Franchise operations		12,629			10,297			40,155			32,534
Fresh dough operations		28,937			24,493			94,691			76,060
Intercompany sales eliminations		(9,462	)		(7,483	)		(30,328	)		(22,479	)

Total Revenues	$	148,626		$	113,772		$	466,946		$	348,993

Segment profit:
Company bakery-cafe operations	$	21,387		$	16,662		$	68,308		$	48,578
Franchise operations		10,593			9,204			34,931			28,418
Fresh dough operations		2,973			1,598			8,470			4,773

Total segment profit	$	34,953		$	27,464		$	111,709		$	81,769

Total segment profit	$	34,953		$	27,464		$	111,709		$	81,769
Depreciation and amortization		7,947			6,072			24,481			18,701
Unallocated general and administrative expenses		8,333			6,794			28,941			21,222
Pre-opening expenses		549			692			1,946			2,098
Interest Expense		9			4			37			20
Other (income) expense, net		(261	)		410			(422	)		1,086

Income before income taxes	$	18,376		$	13,492		$	56,726		$	38,642

Depreciation and amortization:
Company bakery-cafe operations	$	5,710		$	4,334		$	17,178		$	13,097
Fresh dough operations		1,381			998			4,571			3,241
Corporate administration		856			740			2,732			2,363

Total depreciation and amortization	$	7,947		$	6,072		$	24,481		$	18,701

Capital expenditures:
Company bakery-cafe operations	$	15,996		$	18,139		$	47,206		$	48,527
Fresh dough operations		2,099			2,970			5,273			5,425
Corporate administration		2,040			596			4,970			2,815

Total capital expenditures	$	20,135		$	21,705		$	57,449		$	56,767


	October 4, 2005		December 25, 2004
	(in thousands)
Segments assets:
Company bakery-cafe operations	$	236,981	$	199,564
Franchise operations		1,712		1,778
Fresh dough operations		40,103		39,968

Total segment assets	$	278,796	$	241,310

Total segment assets	$	278,796	$	241,310
Unallocated trade and other accounts receivable		6,442		6,499
Unallocated property and equipment		13,319		12,291
Unallocated deposits and other		4,038		2,613
Other unallocated assets		97,454		61,959

Total assets	$	400,049	$	324,672

NOTE J— RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R will require the Company 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, 2005; therefore, the Company will adopt the new requirements when required in fiscal 2006. The Company anticipates it will adopt SFAS 123R using the modified prospective transition approach and believes adoption of the expensing requirements will reduce the Company’s diluted EPS by $0.12 to $0.13 in 2006.

In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, “Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004” (“FSP 109-1”). FSP 109-1 states that qualified domestic production activities should be accounted for as a special deduction under SFAS No. 109, “Accounting for Income Taxes.” The provisions of FSP 109-1 are effective immediately. Adoption of this pronouncement does not have a significant impact on the Company’s financial statements.

On October 6, 2005, the FASB issued FASB Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”). FSP 13-1 is effective for the first reporting period beginning after December 15, 2005. FSP 13-1 states that rental costs associated with operating leases must be recognized as rental expense allocated on a straight-line basis over the lease term, which includes the construction period. This accounting is consistent with the Company’s current practice.

NOTE K — SUBSEQUENT EVENT

On November 1, 2005, the Company purchased from a franchisee substantially all of the assets of twenty-one bakery-cafes (plus two more which are under construction) and the area development rights for certain markets in Indiana for a purchase price of approximately $27 million in cash plus the assumption of certain liabilities including those associated with bakery-cafe construction. The acquisition price was paid with cash on hand. The Consolidated Statements of Operations will include the results of operations from the operating bakery-cafes from the date of the acquisition. The pro forma impact of the acquisition on prior periods is not presented, as the impact is not material to reported results. The Company will allocate the purchase price to the assets acquired and liabilities assumed in the acquisition at their estimated fair values with any remainder allocated to tax deductible goodwill.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Panera Bread Company (including its wholly owned subsidiaries, Panera, LLC and Pumpernickel, Inc., and its indirect subsidiaries) may be referred to as the “Company,” “Panera Bread,” or in the first person notation of “we,” “us,” and “ours” in the following discussion.

As previously reported, the Company changed its fiscal week in the first quarter of 2005 to end on Tuesday rather than Saturday. As a result, the Company had an additional three days in the first quarter of 2005, which ended on April 19, 2005. These additional three days did not have a material impact on the Company’s financial statements. The Company’s second, third, and fourth quarters of 2005, which each consist of 12 weeks, end on July 12, 2005, October 4, 2005, and December 27, 2005, respectively. This change will allow the Company to better serve customers by shifting the weekly closing activities to a less busy day of the week. In fiscal year 2006, the Company intends to convert to a 4-5-4 fiscal calendar whereby each quarter will include 13 weeks rather than its current calendar which has 16 weeks in the first quarter and 12 weeks in the second, third, and fourth quarters. The Company intends to show pro forma results for 2005, in addition to historical results, for quarterly comparisons in 2006.

