You are a financial analyst for Panera Bread Company, reporting to the CFO. Part of your job involves preparing financial projections and it is time to generate those for the coming years. You need to provide a report to your boss that details the external funding needs required by Panera Bread Company as they undergo some tightening of margins and a repurchase of $75 million of stock. Write a three to four page memo (plus exhibits) to inform the CFO of your recommendation regarding the amount of long-term debt that will be required to move forward over the next three years. Your memo should include:

1 .Financial projections for the years 2007, 2008 and 2009 indicating Paneras need for funds. Use a sales projections of $1,050,000,000 for 2007 and generate your own revenue projections for 2008 and 2009.

2. Size of the loan you think Panera should request from their bank. Assume that the loan will carry a 6% rate of interest, may be taken out over a two-year period beginning in 2007, and will require no principal payments until 2011.

3 .Assume the stock buy-back will be spread over two years so that $37.5 million is repurchased in each 2007 and 2008.

4. Note that the equity account on Paneras balance sheet includes stock and retained earnings. The value of property, plant and equipment is shown net of depreciation.

5. Results of sensitivity analysis on key parameters indicating why changes in their values may occur and how those changes will affect Paneras need for funds.

PANERA BREAD COMPANY As the end of 2007 drew near, Panera Bread Company was facing a brand-new challenge. Until recently, strong margins had allowed Panera to finance its rapid growth largely through retained earnings and very minor equity infusions resulting from compensation programs. The company used no permanent debt financing and, in fact, had allowed a $10 million dollar credit facility to expire. But now Panera was facing a decline in margins that would limit its ability to rely on internal funds. With growth expected to continue and a $75 million stock repurchase under consideration, the company realized it would almost surely need capital from external markets in both the short run and the long run. History and Business Model Panera Bread Company had its origins in another successful bread venture, Au Bon Pain Co., which was founded in 1981. The success of Au Bon Pain in the 1980s gave rise to the 1993 purchase of Saint Louis Bread Company, a small bakery-caf company located in St. Louis, Missouri. By the end of 1999, the Saint Louis Bread Company concept was being expanded under the Panera Bread name, Au Bon Pain had sold off all its units except Panera Bread, and Au Bon Pain itself had adopted the Panera name. The goal of Panera Bread Company was to create a dining experience centered on fresh- baked bread in an environment where people "slowed down to enjoy real food." Its emphasis on wholesome foods and a welcoming environment placed the company in stark contrast to the fast- food experience that dominated the multiunit restaurant business. An essential element was a commitment to high-quality bread. Panera breads were baked fresh every day, at every location. The bread was featured in virtually all the store offerings, including such selections as made-to- order sandwiches and soup served in a bread bowl. Ensuring high-quality bread required the best ingredients, specialized equipment, and careful training. For example, Panera baked its breads on heated stone slabs in European-style ovens. Customers appreciated the resultsPanera consistently earned recognition for the quality of its offerings, often attaining the top position in customer-satisfaction surveys. The essential business model, therefore, was to provide a meal and dining environment of sufficient high quality that customers would gladly pay for that qualityat a price that would also make the company financially successful. The success of this business model was readily apparent. Starting with just 20 stores in 1993, the firm had more than 1,000 locations across 38 states by the end of 2006 operating under the Panera Bread and Saint Louis Bread Co. names. During 2006 alone, the company increased its number of outlets by 17% and attained more than 4% same-store sales growth. For the three years ending in 2006, total revenues grew an average of 32% a year with operating profit to sales averaging 12%. Recent Challenges A key measure of success in the restaurant business was transaction growththe increase in same-store sales ignoring the effect of price increases. Transaction growth at the start of 2007, continuing a trend from the very end of 