U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended October 7, 1997.
|_| Transition report under Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from _____ to_______.
COMMISSION FILE NUMBER 333-5488-D
STOICO RESTAURANT GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 48-1177558
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Brittany Two Place, 1938 N. Woodlawn, Suite 301
Wichita, Kansas 67208
(Address of principal executive office) (Zip code)
(316) 691-8880
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes |X| No |_|.
At October 7, 1997, 5,708,966 shares of common stock, $0.01 per share
par value were outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No X
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STOICO RESTAURANT GROUP, INC.
INDEX TO 10-QSB FOR THE QUARTERLY
PERIOD ENDED OCTOBER 7, 1997
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Stoico Restaurant Group, Inc. and Subsidiaries Consolidated
Balance Sheets - October 7, 1997 and December 31, 1996 3
Stoico Restaurant Group, Inc. and Subsidiaries Consolidated
Statements of Operations - Twelve Week Period and Forty
Week Period ended October 7, 1997 and October 1, 1996,
respectively. 4
Stoico Restaurant Group, Inc. and Subsidiaries Consolidated
Statements of Cash Flows - Forty Week Period ended
October 7, 1997 and October 1, 1996, respectively. 5
Notes to Consolidated Financial Statements - October 7, 1997 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 16
ITEM 2: CHANGES IN SECURITIES 16
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 16
ITEM 5: OTHER INFORMATION 16
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
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<TABLE>
<CAPTION>
Stoico Restaurant Group, Inc. and Subsidiaries
Consolidated Balance Sheets
October 7, 1997 and December 31, 1996
October 7, December 31,
Assets 1997 1996
------ ------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,369 $ 2,271,550
Receivables 195,019 59,351
Inventories 155,087 177,909
Prepaid expenses and other current assets 175,169 253,216
------------ ------------
Total current assets 573,644 2,762,026
Property and equipment 3,464,073 4,521,779
Goodwill, net of amortization of $136,940 and $76,655,
respectively 929,129 989,413
Notes receivable:
Former Officer 66,873 225,000
Other, net of related deferred income of
$201,560 37,716 22,077
Other assets 48,013 51,225
------------ ------------
Total assets $ 5,119,448 $ 8,571,520
============ ============
Liabilities and Stockholders' Equity Current liabilities:
---------------------------------------------------------
Accounts payable $ 1,524,353 $ 1,963,764
Accrued expenses 350,806 300,282
Current portion of long-term debt 1,141,965 190,191
Note Payable - officer 40,000 --
Deferred revenue 50,000 195,000
------------ ------------
Total current liabilities 3,107,125 2,649,237
Long-term debt, less current portion 18,240 43,580
Long-term lease obligation on closed store 61,158 116,951
Deferred revenue 35,000 95,000
------------ ------------
Total liabilities 3,221,523 2,904,768
Stockholder's equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, -0- shares issued and outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,708,966 issued and outstanding 57,090 57,090
Additional paid-in capital 14,285,754 14,285,754
Accumulated deficit (12,444,918) (8,676,092)
------------ ------------
Total stockholders' equity 1,897,926 5,666,752
------------ ------------
Commitments -- --
------------ ------------
Total liabilities and stockholders' equity $ 5,119,448 $ 8,571,520
============ ============
</TABLE>
3
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<TABLE>
<CAPTION>
Stoico Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Twelve Week Period Forty Week
Ended Period Ended
October 7, October 1, October 7, October 1,
Revenues: 1997 1996 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,798,072 $ 1,579,906 $ 6,935,787 $ 5,228,920
Royalty income 23,472 30,673 73,785 104,248
Franchise Fees 25,000 -- 85,000 34,000
----------- ----------- ----------- ----------
Total revenue 1,846,544 1,610,579 7,094,572 5,367,168
--------- --------- --------- ---------
Cost of sales:
Food and paper 587,974 500,396 2,121,113 1,651,954
Wages and benefits 831,639 522,902 2,795,178 1,676,633
------- ------- --------- ---------
Total cost of sales 1,419,613 1,023,298 4,916,291 3,328,587
--------- --------- --------- ---------
Gross profit 426,931 587,281 2,178,281 2,038,581