The Company includes in this report information on Company, franchisee, and/or system-wide comparable bakery-cafe sales increases and average weekly sales. System-wide sales are a non-GAAP financial measure that includes sales at all Company and franchise bakery-cafes, as reported by franchisees. Management uses system-wide sales information internally in connection with store development decisions, planning, and budgeting analyses, and believes it is useful in assessing consumer acceptance of the Company’s brand and facilitating an understanding of financial performance as the Company’s franchisees pay royalties and contribute to advertising pools based on a percentage of their sales.

The Company’s revenues are derived from Company-owned bakery-cafe sales, fresh dough sales to franchisees, and franchise royalties and fees. Fresh dough sales to franchisees are primarily the sales of dough products to our franchisees and the sales of tuna and cream cheese to certain franchisees. Franchise royalties and fees include royalty income and franchise fees. The cost of food and paper products, labor, occupancy, and other operating expenses relate primarily to Company-owned bakery-cafe sales. The cost of fresh dough sales relates primarily to the sale of fresh dough products and tuna and cream cheese to franchisees. General and administrative, depreciation, and pre-opening expenses relate to all areas of revenue generation.

In the third quarter of 2005, the Company earned $0.37 per diluted share with the following performance on key metrics: system-wide comparable bakery-cafe sales growth of 8.2% (comparable bakery-cafe sales growth of 7.2% for Company and 8.6% for franchisees), system-wide average weekly sales of $38,342 ($37,347 for Company and $38,812 for franchisees), and 30 new bakery-cafes opened system-wide in the third quarter, including 10 Company-owned bakery-cafes and 20 franchise bakery-cafes.

The Company expects earnings per diluted share for the fourth quarter of 2005 of $0.48 to $0.49 resulting in full year earnings per share of $1.62 to $1.63. The fourth quarter target assumes system-wide comparable sales growth of 5.25% to 5.75%. Additionally, the Company expects system-wide average weekly sales per bakery-cafe for the fourth quarter to be in the range of $39,400 to $40,400 and expects operating weeks to be in the range of 10,150 to 10,200. Bakery-cafe openings in the fourth quarter are now targeted at 54 (24 Company and 30 franchise) compared to 41 (15 Company and 26 franchise) in the fourth quarter of 2004 and are expected to occur later in the quarter versus the fourth quarter of 2004. In addition, fourth quarter earnings growth is expected to be impacted by significant marketing development expenditures.

Forward-Looking Statements

The matters discussed in this Form 10-Q and in our public disclosures, whether written or oral, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are based on management’s current expectations, beliefs and intentions that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These forward-looking statements may include, but are not limited to, any discussion or impact, expressed or implied, on the Company’s anticipated growth in earnings, impact of required accounting changes, comparable bakery-cafe sales, average weekly sales, operating weeks, capital expenditures, and bakery-cafe openings on operating results and future earnings per share, plans and objectives, or statements of the underlying assumptions of forward-looking statements. These statements are often identified by the words “believe”, “positioned”, “estimate”, “project”, “target”, “assume”, “continue”, “intend”, “expect”, “future”, “anticipates”, “preliminary” and similar expressions. All forward-looking statements, whether written or oral, are expressly qualified by the cautionary statements described in this provision. All forward-looking statements included in this report are made only as of the date of this report, and the Company undertakes no obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that occur or of which it hereinafter becomes aware after that date.

The Company believes that it is important to communicate future expectations to investors. However, there are events in the future that the Company is not able to accurately predict or control. Although the Company believes that expectations are based on

reasonable assumptions, actual results may differ materially from the expectations described in the Company’s forward-looking statements due to known and unknown risks, uncertainties, and developments and could be negatively impacted by a number of factors.

