FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Quarterly Period Ended APRIL 4, 2001 Commission File Number 333-62775 NE RESTAURANT COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 06-1311266 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5 CLOCK TOWER PLACE, MAYNARD, MASSACHUSETTS 01754 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 897-1400 -------------- 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 X No ----- ----- 2,978,955 shares of the registrant's Common Stock were outstanding on May 18, 2001. NE RESTAURANT COMPANY, INC. FORM 10-Q TABLE OF CONTENTS PAGE PART I: FINANCIAL INFORMATION Item 1. Financial Statements: 1) Consolidated Balance Sheets April 4, 2001 (Unaudited) and January 3, 2001 3 2) Consolidated Statements of Operations For the Thirteen Weeks Ended April 4, 2001 (Unaudited) and March 29, 2000 (Unaudited) 4 3) Consolidated Statement of Stockholders' Equity for the Thirteen Weeks Ended April 4, 2001 (Unaudited) 5 4) Consolidated Statements of Cash Flows for the Thirteen Weeks April 4, 2001 (Unaudited) and March 29, 2000 (Unaudited) 6 5) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II: OTHER INFORMATION 16 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 17 2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements NE RESTAURANT COMPANY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) April 4, January 3, 2001 2001 ---------------------- ---------------------- ASSETS Current Assets: Cash $ 1,145 $ 7,602 Credit card receivables 1,271 838 Inventories 1,868 1,885 Prepaid expenses and other current assets 653 2,617 Assets held for sale - short term - 200 Prepaid and current deferred income taxes 5,433 5,433 ---------------------- ---------------------- Total current assets 10,370 18,575 ---------------------- ---------------------- Property and equipment, at cost: Land and land right 7,866 7,858 Buildings 12,570 12,549 Leasehold improvements 85,469 83,973 Furniture and equipment 51,636 50,455 ---------------------- ---------------------- 157,541 154,835 Less - Accumulated depreciation (43,437) (40,196) ---------------------- ---------------------- 114,104 114,639 Construction work in process 3,879 2,917 ---------------------- ---------------------- Net property and equipment 117,983 117,556 Goodwill, net 27,835 28,404 Deferred finance costs, net 7,800 8,025 Liquor licenses 3,014 3,014 Deferred taxes, noncurrent 6,451 6,451 Other assets, net 1,535 1,570 ---------------------- ---------------------- Total Assets $ 174,988 $ 183,595 ====================== ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit loans $ 1,100 $ - Mortgage loans payable - current portion 1,562 1,578 Accounts payable 10,591 14,510 Accrued expenses 14,019 18,817 ---------------------- ---------------------- Total current liabiliites 27,272 34,905 Mortgage loan payable, net of current portion 39,467 39,737 Bonds payable 100,000 100,000 Deferred rent and other long-term liabilites 4,839 4,887 ---------------------- ---------------------- Total liabilities 171,578 179,529 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value 37 37 Authorized - 4,000,000 shares Issued and outstanding - 3,666,370 shares Less treasury stock-687,415 shares at cost (8,088) (8,088) Additional paid-in capital 29,004 29,004 Accumulated deficit (17,543) (16,887) ---------------------- ---------------------- Total stockholders' equity 3,410 4,066 ---------------------- ---------------------- Total Liabiliites and Stockholders' Equity $ 174,988 $ 183,595 ====================== ====================== The accompanying notes are an integral part of these consolidated financial statements 3 NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) (Unaudited) Thirteen weeks ended -------------------------------------- April 4, March 29, 2001 2000 ------------------ ------------------ Net sales $ 69,813 $ 67,035 ------------------ ------------------ Cost of sales and expenses: Cost of sales 18,070 17,563 Operating expenses 40,466 38,958 General and administrative expenses 3,808 4,488 Deferred rent, depreciation and amortization and preopening expenses 4,476 4,529 ------------------ ------------------ Total cost of sales and expenses 66,820 65,538 ------------------ ------------------ Income from operations 2,993 1,497 Interest expense, net 3,781 3,674 ------------------ ------------------ Loss before income tax benefit (788) (2,177) Income tax benefit (132) (705) ------------------ ------------------ Net loss $ (656) $ (1,472) ================== ================== Basic and diluted loss per share $ (0.22) $ (0.49) ================== ================== Basic and diluted weighted average shares outstanding 2,978,955 2,986,622 The accompanying notes are an integral part of these consolidated financial statements 4 NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data) Common Stock Treasury Stock ------------------------------------- ----------------------------------------- Number of $.01 per Number of Shares Share Shares Amount ------------------------------------- -------------------- ------------------- Balance January 3, 2001 3,666,370 $ 37 (687,415) $ (8,088) Net loss --------------------- -------------- -------------------- ------------------- Balance April 4, 2001 (Unaudited) 3,666,370 $ 37 (687,415) $ (8,088) ===================== ============== ==================== =================== Total Additional Paid - Accumulated Stockholders' In Capital Deficit Equity --------------------------- ---------------------- ---------------------- Balance January 3, 2001 $ 29,004 $ (16,887) $ 4,066 Net loss (656) (656) --------------------------- ---------------------- ---------------------- Balance April 4, 2001 (Unaudited) $ 29,004 $ (17,543) $ 3,410 =========================== ====================== ====================== The accompanying notes are an integral part of these consolidated financial statements 5 NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited) Thirteen weeks ended ------------------------------------------------ April 4, 2001 March 29, 2000 ----------------------- ----------------------- Cash flows from operating activities Net loss $ (656) $ (1,472) ----------------------- ----------------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, amortization and deferred rent 4,240 4,153 Changes in operating assets and liabilities Inventories 17 (51) Prepaid expenses, receivables and other 1,531 702 Accrued expenses (4,798) (6,273) Accounts payable (3,919) 89 Other operating assets and liabilities (220) (396) ----------------------- ----------------------- Total adjustments (3,149) (1,776) ----------------------- ----------------------- Net cash used in operating activities (3,805) (3,248) ----------------------- ----------------------- Cash flows from investing activities Additions to property and equipment (3,666) (3,606) Proceeds from sale of restaurant properties 200 1,390 ----------------------- ----------------------- Net cash used for investing activities (3,466) (2,216) ----------------------- ----------------------- Cash flows from financing activities Borrowings of mortgage loans - 1,100 Payments of mortgage loans and capital lease obligations (286) (348) Borrowings of line of credit 1,100 - ----------------------- ----------------------- Net cash provided by financing activities 814 752 ----------------------- ----------------------- Net decrease in cash (6,457) (4,712) Cash, beginning of period 7,602 7,579 ----------------------- ----------------------- Cash, end of period $ 1,145 $ 2,868 ======================= ======================= Supplemental Disclosure of Cash Flow Information: Cash paid for interest, net of amounts capitalized $ 6,505 $ 6,261 ======================= ======================= Cash paid (refunds received) for income taxes $ (356) $ 69 ======================= ======================= The accompanying notes are an integral part of these consolidated financial statements 6 NE RESTAURANT COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 4, 2001 (Unaudited) 1. The unaudited consolidated financial statements (the "Unaudited Financial Statements") presented herein have been prepared by NE Restaurant Company, 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 consolidated financial statements and notes included in the Company's Form 10-K. 2. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and for hedging activities) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedging accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT OF FASB STATEMENT NO. 133, which amended SFAS no. 133 and added guidance for certain derivative instruments and hedging activities. The new standard, SFAS No. 133 as amended by SFAS No. 138, requires recognition of all derivatives as either assets or liabilities at fair value. One of the primary amendments to SFAS No. 133 that is covered by SFAS No. 138 establishes an exemption for normal purchases and normal sales that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. The adoption of this standard effective January 4, 2000 did not have a material impact on the Company's fiscal position or results of operations. 