FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1998
Commission File Number 333-62775
NE RESTAURANT COMPANY, INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1311266
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80A TURNPIKE ROAD, WESTBOROUGH, MASSACHUSETTS 01581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 870-9200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securities Exchange Act of the 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 the filing
requirements for the past 90 days.
Yes___________ No_____X_______
On October 31, 1998, 2,975,598 shares of the registrant's Common Stock were
outstanding.
NE RESTAURANT COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
1) Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997 4
2) Consolidated Condensed Statements of Operations
For the Three and Nine Months Ended September 30, 1998
and September 30, 1997 6
3) Consolidated Condensed Statements of Shareholders'
Equity For the Nine Months Ended September 30, 1998 7
4) Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1998
and September 30, 1997 8
5) Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
PART II: OTHER INFORMATION 20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 22
PART I: FINANCIAL INFORMATION
NE RESTAURANT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS (UNAUDITED)
Current Assets:
Cash $ 217,176 247,675
Credit card receivables 627,920 297,221
Inventories 1,861,227 592,143
Prepaid expenses and other current assets 800,301 184,494
Prepaid and current deferred income taxes 1,138,189 111,504
Pre-opening costs, net of
accumulated amortization 1,208,063 159,728
--------- ---------
Total current assets 5,852,876 1,592,765
--------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land and land rights 7,694,536 3,792,524
Buildings 12,970,074 4,216,126
Leasehold improvements 74,189,763 16,623,160
Furniture and equipment 40,174,406 15,155,666
------------ -----------
135,028,779 39,787,476
Less accumulated depreciation (14,626,607) (9,992,744)
------------ -----------
120,402,172 29,794,732
Construction work in process 9,992,690 1,157,813
------------ -----------
Net property and equipment 130,394,862 30,952,545
GOODWILL, NET 22,098,304 -
DEFERRED FINANCE COSTS, NET 8,557,646 1,415,402
LIQUOR LICENSES 3,099,489 1,195,887
RESTRICTED INVESTMENTS 1,061,118 931,676
OTHER ASSETS, NET 4,086,743 1,248,551
----------- -----------
$ 175,151,038 $ 37,336,826
================ =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of mortgage loan
and bonds payable $ 657,538 $ 632,538
Accounts payable 5,173,801 3,987,794
Accrued expenses 22,849,700 5,298,000
Capital lease obligation-
current portion 72,647 79,997
---------- ----------
Total current liabilities 28,753,686 9,998,329
LINE OF CREDIT LOANS 1,100,000 13,500,000
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION 173,352 232,490
MORTGAGE LOANS PAYABLE, NET OF
CURRENT PORTION 24,968,187 23,463,313
BONDS PAYABLE, NET OF
CURRENT PORTION 100,000,000 -
DEFERRED RENT AND OTHER
LONG-TERM LIABILITIES 3,987,185 3,249,548
----------- -----------
Total liabilities 158,982,410 50,443,680
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock $.01 par value:
8,000,000 shares 36,649 20,060
authorized and 3,664,942 shares
issued at 9/30/98; 4,000,000 shares
authorized and 2,006,000 shares issued
at 12/31/97
Less treasury stock-689,344
shares at cost (8,017,070) (8,017,070)
Additional paid in capital 29,053,920 22,440
(Accumulated deficit) retained
earnings (4,904,871) (5,132,284)
----------- -----------
Total stockholders'
equity (deficit) 16,168,628 (13,106,854)
----------- ------------
$ 175,151,038 $ 37,336,826
============== =============
The accompanying notes are an integral part of these consolidated
financial statements.
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -------------- ------------- -------------
1998 1997 1998 1997
--------------- -------------- ------------- -------------
Net Sales $ 54,253,416 $ 21,007,772 $ 99,302,468 $ 59,880,140
--------------- -------------- ------------- -------------
Cost of Sales and Expenses
Cost of sales 14,644,067 5,961,145 27,365,935 17,295,204
Operating expenses 29,183,569 10,534,399 51,811,239 29,978,430
General and administrative expenses 2,582,115 1,029,966 4,880,412 3,042,970
Deferred rent, depreciation and
amortization 3,565,982 971,352 5,555,295 3,026,827
Taxes other than income 2,504,891 958,152 4,636,932 2,847,945
---------- ---------- ---------- ----------
Total cost of sales and expenses 52,480,624 19,455,014 94,249,813 56,191,376
---------- ---------- ---------- ----------
Income from operations 1,772,792 1,552,758 5,052,655 3,688,764
Interest Expense, net 2,894,657 397,605 4,758,594 1,004,397
Income (loss) before income tax (1,121,865) 1,155,153 294,061 2,684,367
expense (benefit)
Income Tax Expense (Benefit) (406,393) 418,179 66,648 961,187
---------- ---------- --------- ---------
Net Income (Loss) $(715,472) $736,974 $227,413 $1,723,180
========== ========== ========= ==========
Basic and Diluted Earnings (Loss) per Share $(0.28) $0.47 $0.13 $0.93
Weighted Average Shares Outstanding 2,595,557 1,575,788 1,745,255 1,858,596
The accompanying notes are an integral part of these consolidated
financial statements.