Restaurant operating expenses 780,782 453,096 2,667,563 1,547,667
Pre-opening expenses -- 97,389 123,054 133,973
Restaurant closing expenses 1,732,576 -- 1,732,576 --
Administrative expenses 335,734 474,405 1,440,740 1,329,031
Noncash compensation expense -- -- -- 13,749
----------- ----------- ----------- -----------
Operating loss (2,422,161) (437,609) (3,785,652) (985,839)
Other income (expense):
Miscellaneous other income 3,599 5,621 34,902 31,695
Provision for lease obligation on
closed store -- -- -- (175,855)
Interest income 7,273 17,056 36,272 42,824
Interest expense (30,669) (161,859) (54,348) (471,464)
----------- ----------- ----------- -----------
Loss before income taxes (2,441,958) (576,791) (3,768,826) (1,558,639)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(2,441,958) $ (576,791) $(3,768,826) $(1,558,639)
=========== =========== =========== ===========
Total weighted average of common and common
equivalent shares 5,730,700 4,328,756 5,730,700 4,307,252
=========== =========== =========== ===========
Loss per common share $ (.43) $ (.13) $ (.66) $ (.36)
=========== =========== =========== ===========
</TABLE>
4
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<TABLE>
<CAPTION>
Stoico Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Forty Week
Period Ended
---------------------------------
October 7, October 1,
1997 1996
-------------- --------------
<S> <C> <C>
Cash from operating activities:
Net loss $(3,768,826) $(1,558,639)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 732,726 321,256
(Gain) loss on disposal of equipment (24,786) 3,302
Income attributable to Area Development fee forfeiture (45,000) --
Noncash restaurant closing expenses 1,662,877 --
Increase in receivables (135,668) (6,461)
Decrease (increase) in inventories 22,822 (7,081)
Decrease (increase) in notes receivable 142,488 (242,385)
Decrease (increase) in prepaid expenses and other current assets 78,047 (110,491)
Decrease (increase) in other assets 3,212 (34,998)
(Decrease) increase in accounts payable (439,410) 78,318
Increase in accrued expenses 50,524 171,124
(Decrease) increase in long term lease obligation on closed sto(55,793) 123,333
(Decrease) increase in deferred revenue (40,000) 218,083
----------- -----------
Net cash used in operating activities (1,816,787) (1,044,639)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,340,734) (606,949)
Proceeds from sale of restaurant 87,906 251,300
----------- -----------
Net cash used in investing activities (1,252,828) (355,649)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long term debt 1,000,000 1,000,000
Principal payments on long-term debt (73,566) (195,944)
Principal payments on officer note payable (80,000)) --
Proceeds from issuance of common stock -- 315,095
Deferred offering costs -- (281,621)
----------- -----------
Net cash provided by financing activities 846,434 837,530
----------- -----------
Net decrease in cash and cash equivalents (2,223,181) (562,758)
Cash and cash equivalents at beginning of period 2,271,550 784,171
----------- -----------
Cash and cash equivalents at end of period $ 48,369 $ 221,413
=========== ===========
</TABLE>
5
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STOICO RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and, therefore, do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The information furnished, in the opinion of
management, reflects all adjustments, which consist of normal recurring
adjustments, necessary to present fairly the results of operations of Stoico
Restaurant Group, Inc. and subsidiaries (the "Company") for the forty week
period ended October 7, 1997, and October 1, 1996. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report dated March 27, 1997.
In February 1997, FASB issued Statement No. 128, Earnings Per Share (FAS
128), effective for the Company for the interim periods and years ended after
December 15, 1997. FAS 128 replaces the presentation of primary earnings per
share (EPS) with a presentation of "basic" EPS. Basic EPS excludes the dilutive
effects of common stock equivalent shares in its calculation. A diluted EPS will
still be required, and will be computed similarly to the current fully diluted
EPS . Under FAS 128, both the basic and diluted EPS amounts will be presented in
the financial statements. Also, the statement will require restatement of all
prior period EPS data presented in the financial statements. EPS as calculated
at October 7, 1997 would not be materially different if calculated using basic
EPS.