These factors, in no particular order, include but are not limited to the following:

	•		changes in the costs of development and the availability of sufficient capital to the Company and the developers party to franchise development agreements with the Company;

	•		greater than anticipated delays in bakery-cafe openings and other variations in the number and timing of bakery-cafe openings;

	•		the ability by the Company and franchisees to operate additional bakery-cafes profitably; ·

	•		public acceptance of new bakery-cafes and new markets; ·

	•		competition;

	•		risks to the Company’s ability to protect its intellectual property, trade secrets and other confidential and proprietary information and know-how;

	•		national and regional weather conditions;

	•		changes in restaurant operating costs, particularly market changes, food and labor costs, equipment, software system and installation costs, insurance costs and inflation;

	•		shortages and delays in the delivery of fresh produce, and other food supplies meeting the Company’s specifications by third party vendors and products from the Company’s fresh dough facilities;

	•		changes in consumer nutritional habits;

	•		consumer reaction to pricing or menu ingredient changes;

	•		changes in costs of new bakery-cafe openings;

	•		the actual cost of market research and other factors that may affect retailers in general;

	•		general economic conditions, including fuel costs;

	•		accounting changes; and,

	•		the costs of compliance with federal, state and local government regulation.

For all of these reasons, all forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. These and other risks are discussed from time to time in the Company’s SEC reports, including its Form 10-K for the year ended December 25, 2004 and the Company’s quarterly reports on Form 10-Q.

Results of Operations

The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in the Company’s Consolidated Statements of Operations for the periods indicated. Percentages may not add due to rounding:


	For the twelve weeks ended						For the forty weeks ended
				(as restated)						(as restated)
	October 4, 2005			October 2, 2004			October 4, 2005			October 2, 2004
Revenues:
Bakery-cafe sales		78.4	%		76.0	%		77.6	%		75.3	%
Franchise royalties and fees		8.5			9.0			8.6			9.3
Fresh dough sales to franchisees		13.1			15.0			13.8			15.4

Total revenue		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Bakery-cafe expenses (1):
Cost of food and paper products		29.3	%		28.1	%		28.6	%		28.3	%
Labor		30.3			29.9			30.6			30.8
Occupancy		7.5			7.6			7.6			7.5
Other operating expenses		14.5			15.1			14.3			15.0

Total bakery-cafe expenses		81.6			80.7			81.2			81.5
Fresh dough cost of sales to franchisees (2)		84.7			90.6			86.8			91.1
Depreciation and amortization		5.3			5.3			5.2			5.4
General and administrative expenses		7.0			6.9			7.3			7.3
Pre-opening expenses		0.4			0.6			0.4			0.6

Total costs and expenses		87.8			87.8			87.9			88.6

Operating profit		12.2			12.2			12.1			11.4
Interest expense		—			—			—			—
Other (income) expense, net		(0.2	)		0.4			(0.1	)		0.3

Income before income taxes		12.4			11.9			12.1			11.1
Income taxes		4.5			4.3			4.4			4.0

Net income		7.9	%		7.5	%		7.7	%		7.0	%


(1)		As a percentage of bakery-cafe sales.

(2)		As a percentage of fresh dough sales to franchisees.

The following table sets forth certain information and other data relating to Company-owned and franchise operated bakery-cafes:


	For the twelve weeks ended					For the forty weeks ended
	October 4, 2005		October 2, 2004			October 4, 2005			October 2, 2004
Number of bakery-cafes:
Company-owned:
Beginning of period		255		197			226			173
Bakery-cafes opened		10		15			40			39
Bakery-cafes closed		—		—			(1	)		—

End of period		265		212			265			212

Franchise operated:
Beginning of period		540		472			515			429
Bakery-cafes opened		20		19			46			63
Bakery-cafes closed		—		(2	)		(1	)		(3	)

End of period		560		489			560			489

System-wide:
Beginning of period		795		669			741			602
Bakery-cafes opened		30		34			86			102
Bakery-cafes closed		—		(2	)		(2	)		(3	)

End of period		825		701			825			701

Increases in comparable bakery-cafe sales for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 were as follows:


	For the twelve weeks ended						For the forty weeks ended
	October 4, 2005			October 2, 2004			October 4, 2005			October 2, 2004
Company-owned		7.2	%		2.2	%		7.4	%		2.3	%
Franchised		8.6	%		1.2	%		8.1	%		1.5	%
System-wide		8.2	%		1.5	%		7.9	%		1.7	%

Comparable bakery-cafe sales exclude closed locations and are based on sales for bakery-cafes that have been in operation for at least 18 months.

Comparable sales for the twelve and forty weeks ended October 4, 2005 increased at a higher rate than comparable sales for the twelve and forty weeks ended October 2, 2004 as a result of increased sales of products from our new antibiotic-free chicken, sales from the Company’s Via Panera ® catering business which began in 2004, sales from strengthened new product development, in store execution, and price increases.