NE RESTAURANT COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
COMMON STOCK Treasury Stock
---------------------------------------------------
NUMBER .01 per Number Amount Additional (Accumulated Total
OF SHARES Share of Shares Paid In Deficit) Retained Stockholders'
Capital Earnings (Deficit) Equity
---------------------------------------------------
BALANCE DECEMBER 31, 1997 2,006,000 $ 20,060 (689,344) $(8,017,070) $ 22,440 $ (5,132,284) $ (13,106,854)
Net Income 227,413 227,413
Issuance of Common Stock 1,658,942 16,589 $ 29,031,480 29,048,069
-----------------------------------------------------------------------------------------------------
Balance September 30, 1998 3,664,942 $ 36,649 (689,344) $(8,017,070)$ 29,053,920 $ (4,904,871) $ 16,168,628
=====================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 227,413 $ 1,723,180
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and deferred rent 5,555,295 3,026,827
Deferred taxes - 94,023
Changes in operating assets and liabilities
Inventories (65,150) 117,036
Prepaid expenses, receivables and other 3,294 (526,551)
Accrued expenses 7,870,719 (576,118)
Accounts payable (2,433,803) 739,007
Other operating assets and liabilities (4,045,599) 435,278
----------- ---------
Total adjustments 6,884,756 2,874,224
----------- ---------
Net cash provided by (used in) operating activities 7,112,169 4,597,404
CASH FLOWS FROM INVESTING ACTIVITIES
Business acquired, net of cash acquired (90,002,596) -
Additions to property and equipment (13,678,668) (2,425,919)
Development and franchise fees paid - (280,000)
Acquisition of liquor licenses (25,324) (8,979)
Additions to preopening costs (1,440,790) (190,079)
------------- -----------
Net cash provided by investing activities (105,147,378) (2,904,977)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of mortgage loans 1,859,867 24,250,000
Repayments of mortgage loans (318,611) -
Financing costs (6,618,127) (1,439,402)
Cash dividend paid - (12,221,927)
Return of capital - (4,447,933)
Issuance of common shares - 22,500
Repurchase of treasury shares - (8,332,069)
Principal payments under capital lease obligations (66,488) (44,803)
Net (payments) borrowings under lines of credit (25,900,000) (325,000)
Borrowings of bonds payable 100,000,000 -
Issuance of common shares 20,048,069 -
------------ -----------
Net cash provided by (used in) financing activities 98,004,710 (2,538,634)
------------ -----------
Net Decrease in Cash (30,499) (846,207)
Cash, beginning of period 247,675 410,929
----------------------- ----------------------
Cash, end of period $ 217,176 $ (435,278)
----------------------- ----------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net amounts capitalized $ 1,437,315 $ 1,845,682
----------------------- ----------------------
Cash paid for income taxes $ 810,000 $ 3,234,000
----------------------- ----------------------
The accompanying notes are an integral part of these consolidated
financial statements.
NE RESTAURANT COMPANY, INC.
Notes To Consolidated Condensed Financial Statements
(Unaudited)
1. The unaudited condensed consolidated financial statements (the
"Unaudited Financial Statements") presented herein have been prepared
by NE Restaurant Co., Inc. and include all of its subsidiaries
(collectively, the "Company") after elimination of intercompany
accounts and transactions, without audit, and, in the opinion of
management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the interim periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been omitted, although the Company
believes that the disclosures included are adequate to make the
information presented not misleading. It is suggested that the
Unaudited Financial Statements be read in conjunction with the
financial statements and notes included in the Company's Registration
Statement on Form S-4, No. 333-62775, which was declared effective by
the Securities and Exchange Commission on November 12, 1998.
2. On July 21, 1998 the Company completed its acquisition of Bertucci's,
Inc. ("Bertucci's") pursuant to the terms of an Agreement and Plan of
Merger dated as of May 13, 1998 (the "Acquisition"). The Company
purchased all of the issued and outstanding shares of the Bertucci's
common stock at a price of $10.50 per share. The total purchase price
was approximately $98 million.
3. In connection with the acquisition of Bertucci's, the Company sold
$100,000,000 principal amount of its 10 3/4% Senior Notes due July 15,
2008. The net proceeds were used to consummate the Acquisition, repay
certain outstanding indebtedness of the Company and Bertucci's and pay
fees and expenses incurred in connection with the financing and the
Acquisition.
4. The Acquisition is accounted for as a purchase and, accordingly, has
been included in the Company's consolidated results of operations since
the consummation of the Acquisition on July 21, 1998. The purchase
price allocation is preliminary and subject to refinement when all
pertinent information regarding the Acquisition has been obtained.