In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets Disposed Of," the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired, and the carrying
amount of the assets may not be recoverable from future undiscounted cash flows
generated by those assets. If assets are considered impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
Due to the closing of certain restaurants in the current quarter ending
October 7, 1997, the Company indicated that $945,476 of assets might be
impaired. However, as of October 7, 1997, the Company had not yet determined
which of those assets would be utilized in other restaurants, sold, or kept in
storage, and thus there is no determination of future undiscounted cash flows to
be generated from the assets. Nonetheless, it is reasonably possible that in the
next quarter, an estimate of undiscounted cash flows will be determinable,
resulting in a need to write-down those assets to fair value.
6
<PAGE>
(2) Income (Loss) Per Share
Loss per share is determined based on the weighted average number of common
and common equivalent shares outstanding during each period. The weighted
average number of common and common equivalent shares outstanding for the forty
weeks ended October 7, 1997 and October 1, 1996 were 5,730,700 and 4,307,252,
respectively.
(3) Statements of Cash Flow
Noncash financing and investing activities consist of the following for the
period ended October 7, 1997 and October 1, 1996:
October 7, 1997
o Deferred revenue reclassified to note payable to an officer of $120,000.
October 1, 1996
o Property and equipment sold in exchange for note receivable, net of related
deferred income of $201,560.
(4) Related Party Transactions
On July 17 1996, the Company made a loan to Timothy J. Jeffrey, the former
President, Chief Executive Officer and a director of the Company in the amount
of $66,873.31 was due July 31, 1997. As of the filing of this report that loan
has not been paid.
In February 1997 the Company's board of directors determined that $120,000
advanced to the Company by one of its officers should be refunded. Accordingly,
this amount was reclassified from deferred revenue to note payable - officer, of
which $40,000 is still payable as of October 7, 1997.
(5) Subsequent Events
The following event occurred subsequent to October 7, 1997:
o Three under performing restaurants of which two were Spaghetti Jack's and
one was a Sub & Stuff have been closed that were previously opened earlier
in 1997 or late 1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Company-Owned Restaurants Opened at End of Period
Forty Weeks Ended
October 7, October 1,
1997 1996
------------- ------------
Spaghetti Jack's 5 4
Sub & Stuff 18 16
Results of Operations
The following table sets forth information derived from the Company's
statement of operations expressed as a percentage of revenues:
Forty Weeks Ended
-----------------------------------
October 7, October 1,
1997 1996
-----------------------------------
Revenues..................................... 100.00% 100.00%
Cost of sales................................ 69.3 62.0
Restaurant operating expenses................ 37.6 28.8
Pre-opening expenses......................... 1.7 2.5
Restaurant closing expenses.................. 24.4 0.0
Administrative expenses...................... 20.3 24.8
Other income (expense)....................... .2 (10.7)
Income taxes................................. 0.0 0.0
Noncash compensation expense................. 0.0 .3
Net loss..................................... 53.1 29.0
8
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Twelve Week Period Ended October 7, 1997 and October 1, 1996
Revenues
Revenues for the twelve week period ended October 7, 1997 increased by
$235,965 or 14.7% compared to the twelve week period ended October 1, 1996
primarily for the reasons discussed below. Spaghetti Jack's restaurant sales
increased by $245,836 or 62.7% in 1997. The increase in sales is the result of
the opening of three Company-owned restaurants during 1997, and the opening of
four Company-owned restaurants late in 1996, as of November 5, 1997 all of these
have since been closed, in addition one opened in 1995 has also been closed.