Revenues

Total revenues for the twelve weeks ended October 4, 2005 increased 30.6% to $148.6 million compared to $113.8 million for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005, total revenues increased 33.8% to $466.9 million compared to $349.0 million for the forty weeks ended October 2, 2004. The growth in total revenue for the twelve and forty weeks ended October 4, 2005, compared to the same periods in the prior year, is primarily due to the opening of 127 new bakery-cafes system-wide since the end of the third quarter of 2004 and the increase in system-wide comparable bakery-cafe sales for the forty weeks ended October 4, 2005 of 7.9%. The system-wide average weekly sales per bakery-cafe and the related number of operating weeks for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 are as follows:


	For the twelve weeks ended				For the forty weeks ended
	October 4, 2005		October 2, 2004		October 4, 2005		October 2, 2004
System-wide average weekly sales	$	38,342	$	35,658	$	37,574	$	35,296
System-wide number of operating weeks		9,722		8,211		31,169		25,838

Average weekly sales is calculated by dividing total net sales by operating weeks. Accordingly, year over year growth reflects all sales, whereas comparable bakery-cafe sales reflects only sales for those bakery-cafes that have been open for more than 18 months. In addition, as described above, the Company had an additional three days in the first quarter of 2005 as compared to the first quarter of 2004 as a result of changing its fiscal week in 2005 to end on Tuesday rather than Saturday. Average weekly sales and comparable bakery-cafe sales exclude these three additional days in the first quarter of 2005 for comparative purposes.

Bakery-cafe sales for the twelve weeks ended October 4, 2005 for the Company increased 34.7% to $116.5 million from $86.5 million for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005, bakery-cafe sales increased 37.8% to $362.4 million from $262.9 million. Company bakery-cafe sales as a percentage of total revenue increased by 2.4 and 2.3 percentage points for the twelve and forty weeks ended October 4, 2005, respectively, as compared to the same period in the prior year, while fresh dough sales to franchisees as a percentage of total revenue decreased by 1.9 and 1.6 percentage points for the twelve and forty weeks ended October 4, 2005, respectively, as compared to the same period in the prior year, primarily as a result of the increase in the number of Company bakery-cafe openings. The increase in bakery-cafe sales is primarily due to the opening of 55 new Company-owned bakery-cafes since the end of the third quarter of 2004 and the 7.4% increase in comparable Company-owned bakery-cafe sales for the forty weeks ended October 4, 2005. The average weekly sales per Company-owned bakery-cafe and the number of operating weeks for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 are as follows:


	For the twelve weeks ended				For the forty weeks ended
	October 4, 2005		October 2, 2004		October 4, 2005		October 2, 2004
Company-owned average weekly sales	$	37,347	$	35,432	$	36,615	$	34,980
Company-owned number of operating weeks		3,120		2,440		9,804		7,515

Franchise royalties and fees rose 22.3% for the twelve weeks ended October 4, 2005 to $12.6 million from $10.3 million for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005, franchise royalties and fees increased 23.7% to $40.2 million compared to $32.5 million for the forty weeks ended October 2, 2004. The components of franchise royalties and fees are as follows (in thousands):


	For the twelve weeks ended				For the forty weeks ended
	October 4, 2005		October 2, 2004		October 4, 2005		October 2, 2004
Franchise royalties	$	11,964	$	9,612	$	38,420	$	30,349
Franchise fees		665		685		1,735		2,185

Total	$	12,629	$	10,297	$	40,155	$	32,534

The increase in royalty revenue can be attributed primarily to the addition of 72 franchised bakery-cafes opened since the end of the third quarter of 2004 and the 8.1% increase in comparable franchise-operated bakery-cafe sales for the forty weeks ended October 4, 2005. The average weekly sales per franchise-operated bakery-cafe and the number of operating weeks for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 are as follows:


	For the twelve weeks ended				For the forty weeks ended
	October 4, 2005		October 2, 2004		October 4, 2005		October 2, 2004
Franchisee average weekly sales	$	38,812	$	35,753	$	38,013	$	35,425
Franchisee number of operating weeks		6,602		5,771		21,365		18,323

As of October 4, 2005, the total backlog of additional franchise commitments was 420 bakery-cafes. We expect these bakery-cafes to open according to the timetables established in the various area development agreements (ADA) with franchisees, with the majority opening in the next four to five years. The Company expects its area developers to open 76 new franchise bakery-cafes in 2005 and 80 to 85 new franchise bakery-cafes in 2006. The ADA requires a franchisee to develop a specified number of bakery-cafes on or before specific dates. If developers fail to open bakery-cafes on schedule, the Company, in addition to other remedies, has the right to terminate the ADA and develop Company-owned locations or develop locations through new area developers in that market.