3. The Company had operated one Sal & Vinnie's Sicilian Steakhouse as a result of its 1998 acquisition of Bertucci's Inc. In December 2000, the Company abandoned the restaurant in exchange for termination of its lease obligation and recorded a $2.0 million loss on abandonment. On April 12, 2001, the Company completed its sale of 40 Chili's and seven On The Border restaurants to the chains' franchisor Brinker International, Inc. of Dallas, Texas (Brinker) (the Brinker Sale). Total consideration, subject to closing adjustments, was $93.5 million. Brinker acquired the inventory, facilities, equipment, management teams associated with these restaurants, as well as the four Chili's restaurants currently under development by the Company. Further, Brinker assumed the mortgage debt on the Company's Chili's and On The Border restaurants. The pro forma Consolidated Balance Sheet presented below reflects the recognition of the Brinker Sale as of April 4, 2001. The abandonment of Sal & Vinnie's was previously reported in the Consolidated Balance Sheet as of January 3, 2001 as filed in Form 10-K on March 30, 2001. Brinker Sale impact assumptions used in the preparation of the pro forma Consolidated Balance Sheet included: a. Cash reflects the $93.5 million total consideration less mortgage debt assumed of $41.3 million. b. Income tax payable and Deferred Taxes (noncurrent), reflect the tax liability associated with the gain on the transaction. This liability is less than the statutory rate of 35% due to the availability of net operating loss and tax credit carry forwards from prior years. c. The increase in Retained earnings reflects the gain on the transaction, net of income tax. d. The unamortized balances of Finance Costs and Development Fees, as well as Deferred Rent liability balances on Brinker Concepts Restaurants, are written off by the Company as a result of the Brinker Sale. e. All other adjustments are to reflect assets purchased and liabilities assumed by Brinker. The pro forma Consolidated Statements of Operations reflect (a) the recognition of the Brinker Sale; and (b) the abandonment of Sal & Vinnie's as if the dispositions occurred on December 30, 1999. Accordingly, operating results of the Brinker restaurants are removed for both periods presented. Sal & Vinnie's operating results are removed for the prior year period presented only as it was abandoned in December 2000. 7 NE RESTAURANT COMPANY, INC. PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited) (In thousands) As of April 4, 2001 As Reported Brinker Sale Pro Forma ------------ ------------- ------------- ASSETS Current Assets: Cash $ 1,145 $ 50,267 $ 51,412 Credit card receivables 1,271 - 1,271 Inventories 1,868 (854) 1,014 Prepaid expenses and other current assets 653 (350) 303 Prepaid and current deferred income taxes 5,433 - 5,433 ------------ ------------- ------------- Total current assets 10,370 49,063 59,433 ------------ ------------- ------------- Property and equipment, at cost: Land and land right 7,866 (5,397) 2,469 Buildings 12,570 (5,979) 6,591 Leasehold improvements 85,469 (37,925) 47,544 Furniture and equipment 51,636 (25,418) 26,218 ------------ ------------- ------------- 157,541 (74,719) 82,822 Less - Accumulated depreciation (43,437) 22,856 (20,581) ------------ ------------- ------------- 114,104 (51,863) 62,241 Construction work in process 3,879 (1,794) 2,085 ------------ ------------- ------------- Net property and equipment 117,983 (53,657) 64,326 Goodwill, net 27,835 - 27,835 Deferred finance costs, net 7,800 (2,087) 5,713 Liquor licenses 3,014 (1,208) 1,806 Deferred taxes, noncurrent 6,451 (4,853) 1,598 Other assets, net 1,535 (1,368) 167 ------------ ------------- ------------- Total Assets $ 174,988 $ (14,110) $ 160,878 ============ ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit loans $ 1,100 $ (1,100) $ - Mortgage loans payable - current portion 1,562 (1,562) - Accounts payable 10,591 - 10,591 Accrued expenses 14,019 (1,848) 12,171 Income taxes payable - 9,784 9,784 ------------ ------------- ------------- Total current liabiliites 27,272 5,274 32,546 Mortgage loan payable, net of current portion 39,467 (39,467) - Bonds payable 100,000 - 100,000 