Comparable restaurant sales (defined as sales from restaurants open during both
fiscal periods for the entire period) for Spaghetti Jack's decreased by $78,787
or 25.8% in the aggregate. Sub & Stuff restaurant sales decreased by $27,668 or
2.3% in 1997. Three restaurant openings late 1996 and four in 1997 contributed
$65,313 in restaurant sales, as of October 30, 1997 of these five have since
been closed. Comparable restaurant sales for Sub & Stuff decreased by $92,981 or
9.1% in the aggregate. These decreases in comparable restaurant sales for
Spaghetti Jack's and Sub & Stuff are due to discontinuing couponing as a
marketing tool in early 1997, and increased competition in their core market.
Spaghetti Jack's royalty income decreased by $7,917 or 29.4% in 1997, compared
to the same period in 1996, due to the closing of four franchise Restaurants.
Sub & Stuff royalty income increased $716 or 19.2% in 1997, compared to the same
period in 1996. Sub & Stuff did not have any franchise fees for the twelve week
period ended October 7, 1997. Spaghetti Jack's franchise fees for the twelve
week period ended October 7, 1997 were $25,000 which is the result of the
addition of one franchisee.
Cost of Sales
Cost of sales for the twelve week period ended October 7, 1997,
compared to the twelve week period ended October 1, 1996, increased $396,315 or
38.7% primarily as a result of opening seven Company-owned restaurants in 1997,
and seven Company-owned restaurants late in 1996, as of November 5, 1997 twelve
of these have since been closed, in addition one opened in 1995 has also been
closed. Spaghetti Jack's food and paper costs increased by $102,347 or 88.1% in
1997, compared to the same period in 1996. This increase is attributed to the
opening of three Company-owned restaurants in 1997 and four Company-owned
restaurants late in 1996, as of November 5, 1997 all of these have since been
closed, in addition one opened in 1995 has also been closed. As a percentage of
Spaghetti Jack's sales, the cost of food and paper increased to 34.3% in 1997
from 29.6% compared to the same period in 1996. This increase is due to a change
in product specifications resulting in larger portions. Sub & Stuff food and
paper cost decreased by $14,768 or 3.8% in 1997, compared to the same period in
1996. As a percentage of Sub & Stuff sales, the cost of food and paper decreased
to 31.9% in 1997 from 32.4% in the comparable period in 1996. Spaghetti Jack's
cost of wages and benefits increased by
9
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$184,675 or 156.8% in 1997, compared to the twelve week period ended October 1,
1996. As a percentage of Spaghetti Jack's restaurant sales, the cost of wages
and benefits increased to 47.4% in 1997 from 30.0% in 1996. This increase in
wages and benefits, as a percentage of restaurant sales, is a result of the
fixed component of management salaries and crew wages, compared to the low sales
volume of the new restaurants, decreases in same store sales, and lack of labor
efficiencies. Sub & Stuff wages and benefits increased by $124,061 or 30.6% in
1997, compared to the same period in 1996. As a percentage of Sub & Stuff
restaurant sales, the cost of wages and benefits increased to 45.6% in 1997 from
34.1% in the comparable period in 1996. This increase is attributed to the
opening of Company-owned restaurants as stated above.
Restaurant Operating Expense
Overall restaurant operating expenses for the twelve week period ended
October 7, 1997, compared to the twelve week period ended October 1, 1996,
increased by $327,685 or 72.3% primarily as a result of opening seven
Company-owned restaurants in 1997, and seven Company-owned restaurants late in
1996, as well as, an increase in depreciation and amortization of $129,960 or
202.8% associated with new restaurant development. As of November 5, 1997 twelve
of these restaurants have since been closed, in addition one opened in 1995 has
also been closed. Spaghetti Jack's restaurant operating expenses increased by
$254,774 or 207.0% primarily a result of opening three Company-owned restaurants
in 1997, and four Company-owned restaurants late in 1996, of which depreciation
and amortization accounts for $83,781 of the increase. As of November 5, 1997
all of these restaurants have since been closed, in addition to one opened in
1995 has also been closed. As a percentage of Spaghetti Jack's restaurant sales,
operating expenses increased to 59.2% in 1997, compared to 31.4% in the
comparable twelve week period ended October 1, 1996. Sub & Stuff's operating
expenses increased by $72,913 or 22.1% in 1997, primarily the result of new
restaurant openings, as well as an increase in depreciation and amortization of
$46,180 associated with new restaurant development. As a percentage of Sub &
Stuff restaurant sales, operating expenses increased to 34.7% compared to 27.8%
in the comparable twelve week period ended October 1, 1996.