Fresh dough sales to franchisees increased 14.7% to $19.5 million for the twelve weeks ended October 4, 2005 from $17.0 million for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005, fresh dough sales to franchisees increased 20.1% to $64.4 million compared to $53.6 million for the forty weeks ended October 2, 2004. These increases were primarily driven by the increased number of franchise bakery-cafes opened described previously partially offset by a decrease in average fresh dough sales per bakery-cafe to franchisees due to a change in the mix of product sold by franchisees.

Costs and Expenses

The cost of food and paper products includes the costs associated with the fresh dough operations that sell fresh dough products to Company-owned bakery-cafes as well as the cost of food and paper products supplied by third party vendors and distributors. The costs associated with the fresh dough operations that sell fresh dough products to the franchised 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 29.3% of bakery-cafe sales for the twelve weeks ended October 4, 2005 compared to 28.1% (as restated) of bakery-cafe sales for the twelve weeks ended October 2, 2004. The increase in the cost of food and paper products as a percentage of bakery-cafe sales is primarily due to the increased cost of antibiotic-free, all natural chicken and increased fuel cost. These factors are expected to continue in the fourth quarter of 2005. Fuel costs, which averaged $3.20 per gallon, a 46.1% increase compared to the third quarter of 2004, increased distribution costs within the fresh dough facility operations. For the twelve weeks ended October 4, 2005, there was an average of 49.1 bakery-cafes per fresh dough facility compared to an average of 40.6 for the twelve weeks ended October 2, 2004.

Labor expense was $35.3 million, or 30.3% of bakery-cafe sales, for the twelve weeks ended October 4, 2005 compared to $25.9 million, or 29.9% of bakery-cafe sales, of labor expense for the twelve weeks ended October 2, 2004. This increase in labor expense as a percentage of total revenue is primarily due to higher incentive payments resulting from strong year-over-year operating results. For the forty weeks ended October 4, 2005, labor expense was $110.8 million, or 30.6% of bakery-cafe sales, compared to $80.9 million, or 30.8% of bakery-cafe sales, for the forty weeks ended October 2, 2004. This decrease in labor expense as a percentage of total revenue is primarily due to the leveraging of labor costs as sales grew at a greater rate than our labor costs partially offset by higher incentive payments resulting from strong year-over-year operating results.

Other bakery-cafe operating expenses were $16.9 million, or 14.5% of bakery-cafe sales, for the twelve weeks ended October 4, 2005 compared to $13.0 million, or 15.1% of bakery-cafe sales, for the twelve weeks ended October 2, 2004. Other bakery-cafe operating expenses were $51.9 million, or 14.3% of bakery-cafe sales, for the forty weeks ended October 4, 2005 compared to $39.5 million, or 15.0% of bakery-cafe sales, for the forty weeks ended October 2, 2004. The decrease in other bakery-cafe operating expenses is primarily due to the leveraging of these costs over higher sales volumes as well as a reduction in marketing cost components, offset in part by higher utility costs.

For the twelve weeks ended October 4, 2005, fresh dough cost of sales to franchisees was $16.5 million, or 84.7% of fresh dough sales to franchisees, compared to $15.4 million, or 90.6% of fresh dough sales to franchisees, for the twelve weeks ended October 2, 2004. Fresh dough cost of sales to franchisees was $55.9 million, or 86.8% of fresh dough sales to franchisees, for the forty weeks ended October 4, 2005, compared to $48.8 million, or 91.1% of fresh dough sales to franchisees, for the forty weeks ended October 2, 2004. The decrease in the fresh dough cost of sales rate in fiscal 2005 is primarily due to lower ingredient costs. Butter costs in the third quarter of 2005 averaged $1.64 per pound compared to $1.89 per pound in the third quarter of 2004, which was higher than butter costs in 2003.

Depreciation and amortization was $7.9 million, or 5.3% of total revenue, for the twelve weeks ended October 4, 2005 compared to $6.1 million (as restated), or 5.3% (as restated) of total revenue, for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005 depreciation and amortization was $24.5 million, or 5.2% of total revenue, compared to $18.7 million, or 5.4% of total revenue, for the forty weeks ended October 2, 2004. The increase of $1.8 million and $5.8 million for the twelve weeks and forty weeks, respectively, over the same time periods in 2004 was primarily due to the increase in number of Company-owned bakery

cafes. The decrease in depreciation and amortization as a percentage of total revenue for the forty weeks ended October 4, 2005 is primarily due to the leveraging of these costs over higher sales volumes.