2006, was lower than anticipated. In addition, margins for 2006, while strong, were down slightly from the previous two years (financial statements for 2003 to 2006 are presented in Exhibits 1 and 2 with a forecast of operating results for 2007 presented in Exhibit 3) and were expected to be lower in 2007. These problems were not unique to Panera. Commodity costs, particularly wheat, had risen, and cost uncertainty was a concern for the entire restaurant industry. To drive transaction growth for the future, the company might need to back off on price increases even in the face of rising costs. In other words, to sustain the firm's growth, Panera might have to operate at tighter margins. Furthermore, as a result of tightening margins, uncertain costs, and a softening in transaction growth in 2007, Panera's stock price had dropped a precipitous 10% on the announcement of third-quarter results and was down almost 40% over the past year (Exhibit 4 presents recent stock price data). In response, the firm was considering a $75 million dollar stock repurchase. As JPMorgan analyst Steven Rees observed, the repurchase would signal management's position on the long-term potential of the business as well as many company- specific near-term initiatives to drive sales and margin improvements." 995 Financing In the past, Panera had financed growth through retained earnings and through the modest increases in equity capital that resulted from the exercise of stock options and employee stock ownership plans. In effect, there had been little reliance on external capital. This reluctance to assume debt was typical of some, but not all, competitors (Exhibit 5 presents capital structure information for a variety of dining companies). As 2007 drew to a close, however, Panera Bread Company was clearly stuck between a rock and a hard place. Raising prices to improve margins would stymie company growth and likely precipitate a further decline in the firm's stock price. Accepting tighter margins would allow growth but limit the ability of internally generated funds to finance that growth. Adding to this conflict was the need to raise funds to make the stock repurchase. In the end, it was clear that Panera would have to consider, for the first time, accessing external capital markets. The real question was how much, what kind, and when. Exhibit 1 PANERA BREAD COMPANY Historic Income Statements (in thousands of dollars) 2003 2004 2005 2006 Number of bakery cafs) 602 741 877 1,027 Revenue 363,702 479,139 640,275 828,971 Costs of goods sold Bakery-caf Dough sold to franchisees Depreciation General and administrative) 210,822 54,967 18,304 31,502 315,595 288,706 65,627 25,298 38,735 418,366 399,760 75,036 33,011 50,240 558,047 542,916 85,618 44,166 63,502 736,202 Operating profit 48,107 60,773 82,228 92,769 92 Interest expense Pretax profit Tax Net income 48 48,059 17,629 30,430 18 60,755 22,175 38,580 50 82,178 29,995 52,183 92,677 33,827 58,850 Includes both company-owned and franchised bakery-cafs. (b Includes preopening expenses and other expenses. Data source: Panera Bread Company annual reports, 200306. Exhibit 2 PANERA BREAD COMPANY Historic Balance Sheets (in thousands of dollars) Historic Balance Sheets: 2003 2004 2005 2006 Cash and short-term investments Accounts receivable Inventory Prepaid expenses and deferred taxes Current assets 51,421 12,394 4,350 3,887 72,052 58,054 17,256 5,398 3,905 84,613 60,651 25,158 7,358 9,607 102,774 72,122 30,919 8,714 15,863 127,618 Property, plant, and equipment Goodwill and other assets 146,362 38,421 201,725 38,334 268,809 66,084 345,977 69,014 Total assets 256,835 324,672 437,667 542,609 Accounts payable Accrued expenses and deferred revenue Current liabilities 8,072 37,571 45,643 5,840 49,865 55,705 4,422 82,443 86,865 5,800 103,810 109,610 Deferred rent and other liabilities Total liabilities 13,616 59,259 27,604 83,309 33,824 120,689 35,333 144,943 Equity 197,576 256,835 241,363 324,672 316,978 437,667 397,666 542,609 Data source: Panera Bread Company annual reports, 2003-06. Exhibit 4 PANERA BREAD COMPANY Stock Price History Panera Stock Price 80 70 Grammy 10 0 6/1/2006 7/1/2006 8/1/2006 9/1/2006 10/1/2006 11/1/2006 12/1/2006 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/1/2007 9/1/2007 10/1/2007 11/1/2007 Data source: Datastream. Exhibit 5 PANERA BREAD COMPANY Data on Comparable Firm Capital Structure Estimates for Year-End 2007 Revenue EBIT LT Debt 11/30/2007 Price Shares Quick Service Restaurants McDonald's Corp Wendy's Group Inc. Burger King Holdings Inc. Domino's Pizza, Inc. Jack in the box Inc. 22,786,600 1,263,717 2,234,000 1,462,870 2,513,431 3,879,000 8,174,500 19,900 739,333 290,000 943,000 193,910 1,720,083 216,996 433,303 56.32 8.10 25.90 13.86 29.95 1,165,300 28,884 135,000 59,665 59,736 Casual Dining Darden Restaurants Inc. Ruby Tuesday Inc. PF Chang's China Bistro Inc. The Cheesecake Factory Inc. California Pizza Kitchen Inc. 5,567,100 1,410,227 1,084,193 1,511,577 632,884 574,400 154,855 53,312 110,803 21,517 491,600 514,338 191,195 175,000 0 38.25 13.11 25.59 23.29 15.91 141,400 53,240 24,152 69,152 28,358 Fast Casual Chipotle Mexican Grill, Inc. 1,085,782 113,706 0 Starbucks Corp. 9,411,497 1,053,945 550,000 Buffalo Wild Wings Inc. 329,652 28,518 12,585 Data sources: Investex, Onesource, Yahoo! Finance, and individual firm 10-K filings. 133.15 23.39 28.91 32,805 727,600 17,657 PANERA BREAD COMPANY As the end of 2007 drew near, Panera Bread Company was facing a brand-new challenge. Until recently, strong margins had allowed Panera to finance its rapid growth largely through retained earnings and very minor equity infusions resulting from compensation programs. The company used no permanent debt financing and, in fact, had allowed a $10 million dollar credit facility to expire. But now Panera was facing a decline in margins that would limit its ability to rely on internal funds. With growth expected to continue and a $75 million stock repurchase under consideration, the company realized it would almost surely need capital from external markets in both the short run and the long run. History and Business Model Panera Bread Company had its origins in another successful bread venture, Au Bon Pain Co., which was founded in 1981. The success of Au Bon Pain in the 1980s gave rise to the 1993 purchase of Saint Louis Bread Company, a small bakery-caf company located in St. Louis, Missouri. By the end of 1999, the Saint Louis Bread Company concept was being expanded under the Panera Bread name, Au Bon Pain had sold off all its units except Panera Bread, and Au Bon Pain itself had adopted the Panera name. The goal of Panera Bread Company was to create a dining experience centered on fresh- baked bread in an environment where people "slowed down to enjoy real food." Its emphasis on wholesome foods and a welcoming environment placed the company in stark contrast to the fast- food experience that dominated the multiunit restaurant business. An essential element was a commitment to high-quality bread. Panera breads were baked fresh every day, at every location. The bread was featured in virtually all the store offerings, including such selections as made-to- order sandwiches and soup served in a bread bowl. Ensuring high-quality bread required the best ingredients, specialized equipment, and careful training. For example, Panera baked its breads on heated stone slabs in European-style ovens. Customers appreciated the resultsPanera consistently earned recognition for the quality of its offerings, often attaining the top position in customer-satisfaction surveys. The essential business model, therefore, was to provide a meal and dining environment of sufficient high quality that customers would gladly pay for that qualityat a price that would also make the company financially successful. The success of this business model was readily apparent. Starting with just 20 stores in 1993, the firm had more than 1,000 locations across 38 states by the end of 2006 operating under the Panera Bread and Saint Louis Bread Co. names. During 2006 alone, the company increased its number of outlets by 17% and attained more than 4% same-store sales growth. For the three years ending in 2006, total revenues grew an average of 32% a year with operating profit to sales averaging 12%. Recent Challenges A key measure of success in the restaurant business was transaction growththe increase in same-store sales ignoring the effect of price increases. Transaction growth at the start of 2007, continuing a trend from the very end of 2006, was lower than anticipated. In addition, margins for 2006, while strong, were down slightly from the previous two years (financial statements for 2003 to 2006 are presented in Exhibits 1 and 2 with a forecast of operating results for 2007 presented in Exhibit 3) and were expected to be lower in 2007. These problems were not unique to Panera. Commodity costs, particularly wheat, had risen, and cost uncertainty was a concern for the entire restaurant industry. To drive transaction growth for the future, the company might need to back off on price increases even in the face of rising costs. In other words, to sustain the firm's growth, Panera might have to operate at tighter margins. Furthermore, as a result of tightening margins, uncertain costs, and a softening in transaction growth in 2007, Panera's stock price had dropped a precipitous 10% on the announcement of third-quarter results and was down almost 40% over the past year (Exhibit 4 presents recent stock price data). In response, the firm was considering a $75 million dollar stock repurchase. As JPMorgan analyst Steven Rees observed, the repurchase would signal management's position on the long-term potential of the business as well as many company- specific near-term initiatives to drive sales and margin improvements." 