Pre-opening Expenses
Pre-opening expenses are those costs associated with the opening of a
Company-owned restaurant. The expenses consist principally of non-recurring
costs such as employee recruiting and training and supplies and miscellaneous
expenditures. During the twelve week period ended October 7, 1997 there were no
pre-opening expenses as compared to $4,131 for the comparable period in 1996.
Costs are expensed as incurred.
10
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Restaurant Closing Expenses
Restaurant closing costs are recorded when the decision to close a
restaurant is made. Restaurant closing costs include estimated losses, the
unrecoverable balances of leasehold improvements, and other expenses. The
Company has recorded all reasonably estimable costs as of October 7, 1997. For
the twelve week period ended October 7, 1997 the Company recorded costs of
$1,732,576 for the closing of six Spaghetti Jack's and four Sub & Stuff
restaurants. The costs of the additional three (two Spaghetti Jack's and one Sub
& Stuff) restaurant closings subsequent to this period will be recorded in the
next quarter.
Administrative Expenses
Administrative expenses decreased by 29.2% or $138,671 for the twelve
week period ended October 7, 1997, compared to the twelve week period ended
October 1, 1996. This decrease is attributed to the elimination of twelve
corporate positions, relocating the corporate office and the reduction of
general overhead expenses.
Other Income and Expense
Interest income decreased by $9,783 to $7,273 for the twelve week
period ended October 7, 1997, compared to the twelve week period ended October
1, 1996. Interest expense decreased by $131,190 to $30,669 for the twelve week
period ended October 7, 1997, compared to $161,859 for the comparable period
ended October 1, 1996. This decrease in interest expense is the result of the
repayment of debt with proceeds of the Company's initial public offering
completed December 18, 1996.
Income Taxes
The Company continues to operate unprofitably and to accumulate net
operating loss carryforwards, and as a result, does not have taxable income.
Forty Week Period Ended October 7, 1997 and October 1, 1996
Revenues
Revenues for the forty week period ended October 7, 1997 increased by
$1,727,404 or 32.2% compared to the forty week period ended October 1, 1996
primarily for the reasons discussed below. Spaghetti Jack's restaurant sales
increased by $1,205,591 or 84.9% in 1997, compared to the same period in 1996.
The increase in sales is the result of opening three Company-owned restaurants
during 1997 and opening four Company-owned restaurants late in 1996, as of
November 5, 1997 all of these have since been closed, in addition one opened in
1995 has also been closed.. Comparable restaurant
11
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sales (defined as sales from restaurants open during both fiscal periods for the
entire period) for Spaghetti Jack's decreased by $270,207 or 26.1% in the
aggregate, this decrease is due to increased competition in the core market. Sub
& Stuff restaurant sales increased $501,276 or 13.2% for the forty week period
ended October 7, 1997, as compared to the same period in 1996. Three restaurant
openings late in 1996 and four in 1997 contributed $709,386 in restaurant sales,
as of October 30, 1997 of these five have since been closed. The increase in
sales is the result of opening four Company-owned restaurants in 1997, the
opening of three Company-owned restaurants late in 1996, relocating one
restaurant, relocating and dual branding the second Sub & Stuff restaurant by
adding the Spaghetti Jack's menu, and dual branding the third Sub & Stuff
restaurant in an existing location by adding the Spaghetti Jack's menu.