Pre-opening expenses, which consist primarily of labor and food costs incurred during in-store training and preparation for opening, exclusive of manager training costs, were $0.5 million, or 0.4% of total revenue, and $0.7 million, or 0.6% of total revenue, for the twelve weeks ended October 4, 2005 and October 2, 2004, respectively. For the forty weeks ended October 4, 2005 pre-opening costs were $1.9 million, or 0.4% of total revenue, compared to $2.1 million, or 0.6% of total revenue, for the forty weeks ended October 2, 2004. The decrease in pre-opening expenses as a percentage of total revenue for the twelve and forty weeks ended October 4, 2005 is primarily due to the leveraging of these costs over higher sales volumes.

Operating Profit

Operating profit for the twelve weeks ended October 4, 2005 increased to $18.1 million, or 12.2% of total revenue, from $13.9 million (as restated), or 12.2% (as restated) of total revenue, for the twelve weeks ended October 2, 2004. Operating profit for the forty weeks ended October 4, 2005 increased to $56.3 million, or 12.1% of total revenue, from $39.7 million (as restated), or 11.4% (as restated) of total revenue, for the forty weeks ended October 2, 2004. Operating profit as a percentage of total revenues for the forty weeks ended October 4, 2005 increased as a result of the factors described above.

Other Income and Expense

Other income and expense was $0.3 million of income, or 0.2% of total revenue, and $0.4 million of expense, or 0.4% of total revenue, for the twelve weeks ended October 4, 2005 and October 2, 2004, respectively. For the forty weeks ended October 4, 2005 other income and expense was $0.4 million of income, or 0.1% of total revenue, compared to $1.1 million of expense, or 0.3% of total revenue, for the forty weeks ended October 2, 2004. The change in other income and expense as a percentage of total revenue for the twelve and forty weeks ended October 4, 2005 is primarily due to increased interest income in 2005 resulting from both higher investment balances and higher interest rates.

Income Taxes

The provision for income taxes increased to $6.7 million for the twelve weeks ended October 4, 2005 compared to $4.9 million (as restated) for the twelve weeks ended October 2, 2004. For the forty weeks ended October 4, 2005 the provision for income taxes increased to $20.7 million compared to $14.1 million (as restated) for the forty weeks ended October 2, 2004. The tax provision for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 reflects a consistent combined federal, state, and local effective tax rate of 36.5%.

Net Income

Net income for the twelve weeks ended October 4, 2005 increased to $11.7 million, or $0.37 per diluted share, compared to net income of $8.6 million (as restated), or $0.28 per diluted share (as restated), for the twelve weeks ended October 2, 2004. Net income for the forty weeks ended October 4, 2005 increased to $36.0 million, or $1.14 per diluted share, compared to net income of $24.5 million (as restated), or $0.80 per diluted share (as restated), for the forty weeks ended October 2, 2004. The increase in net income for the twelve and forty weeks ended October 4, 2005 and October 2, 2004 is consistent with the factors described above.

Liquidity and Capital Resources

Cash and cash equivalents were $42.3 million at October 4, 2005 compared to $29.6 million at December 25, 2004. The Company’s principal requirements for cash are capital expenditures for the development of new bakery-cafes, for maintaining or remodeling existing bakery-cafes, for purchasing existing franchise bakery-cafes, for developing, remodeling and maintaining fresh dough facilities, and for enhancements of information systems and other infrastructure. For the forty weeks ended October 4, 2005, the Company met its requirements for capital with cash from operating activities.

As of October 4, 2005 and December 25, 2004, the Company had investments of $47.4 million and $28.4 million, respectively, in United States treasury notes and government agency securities. Investments are classified as short or long-term in the accompanying consolidated balance sheet based upon their stated maturity dates. As of October 4, 2005, all investments were classified as held-to-maturity as the Company has the intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums to maturity, which approximates fair value at October 4, 2005.

Funds provided by operating activities for the forty weeks ended October 4, 2005 were $81.6 million compared to $47.8 million (as restated) for the forty weeks ended October 2, 2004. Funds provided by operating activities in 2005 primarily resulted from net income, depreciation and amortization, tax benefit from exercise of stock options, and accrued expenses.

Total capital expenditures of $57.4 million for the forty weeks ended October 4, 2005 were primarily related to the opening of 40 Company-owned bakery-cafes, costs incurred on Company-owned bakery-cafes to be opened in fourth quarter of 2005 and first quarter of 2006, and the maintaining or remodeling of existing Company-owned bakery-cafes and fresh dough facilities. Total capital expenditures for the forty weeks ended October 2, 2004 were $56.8 million (as restated), related primarily to the opening of 39 Company-owned bakery-cafes, costs incurred on Company-owned bakery-cafes to be opened in the fourth quarter of 2004 and first quarter of 2005, and the maintaining or remodeling of existing bakery-cafes and fresh dough facilities. Capital expenditures in 2005 and 2004 were funded by cash generated from operating activities.