Deferred rent and other long-term liabilites 4,839 (2,633) 2,206 ------------ ------------- ------------- Total liabilities 171,578 (36,826) 134,752 Commitments and contingencies Stockholders' Equity: Common stock 37 - 37 Less treasury stock (8,088) - (8,088) Additional paid-in capital 29,004 - 29,004 Retained earnings (accumulated deficit) (17,543) 22,716 5,173 ------------ ------------- ------------- Total stockholders' equity 3,410 22,716 26,126 ------------ ------------- ------------- Total Liabiliites and Stockholders' Equity $ 174,988 $ (14,110) $ 160,878 ============ ============= ============= 8 NE RESTAURANT COMPANY, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In thousands, except share and per share data) 13 Weeks Ended April 4, 2001 As Reported Brinker Sale Pro Forma ------------------ ------------------ ------------------- Net sales $ 69,813 $(33,827) $ 35,986 ------------------ ------------------ ------------------- Cost of sales and expenses Cost of sales 18,070 (9,494) 8,576 Operating expenses 40,465 (19,191) 21,274 General and administrative expenses 3,809 (951) 2,858 Deferred rent, depreciation and amortization and preopening expenses 4,476 (1,297) 3,179 ------------------ ------------------ ------------------- Total cost of sales and expenses 66,820 (30,933) 35,887 ------------------ ------------------ ------------------- Income from operations 2,993 (2,894) 99 Interest expense, net 3,781 (1,671) 2,110 ------------------ ------------------ ------------------- Loss before income tax benefit (788) (1,223) (2,010) Income tax benefit (132) (489) (621) ------------------ ------------------ ------------------- Net loss $ (656) $ (734) $ (1,390) ================== ================== =================== Basic and diluted loss per share $ (0.22) $ (0.25) $ (0.47) ================== ================== =================== Basic and diluted weighted average shares outstanding 2,978,955 2,978,955 2,978,955 9 NE RESTAURANT COMPANY, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In thousands, except share and per share data) 13 Weeks Ended March 29, 2000 As Sal & Vinnie's Reported Brinker Sale Abandonment Pro Forma ------------------ ------------------ ------------------ -------------- Net sales $ 67,035 $ (32,540) $ (635) $ 33,860 ------------------ ------------------ ------------------ -------------- Cost of sales and expenses Cost of sales 17,563 (9,025) (229) 8,309 Operating expenses 38,958 (17,856) (429) 20,673 General and administrative expenses 4,488 (1,323) - 3,165 Deferred rent, depreciation and amortization and preopening expenses 4,529 (1,634) (43) 2,852 ------------------ ------------------ ------------------ -------------- Total cost of sales and expenses 65,538 (29,838) (701) 34,999 ------------------ ------------------ ------------------ -------------- Income (loss) from operations 1,497 (2,702) 66 (1,139) Interest expense, net 3,674 (1,545) - 2,129 ------------------ ------------------ ------------------ -------------- Loss before income tax benefit (2,177) (1,157) 66 (3,268) Income tax benefit (705) (463) 26 (1,142) ------------------ ------------------ ------------------ -------------- Net income (loss) before gain on Brinker Sale (1,472) (694) 40 (2,126) Gain on Brinker Sale, net of income tax - 21,953 - 21,953 ------------------ ------------------ ------------------ -------------- Net income (loss) $ (1,472) $ 21,259 $ 40 $ 19,827 ================== ================== ================== ============== Basic income (loss) per share: Income (loss) per share before Brinker Sale $ (0.49) $ (0.23) $ 0.01 $ (0.71) Gain on Brinker Sale, net of income tax - 7.35 - 7.35 ------------------ ------------------ ------------------ -------------- Basic income (loss) per share $ (0.49) $ 7.12 $ 0.01 $ 6.64 ================== ================== ================== ============== Weighted Average Shares Outstanding 2,986,622 2,986,622 2,986,622 2,986,622 Diluted income (loss) per share: Income (loss) per share before Brinker Sale $ (0.49) $ (0.23) $ 0.01 $ (0.71) Gain on Brinker Sale, net of income tax - 7.04 - 7.04 ------------------ ------------------ ------------------ -------------- Diluted income (loss) per share $ (0.49) $ 6.81 $ 0.01 $ 6.33 ================== ================== ================== ============== Weighted Average Shares Outstanding 2,986,622 3,118,661 3,118,661 3,118,661 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the consolidated financial statements of NE Restaurant Company, Inc. ("The Company") and the notes thereto included herein. GENERAL The Company is an operator of full-service, casual dining restaurants in the northeastern United States. The Company's wholly owned subsidiary, Bertucci's Restaurant Corp. ("Bertucci's") owns and operates a restaurant concept under the name Bertucci's Brick Oven Pizzeria(R) ("Bertucci's restaurants). The Company was formed to acquire 15 Chili's restaurants from a prior franchisee. The Company has grown through the addition of 25 new Chili's and seven On The Border restaurants in New England. The Company develops and operates these restaurant franchises under franchise agreements with Brinker International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"). As of April 4, 2001, the Company operated 40 Chili's and 7 On The Border restaurants in five New England states (collectively, the "Brinker Concepts Restaurants"). See Note 3 of Notes to Consolidated Financial Statements for discussion of the sale of the Brinker concepts. In July 1998, the Company completed its acquisition of Bertucci's' parent entity, Bertucci's, Inc., a publicly-owned restaurant company for a purchase price, net of cash received, of approximately $89.4 million (the "Acquisition"). The Company financed the Acquisition primarily through the issuance of $100 million of 10 3/4% senior notes due 2008 (the "Senior Notes"). The Acquisition included 90 Bertucci's restaurants and one Sal & Vinnie's restaurant. Since 1999, the Company closed the Bertucci's test kitchen restaurant in Wakefield, Massachusetts and closed seventeen under performing Bertucci's restaurants. In December of 2000 the Company also closed the one Sal and Vinnie's Sicilian Steakhouse(TM) ("Sal and Vinnie's") located in Massachusetts. As of April 4, 2001, the Company owned and operated 73 full-service, casual dining, Italian-style restaurants under the name Bertucci's Brick Oven Pizzeria(R) located primarily in New England and Mid-Atlantic United States. 11 RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales, unless otherwise indicated, of certain items included in the Company's statement of operations, as well as certain operating data, for the periods indicated: NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS) Thirteen Weeks Ended: (Unaudited) April 4, March 29, 2001 2000 -------------- --------------- Net Sales 100.0% 100.0% -------------- --------------- Cost of sales and expenses Cost of sales 25.9% 26.2% Operating expenses 58.0% 58.1% General and administrative expenses 5.5% 6.7% Deferred rent, depreciation, amortization and preopening expenses 6.4% 6.8% -------------- --------------- Total cost of sales and expenses 95.7% 97.8% -------------- --------------- Income from operations 4.3% 2.2% Interest expense, net 5.4% 5.5% -------------- --------------- Loss before income tax benefit (1.1%) (3.2%) Income tax benefit (0.2%) (1.1%) -------------- --------------- Net Loss (0.9%) (2.2%) ============== =============== RESTAURANT OPERATING DATA (DOLLARS IN THOUSANDS): - ------------------------------------------------------------------------------------------------------------ EBITDA (a) $ 7,469 $ 6,026 Comparable restaurant sales 1.7% 5.5% Number of restaurants - Brinker restaurants: Restaurants open at beginning of period 47 43 Restaurants opened - 2 -------------- --------------- Total restaurants open at end of period 47 45 Number of restaurants - Bertucci's restaurants: (b) Restaurants open at beginning of period 72 79 Restaurants opened 1 - Restaurants closed - 7 -------------- --------------- Total restaurants open at end of period 73 72 (a) "EBITDA" is defined as income from operations before deferred rent, depreciation, amortization and preopening costs. EBITDA is not a measure of performance defined by Generally Accepted Accounting Principles ("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. (b) Does not include Sal & Vinnie's. 12 THIRTEEN WEEKS ENDED APRIL 4, 2001 COMPARED TO THIRTEEN WEEKS ENDED MARCH 29, 2000 NET SALES. Net sales increased $2.8 million, or 4.1%, to $69.8 million during the first quarter 2001 from $67.0 million during the first quarter 2000. The increase was primarily due to increased comparable restaurant sales for the Bertucci's restaurants of 4.8% plus the addition of one new Bertucci's restaurant in Danbury, CT. This increase was partially offset by the closing of the Sal & Vinnies restaurant and a decrease in comparable restaurant sales of 1.6% at the Brinker Concepts Restaurants. In response to minimum wage increases in some states and the increasing upward pressure on hourly labor rates, the Company raised menu prices early in the first quarter 2001. The Company believes that the majority of the Bertucci's sales increases were the result of menu engineering and the introduction of a broad range of product offerings in fiscal 2000 and the aforementioned menu price increases that took effect in January 2001. COST OF SALES. Cost of sales increased by approximately $500,000, or 2.9%, to $18.1 million during the first quarter 2001 from $17.6 million during the first quarter 2000. The dollar increase in cost of sales primarily was due to increased sales volume. Expressed as a percentage of net sales, overall cost of sales decreased to 25.9% during the first quarter 2001 from 26.2% during the first quarter 2000. Bertucci's restaurants experienced favorable commodity prices on flour, poultry, and oils, as well as a favorable impact from the menu engineering initiated during fiscal 2000. Menu price increases of 2.9% favorably impacted cost of sales at Bertucci's restaurants in the first quarter 2001. Pizza sales as a percent of total item sales has remained steady in the 35% range, which has helped to mitigate the impact of rising cheese prices. Cost of sales at the Brinker Concepts Restaurants, at 28.1% were unfavorable to prior year by 0.4%, and were unfavorably impacted by higher beef, pork and produce costs. OPERATING EXPENSES. Operating expenses increased by $1.5 million, or 3.9%, to $40.5 million during the first quarter 2001 from $39.0 million during the first quarter 2000. Expressed as a percentage of net sales, operating expenses decreased to 58.0% in the first quarter 2001 from 58.1% during the first quarter 2000. The dollar increase in operating expenses is primarily due to higher payroll, snow removal and utilities costs. These increases were offset by a decrease in advertising expenses during the first quarter 2001. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased by approximately $679,000, or 15.1%, to $3.8 million during the first quarter 2001 from $4.9 million during the first quarter 2000. The dollar and percentage decrease in general and administrative expenses was due to decreased payroll costs from reduced staffing, and less recruiting and consulting fees. Expressed as a percentage of net sales, general and administrative costs decreased to 5.5% during the first quarter 2001 from 6.7% during the first quarter 2000. DEFERRED RENT, DEPRECIATION, AMORTIZATION AND PREOPENING EXPENSES. Deferred rent, depreciation, amortization and preopening expenses decreased by approximately $53,000 or 1.2%, to $4.48 million during the first quarter 2001 from $4.53 million during the first quarter 2000. The decrease was primarily due to fewer restaurants built in the first quarter of 2001 offset by higher depreciation expense. Preopening costs of $243,000 in the first quarter 2001 decreased 35% from the $376,500 incurred in the first quarter 2000. INTEREST EXPENSE. Interest expense increased by approximately $100,000 to $3.8 million during the first quarter 2001 from $3.7 million during the first quarter 2000. This increase was primarily attributable to approximately $3.8 million of additional mortgage loan financing for new Brinker 13 Concepts Restaurant development during the last three quarters of fiscal 2000. Interest was approximately $2.7 million on the Senior Notes, $994,000 on the mortgage loans and $104,000 on the Company's revolving credit facility, during the first quarter 2001. INCOME TAXES. The effective income tax benefit rate decreased to 16.7% during the first quarter 2001 from 32.4% during the first quarter 2000. The difference in rate was mainly due to the impact of non-deductible expenses, primarily Goodwill amortization, and certain tax credits on quarterly results. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its capital expenditures and working capital needs through a combination of operating cash flow, mortgage loan financing and borrowing under the Company's revolving credit facility, which provides for borrowings of up to $20.0 million. Net cash flows used by operating activities were $3.8 million for the first quarter 2001 or $600,000 more than the $3.2 million used during the first quarter 2000. A primary reason for the change was an increase in working capital needs. This was partially offset by improvement in the net loss from operations. The Company's capital expenditures increase of $60,000 to $3.66 million for the first quarter 2001 compared to $3.60 million of capital expenditures for the first quarter 2000. The capital expenditures for 2001 were primarily due to $1.6 million for three new Bertucci's restaurants in process and $1.1 million for one new Brinker restaurant near completion. The remaining $900,000 was spent on existing restaurants. As of April 4, 2001, the Company had approximately $142.3 million in consolidated indebtedness, including $100.0 million of indebtedness pursuant to the Senior Notes, $41.1 million of mortgage loan financing, $0.1 million of capital lease obligations, and $1.1 million under the Senior Bank Facility. Significant liquidity demands will arise from debt service on the Senior Notes and borrowings under the Senior Bank Facility. The Company believes that the cash flow generated from its operations with available borrowings under the Senior Bank Facility should be sufficient to fund its debt service requirements, lease obligations, current expected capital expenditures and other operating expenses for the next twelve months. The Senior Bank Facility provides the Company with available borrowing up to an aggregate amount of $20.0 million. As of April 4, 2001, there was $1.1 million outstanding under the Senior Bank Facility. Concurrent with the completion of the Brinker Sale, the Company repaid the balance outstanding under the Senior Bank Facility. Further, the availability of the Senior Bank Facility was restricted due to the change in the Company as a result of the Brinker Sale. The net proceeds of the Brinker Sale provided approximately $40 million in cash. The Company is considering making an offer for a portion of the Senior Notes. The Company's future operating performance and ability to service or refinance the Senior Notes will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. 14 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 quarters. Because of these fluctuations in net sales and net 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. 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. Factors including those set forth herein, as well as those set forth in the Company's Form 10K filed with the Securities and Exchange Commission ("SEC") on March 30, 2001 and other filings with the SEC may affect such expectations. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company has market risk associated with interest rate risk. The Company manages its exposure through its regular financing activities. Interest rate changes would result in a change in the fair value of the Company's debt facilities due to the difference between the market interest rate and the rate at the date of issuance of the debt facilities. Furthermore, the Company has no exposure to specific risks related to derivatives or other "hedging" types of financial instruments. 15 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 that is likely to have a material adverse effect on the Company. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 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) ASSET PURCHASE AND SALES AGREEMENT 99-1 Asset Purchase Agreement on Brinker Sale dated November 20, 2000, and fully executed on April 12, 2001, by and among NE Restaurant Company, Inc., a Delaware corporation, NERC Limited Partnership, a Delaware limited partnership, NERC Limited Partnership II, a Delaware limited partnership, and Brinker International, Inc., a Delaware corporation. (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K on April 27, 2001 announcing the completion of the Brinker Sale. A Pro Forma Consolidated Balance Sheet and Pro Forma Consolidated Statement of Operations as of January 3, 2001 and for the 53 weeks then ended were included in the filing. The pro forma financial statements assumed the completion of the Brinker Sale occurred on December 30, 1999. 16 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: May 18, 2001 By: /s/ Benjamin R. Jacobson --------------------------------------------- Chairman of the Board of Directors, President and Chief Executive Officer, Treasurer (Principal Executive Officer) Date: May 18, 2001 By: /s/ Kurt J. Schnaubelt --------------------------------------------- Vice President (Principal Financial Officer and Principal Accounting Officer) 17