Comparable restaurant sales for Sub & Stuff decreased $208,110 or 6.1% in the
aggregate. Spaghetti Jack's royalty income decreased $32,691 or 34.5% in 1997,
compared to the same period in 1996 due to the closing of four franchise
restaurants. Sub & Stuff royalty income increased $2,228 or 23.5% in 1997, as
compared to the same period in 1996. Sub & Stuff franchise fees for the forty
week period ended October 7, 1997 totaled $15,000 which is the result of the
addition of one franchisee. Sub & Stuff franchise fees for the forty week period
ended October 1, 1996 totaled $9,000 which is the result of the addition of one
franchisee. Spaghetti Jack's franchise fees for the forty week period ended
October 7, 1997 totaled $70,000 of which $45,000 is a fee fortfeiture on an Area
Development Agreement and $25,000 is the addition of one franchisee. Spaghetti
Jack's franchise fees for the comparable period in 1996 totaled $25,000.
Cost of Sales
Cost of sales for the forty week period ended October 7, 1997, compared
to the forty week period ended October 7, 1996, increased $1,587,704 or 47.7%
primarily as a result of opening seven Company-owned restaurants in 1997, and
seven Company-owned restaurants late in 1996, as of November 5, 1997 twelve of
these have since been closed, in addition one opened in 1995 has also been
closed. Spaghetti Jack's food and paper costs increased by $386,530 or 92.2%in
1997, compared to the same period in 1996. This increase is attributed to the
opening of Company-owned restaurants as stated above. As a percentage of
Spaghetti Jack's sales, the cost of food and paper increased to 30.7% in 1997
from 29.5% in the comparable period in 1996. Sub & Stuff food and paper
increased by $80,184 or 6.5% in 1997, compared to the same period in 1996. As a
percentage of Sub & Stuff restaurant sales, the cost of food and paper decreased
from 32.4% to 30.5% in 1997, compared to the same period in 1996. This decrease
is attributed to operational efficiencies, and a price increase. Spaghetti
Jack's cost of wages and benefits increased by $705,647 or 173.2% in 1997
compared to the same period in 1996. As a percentage of Spaghetti Jack's
restaurant sales, the cost of wages and benefits increased to 42.4% in 1997 from
28.7% in the comparable period in 1996. This increase in wages and benefits, as
a percentage of restaurant sales, is a result of the fixed component of
management salaries and crew wages, compared to the low sales volume of
12
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the new restaurants, decreases in same store sales,and lack of labor
efficiencies. Sub & Stuff wages and benefits increased by $437,942 or 34.5% in
1997 compared to the same period in 1996. As a percentage of Sub & Stuff
restaurant sales, the cost of wages and benefits increased to 39.6% from 33.3%
in 1997, compared to the same period in 1996.
Restaurant Operating Expenses
Overall restaurant operating expenses for the forty week period ended
October 7, 1997 compared to the forty week period ended October 1, 1996,
increased by $1,119,896 or 20.9% primarily as a result of opening seven
Company-owned restaurants in 1997, seven Company-owned restaurants late in 1996,
as well as, an increase in depreciation and amortization of $391,854 or 163.9%
associated with new restaurant development. As of November 5, 1997 twelve of
these restaurants have since been closed, in addition one opened in 1995 has
also been closed. Spaghetti Jack's restaurant operating expenses increased by
$773,485 or 159.2% primarily a result of opening three Company-owned restaurants
in 1997, and four Company-owned restaurants late in 1996, as of November 5, 1997
all of these have since been closed. As a percentage of Spaghetti Jack's
restaurant sales, operating expenses increased to 48.0% in 1997 compared to
34.2% in the comparable forty week period ended October 1, 1996. Sub & Stuff
operating expenses increased by $351,805 or 33.1% in 1997 primarily as the
result of new restaurant openings, as well as an increase in depreciation and
amortization of $124,270 or 113.3% associated with new restaurant development.
As a percentage of Sub & Stuff restaurant sales, operating expenses increased to
32.8% in 1997, compared to 27.9% in the comparable forty week period ended
October 1, 1996.
Pre-Opening Expenses
Pre-opening expenses are those costs associated with the opening of a
Company-owned restaurant. The expenses consist principally of non-recurring
costs such as employee recruiting and training and supplies and miscellaneous
expenditures. During the forty week period ended October 7, 1997, expenses
totaled $123,054 related to the opening of seven company restaurants. For the
forty week period ended October 1, 1996, expenses totaled $133,973.
Restaurant Closing Expenses
Restaurant closing costs are recorded when the decision to close a
restaurant is made. Restaurant closing costs include estimated losses, the
unrecoverable balances of leasehold improvements, and other expenses. The
Company has recorded all reasonably estimable costs as of October 7, 1997. For
the forty week period ended October 7, 1997 the Company recorded costs of
$1,732,576 for the closing of six Spaghetti Jack's and four
13
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Sub & Stuff restaurants. The costs of the additional three (two Spaghetti Jack's
and one Sub & Stuff) restaurant closings subsequent to this period will be
recorded in the next quarter.
Administrative Expenses
Administrative expenses increased by 8.4% or $111,709 for the forty
week period ended October 7, 1997, compared to the forty week period ended
October 1, 1996. This net increase is attributed to the following: 1) Increased
insurance costs to include a directors and officers policy that was issued in
late 1996 of $55,196; 2) Professional fee costs increased by $122,241; 3) Wages
and benefits decreased $99,849 with the elimination of corporate positions; 4)
Costs of $57,967 incurred due to three locations that were leased which build
outs were not done due to the lack of funding
Other Income and Expense
Interest income decreased to $36,272 for the forty week period ended
October 7, 1997, over the comparable period in 1996. Interest expense decreased
by $417,116 to $54,348 for the period ended October 7, 1997, compared to
$471,464 for the comparable forty week period ended October 1, 1996. This
decrease in interest expense is the result of the repayment of debt with
proceeds of the Company's initial public offering completed December 18, 1996.
Income Taxes
The Company continues to operate unprofitably and to accumulate net
operating loss carryforwards, and as a result, does not have taxable income.
Liquidity and Capital Resources
The Company's restaurant operations do not have significant receivables
or inventory and receive trade credit based upon negotiated terms in purchasing
food and supplies. As of October 7, 1997, the Company had a working capital
deficit of $2,533,481, as compared to a deficit of $2,694,273, at October 1,
1996.
The Company incurred losses for the forty week period ended October 7,
1997 and October 1, 1996 of $3,768,826 and $1,558,639 resulting in cash used by
operating activities of $1,816,787 and $1,044,639 in 1997 and 1996,
respectively. The Company will not be able to sustain losses or use of cash by
operating activities similar to the levels incurred through third quarter 1997
and 1996 without obtaining additional financing. The Company does not presently
have any commitments to obtain additional financing. Management's plans have
included the elimination of twelve corporate staff positions compared to the
number of positions at year end 1996. The Company relocated its
14
<PAGE>
corporate offices and closed thirteen (eight Spaghetti Jack's and five Sub &
Stuff's) under performing restaurants that were opened earlier in 1997 or late
in 1996, in an effort to reduce operating expenses and cash flow needs.
Continued Negative Cash Flow
Since July 15, 1997, the Company has continued to experience negative
cash flow as sales revenues have not been sufficient to meet the Company's cash
needs. Prior to October 7, 1997, the Company borrowed $500,000 on a short term
basis from WFB, Inc., a major stockholder of the Company, to fund a portion of
the Company's cash flow deficit.
The Company has closed thirteen restaurants since July 17,1997 (eight
Spaghetti Jack's and five Sub & Stuff's), and as of November 25, 1997 had twenty
restaurants open (three Spaghetti Jack's and seventeen Sub & Stuff's).
The Company is continuing to monitor sales levels of certain other
restaurant locations and is considering additional closings of under-performing
units. In addition, the Company has liquidated assets from closed units to raise
cash to repay indebtedness. In the event that sales levels continue to decline
or are not sufficient to meet the Company's cash needs, the Company will be
required to borrow additional funds, sell additional assets, or otherwise raise
liquid capital.
There is no assurance that any such sources of cash will be available
or that the Company will be able to meet its cash needs.
During the forty week period ended October 7, 1997, the Company had a
cash deficit from investing activities of $1,252,828, as compared to a deficit
of $355,649 for 1996. The increase in the deficit was due primarily to the
purchases of property, plant and equipment related to the restaurant openings in
1997. This increase was partially offset by the proceeds from the sale of one
Company-owned Sub & Stuff in 1997.
Capital expenditures during the forty week period ended October 7, 1997
totaled $1,340,734, as compared to expenditures of $606,949 for the comparable
period in 1996. These expenditures are primarily associated with the opening of
seven Company owned restaurants of which four were Sub & Stuff's, three were
Spaghetti Jack's, and the addition of the third dual branded Sub & Stuff adding
the Spaghetti Jack's menu to an existing location in the forty week period ended
October 7, 1997. The Company opened two Sub & Stuff restaurants during the
comparable period in 1996. The amount of the Company's cash requirements for
capital expenditures depends in part on the number of new restaurants opened and
the development costs associated with such restaurants.
The Company does not have any capital expenditures planned for the near
future, as to all available funds will be required to meet operational expenses
and repay debt.
15
<PAGE>
During the forty week period ended October 7, 1997, the Company had
cash flows from financing activities of $846,434, as compared to cash flows of
$837,530 for the comparable period in 1996.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
A lawsuit has been filed in Sedgwick County, Kansas
against the Company and others by a group of shareholders
seeking to represent the class of shareholders that purchased
shares of the Company's stock in the registered stock offering
concluded late last year. The petition alleges that certain
statements made by the Company, certain officers, and the
underwriter were untrue or misleading. The Company intends to
defend this lawsuit vigorously.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
17
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION
S-B
3(a)* Articles of Incorporation
3(b)* Bylaws
27 Financial Data Schedule
* Incorporated by reference to such numbered exhibits filed as part of
Registration Statement No. 333- 5488-D filed with the Commission on August
29, 1996.
(b) REPORTS ON FORM 8-K
One Form 8-K was filed on August 28, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
Dated: November 26, 1997 STOICO RESTAURANT GROUP, INC.
(Registrant)
/s/ Louis Stoico, Jr.
------------------------------
Louis Stoico, Jr.
Chairman of the Board and President
/s/ Cathy K. Martsolf
-------------------------------
Cathy K. Martsolf
Senior Vice President of
Administration and principal
accounting officer
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
3(a)* Articles of Incorporation
3(b)* Bylaws
27 Financial Data Schedule
* Incorporated by reference to such numbered exhibits filed as part of
Registration Statement No. 333-5488-D filed with the Commission on August
29, 1996.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
STOICO RESTAURANT GROUP, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENT OF STOICO RESTAURANT GROUP, INC. AS OF OCTOBER
7, 1997, AND FOR THE FORTY WEEKS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Other
<FISCAL-YEAR-END> Dec-30-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Oct-07-1997
<EXCHANGE-RATE> 1
<CASH> 48,369
<SECURITIES> 0
<RECEIVABLES> 195,019
<ALLOWANCES> 0
<INVENTORY> 155,087
<CURRENT-ASSETS> 573,644
<PP&E> 5,754,407
<DEPRECIATION> 2,290,334
<TOTAL-ASSETS> 5,119,448
<CURRENT-LIABILITIES> 3,107,125
<BONDS> 0
0
0
<COMMON> 57,090
<OTHER-SE> 1,897,926
<TOTAL-LIABILITY-AND-EQUITY> 5,119,448
<SALES> 6,935,787
<TOTAL-REVENUES> 7,094,572
<CGS> 4,916,291
<TOTAL-COSTS> 10,880,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,348
<INCOME-PRETAX> (3,768,826)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,768,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,768,826)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