On December 19, 2003, the Company entered into a $10.0 million unsecured revolving line of credit (revolver). The revolver matures December 19, 2006 and has an interest rate of LIBOR plus 0.75% to 1.5% depending on the Company’s leverage ratio and type of loan (approximately 4.55% to 5.30% at October 4, 2005). The revolver contains restrictions relating to future indebtedness, liens, investments, distributions, mergers, acquisitions, or sales of assets and certain leasing transactions. The revolver also requires the maintenance of certain financial ratios and covenants. As of October 4, 2005, the Company was in compliance with all financial ratios and covenants. At October 4, 2005, the Company had $9.8 million available under the revolver with $0.2 million utilized by an outstanding letter of credit. The Company has not borrowed under its revolver for over three years.

Financing activities provided $10.2 million for the forty weeks ended October 4, 2005, which included $9.4 million from the exercise of stock options and $0.8 million from the issuance of common stock under employee benefit plans. The financing activities for the forty weeks ended October 2, 2004 provided $3.7 million, which included $2.3 million from the exercise of stock options, $0.8 million from the issuance of common stock under employee benefit plans, and $0.6 million from investments by our minority interest owner.

The Company had working capital of $36.1 million at October 4, 2005 and $2.5 million at December 25, 2004. The increase in working capital from December 25, 2004 to October 4, 2005 resulted primarily from an increase in cash and cash equivalents of $12.6 million, an increase in current investments in government securities of $29.3 million, and a decrease in accounts payable of $2.0 million partially offset by an increase in accrued expenses of $13.6 million. The Company has experienced no liquidity difficulties and has historically been able to finance its operations through internally generated cash flow.

The Company anticipates total capital expenditures for fiscal year 2005 of approximately $105 million to $110 million principally for the opening of 64 new Company-owned bakery-cafes, the costs incurred on early 2006 bakery-cafe openings, the acquisition of our Indiana franchisee for approximately $27 million in cash on November 1, 2005, the maintaining and remodeling of existing bakery-cafes, and the remodeling and expansion of existing fresh dough facilities, and corporate infrastructure. The Company expects new bakery-cafes in 2005 will require, on average, an investment per bakery-cafe (excluding pre-opening expenses which are expensed as incurred) of approximately $950,000. In addition, the Company expects to open 70 to 75 bakery-cafes in 2006. The Company expects to fund these expenditures principally through internally generated cash flow and cash from the exercise of employee stock options, supplemented, where necessary, by borrowings on its revolver.

Our capital requirements, including development costs related to the opening or acquisition of additional bakery-cafes and remodeling expenditures, have and will continue to be significant. Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations, and the nature of the arrangements negotiated with landlords. We believe that our cash flow from operations supplemented, where necessary, by borrowings on our revolver, and cash from the exercise of employee stock options, will be sufficient to fund our capital requirements for the foreseeable future.

Critical Accounting Policies & Estimates

There were no material changes in the Company’s critical accounting policies since the end of the most recent fiscal year. For further information, see the “Critical Accounting Policies & Estimates” section of Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 25, 2004.

Other Commitments

The Company is obligated under non-cancelable operating leases for its bakery-cafes, fresh dough facilities and trucks, and administrative offices. Lease terms for its trucks are generally for five to seven years. Lease terms for its bakery-cafes, fresh dough facilities, and administrative offices are generally for ten years with renewal options at most locations and generally require the Company to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts. Certain of the Company’s lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than the date of initial occupancy.

Off-Balance Sheet Arrangement — The Company is a prime tenant or guarantor for certain operating leases of 12 franchisee locations and 33 locations of the former Au Bon Pain Division, or its franchisees. The leases have terms expiring on various dates from October 2005 to December 2018, and the guarantees have a potential amount of future rental payments of approximately $31.1 million. The obligation from leases or guarantees will continue to decrease over time as these operating leases expire. As the guarantees were initiated prior to December 31, 2002, the Company has not recorded a liability for these leases or guarantees pursuant to the provisions of FASB Interpretation Number (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements For Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” Also, the Company has not had to make any payments related to the leases or guarantees. Au Bon Pain and the respective franchisees continue to have primary liability for these operating leases.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R will require the Company 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, 2005; therefore, the Company will adopt the new requirements when required in fiscal 2006. The Company anticipates it will adopt SFAS 123R prospectively and believes adoption of the expensing requirements will reduce the Company’s diluted EPS by $0.12 to $0.13 in 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

No material changes have taken place in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further information, see Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 25, 2004.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended) designed to provide reasonable assurance that information the Company is required to disclose in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s management, with the participation of its chief executive officer and its chief financial officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Act of 1934, as amended) as of October 4, 2005.