995 Financing In the past, Panera had financed growth through retained earnings and through the modest increases in equity capital that resulted from the exercise of stock options and employee stock ownership plans. In effect, there had been little reliance on external capital. This reluctance to assume debt was typical of some, but not all, competitors (Exhibit 5 presents capital structure information for a variety of dining companies). As 2007 drew to a close, however, Panera Bread Company was clearly stuck between a rock and a hard place. Raising prices to improve margins would stymie company growth and likely precipitate a further decline in the firm's stock price. Accepting tighter margins would allow growth but limit the ability of internally generated funds to finance that growth. Adding to this conflict was the need to raise funds to make the stock repurchase. In the end, it was clear that Panera would have to consider, for the first time, accessing external capital markets. The real question was how much, what kind, and when. Exhibit 1 PANERA BREAD COMPANY Historic Income Statements (in thousands of dollars) 2003 2004 2005 2006 Number of bakery cafs) 602 741 877 1,027 Revenue 363,702 479,139 640,275 828,971 Costs of goods sold Bakery-caf Dough sold to franchisees Depreciation General and administrative) 210,822 54,967 18,304 31,502 315,595 288,706 65,627 25,298 38,735 418,366 399,760 75,036 33,011 50,240 558,047 542,916 85,618 44,166 63,502 736,202 Operating profit 48,107 60,773 82,228 92,769 92 Interest expense Pretax profit Tax Net income 48 48,059 17,629 30,430 18 60,755 22,175 38,580 50 82,178 29,995 52,183 92,677 33,827 58,850 Includes both company-owned and franchised bakery-cafs. (b Includes preopening expenses and other expenses. Data source: Panera Bread Company annual reports, 200306. Exhibit 2 PANERA BREAD COMPANY Historic Balance Sheets (in thousands of dollars) Historic Balance Sheets: 2003 2004 2005 2006 Cash and short-term investments Accounts receivable Inventory Prepaid expenses and deferred taxes Current assets 51,421 12,394 4,350 3,887 72,052 58,054 17,256 5,398 3,905 84,613 60,651 25,158 7,358 9,607 102,774 72,122 30,919 8,714 15,863 127,618 Property, plant, and equipment Goodwill and other assets 146,362 38,421 201,725 38,334 268,809 66,084 345,977 69,014 Total assets 256,835 324,672 437,667 542,609 Accounts payable Accrued expenses and deferred revenue Current liabilities 8,072 37,571 45,643 5,840 49,865 55,705 4,422 82,443 86,865 5,800 103,810 109,610 Deferred rent and other liabilities Total liabilities 13,616 59,259 27,604 83,309 33,824 120,689 35,333 144,943 Equity 197,576 256,835 241,363 324,672 316,978 437,667 397,666 542,609 Data source: Panera Bread Company annual reports, 2003-06. Exhibit 4 PANERA BREAD COMPANY Stock Price History Panera Stock Price 80 70 Grammy 10 0 6/1/2006 7/1/2006 8/1/2006 9/1/2006 10/1/2006 11/1/2006 12/1/2006 1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/1/2007 9/1/2007 10/1/2007 11/1/2007 Data source: Datastream. Exhibit 5 PANERA BREAD COMPANY Data on Comparable Firm Capital Structure Estimates for Year-End 2007 Revenue EBIT LT Debt 11/30/2007 Price Shares Quick Service Restaurants McDonald's Corp Wendy's Group Inc. Burger King Holdings Inc. Domino's Pizza, Inc. Jack in the box Inc. 22,786,600 1,263,717 2,234,000 1,462,870 2,513,431 3,879,000 8,174,500 19,900 739,333 290,000 943,000 193,910 1,720,083 216,996 433,303 56.32 8.10 25.90 13.86 29.95 1,165,300 28,884 135,000 59,665 59,736 Casual Dining Darden Restaurants Inc. Ruby Tuesday Inc. PF Chang's China Bistro Inc. The Cheesecake Factory Inc. California Pizza Kitchen Inc. 5,567,100 1,410,227 1,084,193 1,511,577 632,884 574,400 154,855 53,312 110,803 21,517 491,600 514,338 191,195 175,000 0 38.25 13.11 25.59 23.29 15.91 141,400 53,240 24,152 69,152 28,358 Fast Casual Chipotle Mexican Grill, Inc. 1,085,782 113,706 0 Starbucks Corp. 9,411,497 1,053,945 550,000 Buffalo Wild Wings Inc. 329,652 28,518 12,585 Data sources: Investex, Onesource, Yahoo! Finance, and individual firm 10-K filings. 133.15 23.39 28.91 32,805 727,600 17,657