5. In April 1988, the AICPA issued its Statement of Position 98-5 ("SOP
98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES. SOP 98-5
requires that costs incurred during start-up activities, including
organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15,
1998, although early application is encouraged. Initial application of
SOP 98-5 should be as of the beginning of the fiscal year in which it
is first adopted and should be reported as a cumulative effect of a
change in accounting principle.
The Company currently intends to adopt SOP 98-5 on January 1, 1999.
Upon adoption, the Company estimates it will incur a cumulative effect
of a change in accounting principle that will range from $750,000 to
$1.5 million. This estimate primarily includes unamortized preopening
costs which were previously amortized over the 12-month period
subsequent to a restaurant opening.
6. The following presents the unaudited pro forma consolidated statements
of income of the Company for the three months and nine months ended
September 30, 1998 and 1997. In computing pro forma earnings, earnings
have been reduced by the interest expense on indebtedness incurred in
connection with the Acquisition. In addition, earnings have been
reduced by amortization of goodwill and deferred finance costs. The pro
forma information presented does not purport to be indicative of the
results which would have been reported if these transactions had
occurred at the beginning of the respective period, or which may be
reported in the future.
Note 6 (continued)
PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF THE COMPANY
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------------------
1998 1997
------------------------------------- --------------------------
Net Sales $ 58,382 $ 53,671
Cost of Sales and Expenses
Cost of sales 15,759 14,091
Operating expenses 31,522 27,787
General and administrative expenses 3,078 3,022
Deferred rent, depreciation and amortization 3,468 3,279
Taxes other than income 2,711 2,588
------------------------ ------------------
Total cost of sales and expenses 56,538 50,767
------------------------ ------------------
Income from operations 1,844 2,904
Interest Expense, net 3,543 3,464
------------------------ ------------------
Income (loss) before income tax expense (benefit) (1,699) (560)
Income Tax Expense (Benefit) (612) (176)
------------------------ -----------------
Net Income (Loss) $ (1,087) $ (384)
======================== =================
Earnings (loss) per share $ (.37) $ (.13)
EBITDA(a) $ 5,507 $ 6,404
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------------------------
1998 1997
-------------------------------- ----------------------------
Net Sales $ 181,911 $ 164,524
Cost of Sales and Expenses
Cost of sales 47,969 43,372
Operating expenses 95,216 85,007
General and administrative expenses 10,690 9,367
Deferred rent, depreciation and amortization 11,422 10,788
Taxes other than income 8,946 8,301
----------------------- --------------------
Total cost of sales and expenses 174,243 156,835
----------------------- --------------------
Income from operations 7,668 7,689
Interest Expense, net 11,622 10,425
----------------------- --------------------
Income (loss) before income tax expense (benefit) (3,954) (2,736)
Income Tax Expense (Benefit) (1,441) (914)
----------------------- ---------------------
Net Income (Loss) $ (2,513) $ (1,822)
======================= =====================
Earnings (loss) per share $ (.84) $ (.61)
EBITDA(a) $ 19,751 $ 19,248
- - --------
a) "EBIDTA" is defined as income from operations before deferred
rent, depreciation and amortization. EBITDA is not a measure
of performance defined by GAAP. EBITDA should not be
considered in isolation or as a substitute for net income or
the statement of cash flows which have been prepared in
accordance with GAAP. The Company believes EBITDA provides
useful information regarding the Company's ability to service
its debt and the Company understands that such information is
considered by certain investors to be an additional basis for
evaluating a company's ability to pay interest and repay debt.
The EBITDA measures presented herein may not be comparable to
similarly titled measures of other companies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
herein.
GENERAL
NE Restaurant Company, Inc. (together with its subsidiaries, the
"Company") is a leading operator of full-service, casual dining restaurants in
New England. The Company develops and operates two distinct restaurant
franchises, Chili's Grill & Bar(R) ("Chili's") and On The Border Mexican Cafe(R)
("On The Border") restaurants, under franchise agreements with Brinker
International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"),
together with a proprietary restaurant concept under the name Bertucci's Brick
Oven Pizzeria(R) ("Bertucci's"). As of September 30, 1998, the Company operated
33 Chili's and three On The Border restaurants in five New England states, and
owned and operated 89 Bertucci's restaurants located primarily in the
northeastern and Mid-Atlantic United States and one Sal and Vinnie's Sicilian
Steakhouse ("Sal and Vinnie's") restaurant located in Massachusetts.
The Company has entered into franchise and development agreements with
Brinker to operate the 36 Chili's and On The Border restaurants and to
exclusively develop additional restaurants in New England and Westchester County
and additionally, in the case of On The Border, upstate New York. The Company
acquired the Bertucci's and Sal and Vinnie's concepts pursuant to the terms of
an Agreement and Plan of Merger dated as of May 13, 1998, whereby the Company
(through a wholly-owned subsidiary) acquired on July 21, 1998 all of the issued
and outstanding shares of common stock of Bertucci's, Inc. for an aggregate
purchase price of approximately $98.0 million (the "Acquisition").
For all the Company's restaurants, net sales consist of food, beverage
and alcohol sales. Cost of sales consists of food, beverage and alcohol costs.
Total operating expenses consist of five primary categories: (i) labor expenses;
(ii) restaurant operations; (iii) facility costs; (iv) office expenses; and
(v) non-controllable expenses, which include such items as Brinker's royalty
and advertising fees, rent, insurance, and real estate and personal property
taxes. General and administrative expenses include costs associated with those
departments of the Company that assist in restaurant operations and management
of the business, including accounting, management information systems, training,
executive management, purchasing and construction.
RESULTS OF OPERATIONS
The results of operations for the three- and nine-month periods ended
September 30, 1998 include the results of operations of the Bertucci's concepts
from their July 21, 1998 acquisition date.
The following table sets forth the percentage relationship to net
sales, unless otherwise indicated, of certain items included in the Company's
income statement, as well as certain operating data, for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
INCOME STATEMENT DATA:
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales and Expenses:
Cost of sales 27.0% 28.4% 27.6% 28.9%
Operating expenses 53.8% 50.1% 52.2% 50.1%
General and administrative expenses 4.8% 4.9% 4.9% 5.1%
Deferred rent, depreciation and amortization 6.6% 4.6% 5.6% 5.1%
Taxes other than income 4.6% 4.6% 4.7% 4.8%
Total cost of sales and expenses 96.8% 92.6% 95.0% 94.0%
--------------------------------- ----------------------------
Income from operations 3.2% 7.4% 5.0% 6.0%
Interest Expense, net 5.3% 1.9% 4.8% 1.7%
--------------------------------- ----------------------------
Income before income tax expense (benefit) (2.1)% 5.5% 0.2% 4.3%
Income Tax Expense (Benefit) (0.7)% 2.0% 0.1% 1.6%
---------------------------------- ---------------------------
Net Income (Loss) (1.4)% 3.5% 0.1% 2.7%
================================== ===========================
RESTAURANT OPERATING DATA (DOLLARS IN
THOUSANDS):
Average annual sales per restaurant-Brinker $ 2,804 $ 2,626 $ 2,774 $2,556
concepts (a)
Average annual sales per restaurant- $ 1,670 $ 1,731 $ 1,682 $1,674
Bertucci's concepts (a)
Comparable restaurant sales-Brinker 2.2% 3.0% 5.4% 1.9%
concepts
Comparable restaurant sales-Bertucci's (3.7)% 7.4% 0.5% 2.7%
concepts
Number of restaurants:
Restaurants open at beginning of period 121 112 117 110
Restaurants opened 4 2 8 4
Restaurants closed 0 0 0 0
------------ ------------ ------------ ---------
Total restaurants open at end of period 125 114 125 114
============ ============ ============ =========
- - ------------------
(a) Average sales per restaurant for the fiscal three and nine month
periods have been annualized to reflect a full year of operations, but
are not necessarily indicative of results for a full year.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
NET SALES. Net sales increased $33.2 million, or 158.0%, to $54.2
million during the third fiscal quarter 1998 from $21.0 million during the third
fiscal quarter 1997. The increase in net sales primarily was due to the
inclusion of the results of operations of the Bertucci's restaurants since the
Acquisition. In addition, $3.6 million of the increase in net sales was
attributable to the opening of one Chili's, one On The Border and two Bertucci's
restaurants during the third fiscal quarter 1998. Comparable restaurant sales
increased by 2.2% for the Chili's and On The Border restaurants operated by the
Company (I.E., its Brinker concept restaurants) in the third fiscal quarter 1998
as compared to the third fiscal quarter 1997, with the majority of such increase
resulting from an increase in guest counts by 1.6% during the third fiscal
quarter 1998 as compared to the third fiscal quarter 1997. Comparable restaurant
sales for the Bertucci's restaurants decreased by 3.7% in the third fiscal
quarter 1998 as compared to the comparable period in 1997, with the majority of
such decrease resulting from a reduction in planned advertising for the
Bertucci's restaurants which has adversely affected sales in certain markets.
COST OF SALES. Cost of sales increased by $8.7 million, or 145.7%, to
$14.6 million during the third fiscal quarter 1998 from $5.9 million during the
third fiscal quarter 1997. The dollar increase in cost of sales primarily was
due to the inclusion of the results of operations of Bertucci's restaurants
since the Acquisition. Expressed as a percentage of net sales, overall cost of
sales decreased to 26.7% during the third fiscal quarter 1998 from 27.7% during
the third fiscal quarter 1997. The percentage decrease was attributable to
reduced pricing from a new broadline food supplier for the Company's Brinker
concept restaurants and to a more efficient, automated ordering system
implemented during the fourth fiscal quarter 1997. However, this overall
decrease was partially offset by cost of sales for the Bertucci's restaurants
which, expressed as a percentage of net sales for the Bertucci's restaurants,
increased to 26.9% during the third fiscal quarter 1998 from 25.9% during the
comparable period in 1997, primarily as a result of changing broadline suppliers
for the Bertucci's restaurants during July 1998 combined with increases in
cheese commodity costs during the first three fiscal quarters of 1998.
OPERATING EXPENSES. Operating expenses increased by $18.7 million, or
177.0%, to $29.2 million during the third fiscal quarter 1998 from $10.5 million
during the third fiscal quarter 1997. Expressed as a percentage of net sales,
operating expenses increased to 53.8% in the third fiscal quarter 1998 from
50.1% during the third fiscal quarter 1997. The dollar increase in operating
expenses primarily was due to the inclusion of the results of operations of the
Bertucci's restaurants since the Acquisition. The percentage increase primarily
was attributable to increased hourly labor costs driven by a tight labor market
as a result of low unemployment and mandated Federal and state minimum wage
increases, as well as to increased labor costs arising from increased staffing
of restaurant-level management implemented to strengthen restaurant operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $1.6 million, or 150.7%, to $2.6 million during the third
fiscal quarter 1998 from $1.0 million during the third fiscal quarter 1997. The
dollar increase in general and administrative expenses primarily was due to the
inclusion of the results of operations of Bertucci's restaurants since the
Acquisition. Expressed as a percentage of net sales, general and administrative
costs decreased to 4.8% during the third fiscal quarter 1998 from 4.9% during
the third fiscal quarter 1997. The decrease was attributable to an increase in
sales for the Company's Brinker concept restaurants, combined with relatively
flat general and administrative expenses for such restaurants, during the third
fiscal quarter 1998 as compared to the third fiscal quarter 1997 and to reduced
executive salaries for the Bertucci's restaurants, which, however, were
partially offset by increased manager-in-training costs for such restaurants,
during the third fiscal quarter 1998.
DEFERRED RENT, DEPRECIATION AND AMORTIZATION. Deferred rent,
depreciation and amortization expenses increased by $2.6 million, or 260%, to
$3.6 million during the third fiscal quarter 1998 from $1.0 million during the
third fiscal quarter 1997. The increase was primarily due to the inclusion of
the results of the operations of the Bertucci's restaurants since the
Acquisition and to the amortization of approximately $22.0 million of goodwill
associated with the Acquisition.
TAXES OTHER THAN INCOME TAXES. Taxes, other than income taxes,
increased by $1.5 million, or 161.4%, to $2.5 million during the third fiscal
quarter 1998 from $1.0 million during the third fiscal quarter 1997. Expressed
as a percentage of net sales, taxes, other than income taxes, remained constant
at 4.6% during each of the third fiscal quarter 1998 and the third fiscal
quarter 1997. The overall dollar increase in taxes, other than income taxes, was
due to the inclusion of the results of operations of the Bertucci's restaurants
since the Acquisition.
INTEREST EXPENSE. Interest expense increased by $2.5 million to $2.9
million during the third fiscal quarter 1998 from $0.4 million during the third
fiscal quarter 1997. This increase was attributable to the sale by the Company
in July 1998 of $100.0 million aggregate principal amount of its 10-3/4% Senior
Notes due 2008 (the "Senior Notes"), and to the approximately $24.3 million
aggregate principal amount of mortgage loan financing provided, since August
1997, to the Company by FFCA Acquisition Corporation (the "FFCA Loans").
Interest was approximately $2.3 million on the Senior Notes, and $0.6 million on
the FFCA Loans, during the third fiscal quarter 1998.
INCOME TAXES. The effective income tax rate remained constant at 36%
during each of the third fiscal quarter 1998 and the third fiscal quarter 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
NET SALES. Net sales increased by $39.4 million, or 65.8%, to $99.3
million during the nine months ended September 30, 1998 (the "first fiscal nine
months 1998") from $59.9 million during the nine months ended September 30, 1997
(the "first fiscal nine months 1997"). The increase in net sales primarily was
due to the inclusion of the results of operations of the Bertucci's restaurants
since the Acquisition, as well as to an increase in net sales for the Company's
Brinker concept restaurants which increased by $8.9 million, or 14.8%, to $68.8
million during the first fiscal nine months 1998 from $59.9 million during the
first fiscal nine months 1997, primarily due to the opening of one Chili's
restaurant and two On The Border restaurants during the first fiscal nine months
1998. Comparable restaurant sales increased by 5.4% during the first fiscal nine
months 1998, with the majority of such increase resulting from an increase in
guest counts by 4.4% for the Company's Brinker concept restaurants in the first
fiscal nine months 1998 as compared to the first fiscal nine months 1997.
COST OF SALES. Cost of sales increased by $10.1 million, or 58.2%, to
$27.4 million during the first fiscal nine months 1998 from $17.3 million during
the first fiscal nine months 1997. Expressed as a percentage of net sales, cost
of sales decreased to 27.6% during the first fiscal nine months 1998 from 28.9%
during the first fiscal nine months 1997. The dollar increase in cost of sales
primarily was due to the inclusion of the results of operations of the
Bertucci's restaurants since the Acquisition. In addition, cost of sales for the
Company's Brinker concept restaurants increased by $2.2 million to $19.5 million
from $17.3 million, but decreased as a percentage of net sales to 28.3% from
28.9%, during the first fiscal nine months 1998 as compared to the first fiscal
nine months 1997. In each case, the decrease was attributable to reduced pricing
from a new broadline food supplier for the Company's Brinker concept restaurants
and to a more efficient automated ordering system implemented during the fourth
fiscal quarter 1997.
OPERATING EXPENSES. Operating expenses increased by $21.8 million, or
72.8%, to $51.8 million during the first fiscal nine months 1998 from $30.0
million during the first fiscal nine months 1997. Expressed as a percentage of
net sales, operating expenses increased to 52.2% during the first fiscal nine
months 1998 from 50.1% during the first fiscal nine months 1997. The dollar
increase in operating expenses primarily was due to the inclusion of the results
of operations of the Bertucci's restaurants since the Acquisition. The
percentage increase primarily was attributable to increased hourly labor costs
driven by a tight labor market as a result of low unemployment and mandated
Federal and state minimum wage increases, as well as to increased labor costs
arising from increased staffing of restaurant-level management implemented to
strengthen restaurant operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by $1.8 million, or 60.4%, to $4.9 million during the first
fiscal nine months 1998 from $3.1 million during the first fiscal nine months
1997. The dollar increase in general and administrative expenses primarily was
due to the inclusion of the results of operations of Bertucci's restaurants
since the Acquisition. Expressed as a percentage of net sales, general and
administrative expenses decreased to 4.9% during the first fiscal nine months
1998 from 5.1% during the first fiscal nine months 1997. The decrease was
attributable to an increase in sales for the Company's Brinker concept
restaurants, combined with relatively flat general and administrative expenses
for such restaurants, during the first fiscal nine months 1998 compared to the
first fiscal nine months 1997 and to reduced executive salaries for the
Bertucci's restaurants, which, however, were partially offset by increased
manager-in-training costs for such restaurants, during the third fiscal quarter
1998.
DEFERRED RENT, DEPRECIATION AND AMORTIZATION. Deferred rent,
depreciation and amortization expenses increased by $2.6 million, or 54.5%, to
$5.6 million for the first fiscal nine months 1998 from $3.0 million during the
first fiscal nine months 1997. The increase was due to the inclusion of the
results of operations of the Bertucci's restaurants since the Acquisition.
Expressed as a percentage of net sales, deferred rent, depreciation and
amortization expenses increased to 5.6% during the first fiscal nine months 1998
from 5.1% during the first fiscal nine months 1997. This increase was due to the
opening of one Chili's and two On The Border restaurants during the first fiscal
nine months 1998 and two Bertucci's restaurants since the Acquisition, and to
the amortization of approximately $22.0 million of goodwill associated with the
Acquisition.
TAXES OTHER THAN INCOME TAXES. Taxes, other than income taxes,
increased by $1.8 million, or 62.8%, to $4.6 million during the first fiscal
nine months 1998 from $2.8 million during the first fiscal nine months 1997.
Expressed as a percentage of net sales, taxes, other than income taxes,
decreased to 4.7% during the first fiscal nine months 1998 from 4.8% during the
first fiscal nine months 1997. The overall dollar and percentage increases in
taxes, other than income taxes, were due to the inclusion of the results of
operations of the Bertucci's restaurants since the Acquisition.
INTEREST EXPENSE. Interest expense increased by $3.8 million, or
473.8%, to $4.8 million during the first fiscal nine months 1998 from $1.0
million during the first fiscal nine months 1997. This increase was attributable
to the sale of the Senior Notes in July 1998 and to the FFCA Loans entered into
since August 1997. Interest was approximately $2.3 million on the Senior Notes
and $2.5 million on the FFCA Loans during the first fiscal nine months 1998.
INCOME TAXES. The effective income tax rate remained constant at 36%
during each of the first fiscal nine months 1998 and the first fiscal nine
months 1997.
IMPACT OF ACQUISITION ON RESULTS OF OPERATIONS
As a result of the Acquisition, operations going forward will be
impacted by amortization of approximately $22.1 million of goodwill and
additional interest expense associated with the Senior Notes. On a pro forma
basis, during the first fiscal nine months 1998, amortization of goodwill was
approximately $1.1 million and additional interest expense in connection with
the Senior Notes was approximately $8.1 million. The additional interest expense
will have a resulting tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its capital expenditures and working
capital needs through a combination of operating cash flow, borrowings under the
FFCA Loans and borrowing under the Company's revolving credit facility, which
provides for borrowings of up to $20.0 million, with BankBoston, N.A. acting as
administrative agent and Chase Bank of Texas, N.A. acting as documentation agent
(the "Senior Bank Facility").
Net cash flows from operating activities were $7.1 million for the
first fiscal nine months 1998 as compared to $4.6 million for the first fiscal
nine months 1997. This increase was primarily due to changes in working capital,
in particular increases in accrued expenses and accounts payable, due to the
inclusion of the results of operations of the Bertucci's restaurants since the
Acquisition.
The Company's capital expenditures increased by $11.3 million to $13.7
million for the first fiscal nine months 1998. The increase in capital
expenditures was primarily due to the opening of five Bertucci's restaurants,
one Chili's restaurant, and two On The Border restaurants during the first
fiscal nine months 1998. Under its area development agreements with the
Franchisor, the Company is required to open at least two Chili's and two On The
Border restaurants in each of 1998 and 1999 to meet its minimum development
requirements. The Company currently expects to exceed these minimum requirements
by opening a total of two Chili's and three On The Border restaurants in fiscal
1998, requiring capital expenditures of approximately $10.0 million, and four
Chili's and three On The Border restaurants in fiscal 1999, requiring capital
expenditures of approximately $13.4 million. In addition, the Company expects to
open one new Bertucci's restaurant during the fourth fiscal quarter 1998,
requiring capital expenditures of approximately $1.3 million. As described
below, the Company believes that it will have sufficient working capital and
bank borrowing availability to finance its expansion and other plans through
2003.
The Company incurred a significant amount of indebtedness in connection
with the Acquisition. As of September 30, 1998, the Company had approximately
$127.0 million in consolidated indebtedness, including $100.0 million of
indebtedness pursuant to the Senior Notes, $25.5 million of borrowings under the
FFCA Loans, $1.1 million outstanding under the Senior Bank Facility and $0.4
million of capital lease obligations. Significant liquidity demands will arise
from debt service on the Senior Notes, the FFCA Loans and borrowings under the
Senior Bank Facility. In addition to its debt service obligations, the Company
estimates that it will incur $15.6 million for capital expenditures, $0.1
million for lease obligations and $0.7 million for general working capital needs
in 1998 and $31.2 million, $0.1 million and $(0.4) million, respectively, for
such expenditures and obligations in 1999.
The Company believes that the cash flow generated from its operations,
together with available borrowings under the Senior Bank Facility and under the
FFCA Loans and similar secured indebtedness, should be sufficient to fund its
debt service requirements, lease obligations, working capital needs, current
expected capital expenditures and other operating expenses through 2003. The
Senior Bank Facility provides the Company with available borrowing up to an
aggregate amount of $20.0 million. As of September 30, 1998, approximately $18.9
million of borrowings were available under the Senior Bank Facility. The
Company's future operating performance and ability to service or refinance the
Senior Notes, the FFCA Loans, and the Senior Bank Facility will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
SEASONALITY
The Company's quarterly results of operations have fluctuated and are
expected to continue to fluctuate depending on a variety of factors, including
the timing of new restaurant openings and related pre-opening and other startup
expenses, net sales contributed by new restaurants, increases or decreases in
comparable restaurant sales, competition and overall economic conditions. The
Company's business is also subject to seasonal influences of consumer spending,
dining out patterns and weather. As is the case with many restaurant companies,
the Company typically experiences lower net sales and net income during the
first and fourth fiscal quarters. Because of these fluctuations in net sales and
net income (loss), the results of operations of any quarter are not necessarily
indicative of the results that may be achieved for a full year or any future
quarter.
YEAR 2000 IMPACT
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, within the next two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company is currently assessing the potential impact of Year 2000 on the
processing of date-sensitive information by the Company's automated information
and point-of-sale systems and by the computerized information systems for its
Bertucci's operations. While there can be no assurance that Year 2000 matters
will be satisfactorily identified and resolved, the Company currently believes,
based on preliminary discussions with its information systems vendors, that Year
2000 issues will not have a materially adverse affect on the Company.
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff and is designed to ensure that there are no adverse
affects on the Company's ability to conduct business at the restaurant level and
to process and support restaurant activity at the corporate level. The
initiative covers restaurant point-of-sale systems, back office software,
including labor, menu and inventory management software, ordering systems, the
corporate office network and financial systems, payroll processing, corporate
computers and telephone systems. In addition, the project includes a review of
the Year 2000 compliance effects of the Company's key suppliers and other
principal business partners and, as appropriate, the development of joint
business support and continuity plans for Year 2000 issues. The Year 2000
project is divided into the following phases: inventory, assessment,
remediation, testing, deployment and monitoring. As of September 30, 1998, the
inventory and assessment phases are substantially completed, and the
remediation, testing, deployment and monitoring phases are in progress. As part
of its testing phase, the Company intends to conduct independent verification
testing of selected network component upgrades received from suppliers. In
addition, selected Year 2000 upgrades are slated to undergo testing in a
controlled environment that replicates the current network and is equipped to
simulate the turn of the century and leap year dates.
Under its current Year 2000 plan, the Company has brought a number of
its systems into Year 2000 compliance, and has established a target date of
March 1, 1999 for remediation of most of those systems which are not yet
compliant, subject to additional Year 2000 testing and responsive actions. The
Company's accounts receivable system is expected to be compliant by June 1999
and the point-of-sale systems in seven remaining Chili's restaurants are
expected to be compliant by September 1999. The Company's ability to meet the
target dates is dependent upon the timely provision of necessary upgrades and
modifications by its suppliers and contractors. In some instances, third party
upgrades or modifications are not expected to be available until late 1998 or
early 1999; accordingly, the Company's testing and redeployment of affected
items may be delayed into mid-1999. The Company has established a supplier
compliance program, and is working with its key suppliers and the Franchisor to
minimize such risks. Based upon information obtained from the Company's two
principal vendors of restaurant supplies and products (which together account
for approximately 75% to 80% of its supplies), the Company believes that the
vendors' systems that could affect the Company's business are Year 2000
compliant. While the Company believes that its relationships with its smaller
suppliers and the Franchisor, as such relationships relate to Year 2000 issues,
are less significant, it is continuing to assess these relationships and to
develop contingency plans with such suppliers and expects that such efforts will
be completed by June 1, 1999. The Company currently estimates that it will incur
expenses of approximately $230,000 through 1999 in connection with its
anticipated Year 2000 efforts. The timing and amount of the Company's expenses
may vary and are not necessarily indicative of readiness efforts or progress to
date.
As part of its Year 2000 initiative, the Company is evaluating
scenarios that may occur as a result of the century change and is in the process
of developing a contingency and business continuity plan tailored for Year
2000-related occurrences. The Company believes that most of its significant
hardware and software systems are already Year 2000 compliant. However, for
those systems which are not yet compliant, the Company is currently in the
process of evaluating alternative vendors from whom it may obtain upgrades in
the event that the vendors who are expected to deliver such upgrades do not meet
the anticipated delivery dates. The Company believes that the most reasonably
likely worst case scenario of failure by the Company or its suppliers to
adequately resolve Year 2000 issues would arise from a complete failure of its
point-of-sale and ordering systems. Such a failure would require the Company to
resort to "non-computerized" means to undertake such restaurant functions as
placing customer orders, preparing customer checks, accounting of restaurant
receipts, recording and ordering restaurant inventory and supplies, evaluating
menu mix and analyzing other operating statistics. While the Company believes
that it is equipped to operate in such "non-computerized" mode to address such a
failure, there can be no assurance that the Company would not suffer, as a
result of such or any other unanticipated Year 2000 failure, from lost revenues,
increased operating costs, loss of customers or other business interruptions of
a material nature.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technologies and other resources, third
party modification actions and other factors. Given the complexity of these
issues and possible unidentified risks, actual results may vary from those
anticipated and discussed above. Specific factors that might cause such
differences include, among others, the availability and cost of personnel
trained in this area, the ability to locate and correct all affected computer
code, the timing and success of remedial efforts of the Company's third party
suppliers and similar uncertainties.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Quarterly Report on Form 10-Q, including, without limitation, statements
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the Company's future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate" or "believe" or the negative thereof or variations
thereon or similar terminology. Although the Company believes that the
expectations reflected in such forward-looking statements will prove to have
been correct, it can give no assurance that such expectations will prove to have
been correct. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. In the opinion of management, any
ultimate liability arising out of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
Management is not aware of any litigation to which the Company is a
party (other than lawsuits filed from time to time against the Company in the
ordinary course of its business) which is likely to have a material adverse
effect on the Company.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 15, 1998, the Company issued and sold 1,644,775 shares of
its common stock in a private placement to existing stockholders, including
certain members of management, and to certain affiliates of Jacobson Partners,
for an aggregate purchase price of approximately $28.8 million (the "Equity
Investment"). The Company used the net proceeds of the sale, together with the
approximately $96.0 million proceeds of the sale of the 10-3/4% Senior Notes due
2008 (the "Private Notes") and approximately $3.7 million of cash on hand, to
pay amounts due in connection with the Acquisition and certain related
transactions, and to pay fees and expenses related to the Acquisition and such
related transactions. The foregoing shares were sold without registration in a
transaction qualifying for exemption from registration afforded by Section 4(2)
of the Securities Act of 1933, as amended. Fees and expenses for the Equity
Investment, the sale of the Private Notes and the Acquisition were approximately
$9.0 million.
(b) The Company filed a Registration Statement on Form S-4, Commission
File No. 333- 62775, which became effective on November 12, 1998, to allow
holders of the Private Notes to exchange such notes for notes (the "Exchange
Notes") which, among other things, will not bear legends restricting the
transfer thereof. The Company will not receive any cash proceeds from the
issuance of the Exchange Notes.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Form of Real Estate Contract of Sale dated as of
November 6, 1998 by and between Berestco, Inc. and Pinnacle
Properties Management, Inc.
27.1 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NE RESTAURANT COMPANY, INC.
--------------------------------------
(Registrant)
Date: November 16, 1998 BY: /S/ DENNIS PEDRA
-------------------------------------
Dennis Pedra
President and Chief
Executive Officer
Date: November 16, 1998 BY: /S/ PAUL HOAGLAND
-------------------------------------
Paul Hoagland
Chief Financial Officer and
Executive Vice President