Based on that evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

It should be noted that while management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to provide a reasonable level of assurance, the Company does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended October 4, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits


Exhibit No.		Description
3.1		Certificate of Incorporation of Registrant, as amended through June 7, 2002. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 13, 2002.

3.2		Bylaws of Registrant, as amended through March 5, 2004. Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 27, 2003.

4.1		Form of Rights Agreement, dated as of October 21, 1996 between the Company and State Street Bank and Trust Company (now EquiServe Trust Company, N.A.), as Rights Agent. Incorporated by reference to the Company’s Registration Statement on Form 8-A (File No. 000-19253), filed on November 1, 1996.

4.2		Amendment of Rights Agreement between the Company and State Street Bank and Trust Company (now EquiServe Trust Company, N.A.), as Rights Agent, dated as of January 15, 1999. Incorporated by reference to the Company’s Registration Statement on Form 8-A/A (File No. 000-19253), filed on November 2, 1999.

10.1		Panera Bread Company 2005 Long-Term Incentive Program (“LTIP”). Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.2		Panera Bread Company 2001 Employee, Director and Consultant Stock Option Plan (the “2001 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.

10.3		Panera Bread Company 1992 Equity Incentive Plan, as amended (the “1992 Plan”). Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.4		Form of Non-qualified Stock Option Agreement under the LTIP and the 2001 Plan. Incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.5		Form of Restricted Stock Agreement under the LTIP and the 1992 Plan. Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.6		Form of Acknowledgement under the LTIP. Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.7		Form of Confidential and Proprietary Information and Non-Competition Agreement executed by Senior Vice Presidents. Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

EXHIBIT INDEX


Exhibit No.		Description
3.1		Certificate of Incorporation of Registrant, as amended through June 7, 2002. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 13, 2002.

3.2		Bylaws of Registrant, as amended through March 5, 2004. Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 27, 2003.

4.1		Form of Rights Agreement, dated as of October 21, 1996 between the Company and State Street Bank and Trust Company (now EquiServe Trust Company, N.A.), as Rights Agent. Incorporated by reference to the Company’s Registration Statement on Form 8-A (File No. 000-19253), filed on November 1, 1996.

4.2		Amendment of Rights Agreement between the Company and State Street Bank and Trust Company (now EquiServe Trust Company, N.A.), as Rights Agent, dated as of January 15, 1999. Incorporated by reference to the Company’s Registration Statement on Form 8-A/A (File No. 000-19253), filed on November 2, 1999.

10.1		Panera Bread Company 2005 Long-Term Incentive Program (“LTIP”). Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.2		Panera Bread Company 2001 Employee, Director and Consultant Stock Option Plan (the “2001 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.

10.3		Panera Bread Company 1992 Equity Incentive Plan, as amended (the “1992 Plan”). Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.4		Form of Non-qualified Stock Option Agreement under the LTIP and the 2001 Plan. Incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.5		Form of Restricted Stock Agreement under the LTIP and the 1992 Plan. Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.6		Form of Acknowledgement under the LTIP. Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.7		Form of Confidential and Proprietary Information and Non-Competition Agreement executed by Senior Vice Presidents. Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.8		Panera Bread Company and its Affiliates Standards of Business Conduct. Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

10.9		Panera Bread Company Statement of Company Policy relating to Securities Trades by Company Personnel. Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-8 (No. 333-128049) filed with the Commission on September 1, 2005.

31.1		Certification by Chief Executive Officer

31.2		Certification by Chief Financial Officer

32		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer


PART I		FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS (unaudited)
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.		CONTROLS AND PROCEDURES
PART II		OTHER INFORMATION
ITEM 6.		EXHIBITS
Certification of CEO
Certification of CFO
Certification Pursuant to 18 U.S.C. Section 1350 by CEO & CFO


	Panera Bread Company
	(REGISTRANT)

Dated: November 11, 2005	By:	/s/ Ronald M. Shaich

		Ronald M. Shaich
		Chairman and Chief Executive Officer
		(on behalf of registrant and as principal executive officer)

Dated: November 11, 2005	By:	/s/ Neal J. Yanofsky

		Neal J. Yanofsky
		Executive Vice President, Chief Administrative Officer

Dated: November 11, 2005	By:	/s/ Mark E. Hood

		Mark E. Hood
		Senior Vice President, Chief Financial Officer

Dated: November 11, 2005	By:	/s/ Richard R. Isaak

		Richard R. Isaak
		Vice President, Controller, Chief Accounting Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents