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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 28, 1999.
---------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
from _____________________ to __________________.
Commission file number 0-25721.
BUCA, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1802364
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Nicollet Mall
Minneapolis, Minnesota 55403
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(Address of principal executive offices) (Zip Code)
(612) 288-2382
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __________ No X (The registrant's
---
registration of its common stock under the Securities Exchange Act of 1934
became effective on April 20, 1999.)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value -
10,437,005 shares as of June 1, 1999.
1
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INDEX
BUCA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 27, 1998 and March 28, 1999.... 3
Consolidated Statements of Operations - Thirteen Weeks Ended
March 29, 1998 and March 28,1999...................................... 4
Consolidated Statements of Cash Flows - Thirteen Weeks Ended
March 29, 1998 and March 28, 1999..................................... 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 14
Item 2. Changes in Securities and Use of Proceeds.............................. 14
Item 3. Defaults upon Senior Securities........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................... 15
Item 5. Other Information...................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES..................................................................... 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BUCA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
Pro forma
(Unaudited) Shareholders'
December March Equity
27, 1998 28, 1999 (NOTE 1)
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,576 $ 432
Accounts receivable 1,160 1,117
Inventories 935 971
Prepaid expenses and other 585 1285
--------- ---------
Total current assets 9,256 3,805
PROPERTY AND EQUIPMENT, net 27,967 32,867
OTHER ASSETS 607 1,212
--------- ---------
$ 37,560 $ 37,884
========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,638 $ 2,257
Accrued expenses 3,257 3,163
Current maturities of long-term debt 205 1,508
--------- ---------
Total current liabilities 6,100 6,928
LONG-TERM DEBT, less current maturities 7,661 8,194
DEFERRED RENT 239 318
OTHER LIABILITIES 127 125
REEDEMABLE STOCK:
Preferred stock, $01 par value, cumulative, Series A convertible-
2,396,800 shares authorized; 2,240,000 shares issued and outstanding 9,665 9,819 $ -
Preferred stock, $.01 par value, cumulative, Series B convertible-
2,100,000 shares authorized; 1,922,222 shares issued and outstanding 9,441 9,597 -
Preferred stock, $.01 par value, cumulative, Series C convertible-
3,679,053 shares authorized; 2,614,634 shares issued and outstanding 13,154 13,433 -
Common stock, $.01 par value; 601,929 and 597,162 shares issued
and outstanding, respectively 4,713 4,676 -
--------- --------- -------------
36,973 37,525 -
SHAREHOLDERS' (DEFICIT) EQUITY:
Undesignated stock, 617,147 shares authorized, none issued or
outstanding
Common stock, $.01 par value - 13,100,000 shares authorized;
1,918,056 and 1,919,580 shares issued and outstanding, respectively 19 19 71
Additional paid in capital 37,473
Accumulated deficit (13,266) (14,984) (14,984)
--------- --------- -------------
(13,247) (14,965) 22,560
Notes receivable from shareholders (293) (241) (241)
--------- --------- -------------
Total shareholders' (deficit) equity (13,540) (15,206) 22,319
--------- --------- -------------
$ 37,560 $ 37,884 $ 37,884
========= ========= =============
</TABLE>
See notes to consolidated financial statements.
3
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BUCA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------
March 29, 1998 March 28, 1999
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<S> <C> <C>
RESTAURANT SALES $ 7,065 $ 14,173
RESTAURANT COSTS:
Product 2,027 3,922
Labor 2,242 4,511
Direct and occupancy 1,539 2,870
Depreciation and amortization 310 672
---------- ----------
Total restaurant costs 6,118 11,975
GENERAL AND ADMINISTRATIVE EXPENSES 968 1,423
PREOPENING COSTS 397 390
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OPERATING (LOSS) INCOME (418) 385
INTEREST EXPENSE 174 213
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(LOSS) INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY (592) 172
(PROVISION) BENEFIT FOR INCOME TAXES (4) 6
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(LOSS) INCOME BEFORE EXTRAORDINARY (596) 178
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (1,313)
---------- ----------
NET LOSS $ (596) $ (1,135)
========== ==========
CUMULATIVE PREFERRED STOCK DIVIDENDS, ACCRETION
OF PREFERRED STOCK TO REDEMPTION VALUE, AND
CHANGE IN REDEEMABLE COMMON STOCK (520) (553)
---------- ----------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,116) $ (1,688)
========== ==========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.45) $(0.67)
========== ==========
WEIGHTED AVERAGE COMMON SHARES ASSUMED
OUTSTANDING - BASIC AND DILUTED 2,503,030 2,521,007
========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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BUCA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
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March 29, 1998 March 28, 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (596) $(1,135)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 303 654
Deferred income taxes 33
Loss on early extinguishment of debt 1,313
Accretion of call premium 13 13
Amortization of debt discount 54
Change in assets and liabilities
Accounts receivable (457) 43
Inventories (78) (36)
Prepaid expenses and other (299) (700)
Accounts payable (204) (381)
Accrued expenses (861) (94)
Other liabilities 87 77
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Net cash used in operating activities (2,038) (213)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,947) (5,800)
Increase in other assets (7) (138)
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Net cash used in investing activities (2,954) (5,938)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 7,330
Principal payments on long-term debt (221) (6,606)
Loan and lease acquisition costs (27) (201)
Collection on notes receivable from shareholders 7 52
Repurchase of common stock (31)
Common stock issuance costs (537)
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Net cash (used in) provided by financing activities (241) 7
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,233) (6,144)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,099 6,576
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 866 $ 432
======= =======
</TABLE>
See notes to consolidated financial statements.
5
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BUCA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BUCA, Inc. and subsidiaries ("we", "us", or "our") develops and operates family-
style, immigrant Southern Italian restaurants located in Arizona, California,
District of Columbia, Illinois, Indiana, Kansas, Kentucky, Minnesota, New York,
Ohio, Washington, and Wisconsin under the name of BUCA di BEPPO.
The accompanying financial statements have been prepared by us without audit and
reflect all adjustments, consisting of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair statement of financial
position and the results of operations for the interim periods. The statements
have been prepared in accordance with generally accepted accounting principles
and with the regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such SEC rules and regulations.
Operating results for the thirteen weeks ended March 28, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 26, 1999.
The balance sheet at December 27, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Pro forma shareholders' equity represents the conversion
of redeemable preferred stock and the termination of the obligation to redeem
shares of common stock excluding the effect of any offering proceeds.
For further information, refer to the financial statements and notes for the
fiscal year ended December 27, 1998 included in our Registration Statement on
Form S-1, registration No. 333-72593.
2. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted earnings per share assumes
conversion of the convertible subordinated debentures and convertible preferred
stock as of the beginning of the year and exercise of stock options and warrants
using the treasury stock method, if dilutive. Dilutive net loss per share for
1998 and 1999 are the same as basic net loss per share due to the antidilutive
effect of the assumed exercise of stock options, warrants, convertible
subordinated debentures, and convertible preferred stock securities.
Diluted loss per share excludes the following due to their antidilutive effect:
<TABLE>
<CAPTION>
March 29, 1998 March 28, 1999
----------------------- --------------------------
Weighted Weighted
Average Average
Number of Price Per Number of Price Per
Shares Share Shares Share
---------------------- --------------------------
<S> <C> <C> <C> <C>
Stock warrants 218,420 $3.73 397,859 $2.05
Stock options 583,507 5.38 1,034,154 6.96
Convertible preferred stock 2,774,808 6.14 4,545,434 6.70
Convertible subordinated debentures 439,506 4.05 385,907 4.61
---------- ----- ---------- ----------
4,016,241 $5.67 6,363,354 $6.32
========== ===== ========== ==========
</TABLE>
3. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the period ended:
<TABLE>
<CAPTION>
March 29, 1998 March 28, 1999
-------------- --------------
<S> <C> <C>
Cash paid during year for:
Interest expense $ 110 $ 203
Income taxes - 28
Non-cash investing and financing activities:
Shareholder receivable from issuance of common stock 60 -
Accretion of redeemable preferred stock to redemption value 59 120
Dividends accrued on redeemable preferred stock 298 469
Change in value of redeemable common stock - (37)
</TABLE>
6
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We own and operate 24 full service, dinner-only restaurants that offer high
quality, immigrant Southern Italian cuisine served family-style in large
portions in a fun and energetic atmosphere that parodies the decor and ambiance
of post-War Italian/American restaurants. We intend to open 13 new restaurants
in fiscal 1999, of which five have opened through May 1999, six are under
construction and the remaining two have signed leases.
We believe that the sales growth pattern of our new restaurants in the two years
after they open differs from the typical sales growth pattern for new
restaurants in other casual dining concepts. Our restaurants typically
experience lower restaurant sales during the first few periods after opening,
with gradually increasing restaurant sales during the remainder of the
restaurant's first year of operation. In the second year of operation, our
restaurants experience significant comparable restaurant sales growth. In
calculating comparable restaurant sales, we include a restaurant in the
comparable base once it has been open for 12 full calendar months. We believe we
have this "discovery" growth pattern over the first two years of operations
because we rely primarily on word-of-mouth advertising and repeat business to
generate increased restaurant sales. This new restaurant-opening trend has
contributed to our high level of comparable restaurant sales increases of 8.9%
in fiscal 1997, 13.3% in fiscal 1998, and 13.0% over the first thirteen weeks of
fiscal 1999. After two years of operation, our restaurants typically experience
lower comparable restaurant sales increases than experienced in prior periods.
We expect this sales growth trend for new restaurants to continue in the future;
however, we expect that the impact of new restaurant openings on total
comparable restaurant sales will decrease as our mature restaurant base
continues to increase.
During the first quarter of fiscal 1999, we recorded an extraordinary loss on
early extinguishment of debt of $1.3 million. This charge related to the
repayment of our outstanding subordinated debt in the amount of $6.0 million. In
addition, we will incur special non-cash charges in the aggregate amount of
approximately $1.3 million in the second quarter of fiscal 1999. The charges in
the second quarter relate to the $1.8 million of convertible subordinated debt
that is convertible, at the option of the holders, into common stock at a
conversion price equal to 60% of the initial public offering price. As a
consequence of this right, we will recognize a special non-cash charge of
approximately $1.0 million in the second quarter. In addition, the $7.0 million
term loan portion of our credit facility with U.S. Bank was repaid, as required,
in connection with the initial public offering. This will result in an
extraordinary charge of approximately $300,000 in the second quarter for the
write-off of costs related to this loan. Our initial public offering was
completed on April 20, 1999. We received $35.5 million in net proceeds.
Our restaurant sales are comprised almost entirely of the sales of food and
beverages. Product costs include the costs of food and beverages. Labor costs
include direct hourly and management wages, bonuses, taxes and benefits for
restaurant employees. Direct and occupancy costs include restaurant supplies,
marketing costs, rent, utilities, real estate taxes, repairs and maintenance and
other related costs. Depreciation and amortization principally includes
depreciation on capital expenditures for restaurants. General and administrative
expenses are composed of expenses associated with all corporate and
administrative functions that support existing operations, management and staff
salaries, employee benefits, travel, information systems and training and market
research. Preopening costs consist of direct costs related to hiring and
training the initial restaurant workforce and certain other direct costs
associated with opening new restaurants. Interest expense includes the net cost
of interest expense on debt and interest income on invested assets.
Results of Operations
Thirteen Weeks Ended March 28, 1999 Compared to Thirteen Weeks Ended March 29,
1998
Restaurant Sales. Restaurant sales increased by $7.1 million, or 100.6%, to
$14.2 million in the first quarter of fiscal 1999 from $7.1 million in the first
quarter of fiscal 1998. The increase was attributable to restaurant sales of
$6.5 million at new restaurants opened within the last 15 months and to
increased sales at restaurants open prior to
7
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fiscal 1998. Comparable restaurant sales increased by 13.0% in the first quarter
of fiscal 1999, primarily as a result of an increase in guest visits of
approximately 12%.
Product. Product costs increased by $1.9 million to $3.9 million in the first
quarter of fiscal 1999 from $2.0 million in the first quarter of fiscal 1998.
Product costs as a percentage of restaurant sales decreased to 27.7% in the
first quarter of fiscal 1999 from 28.7% in the first quarter of fiscal 1998.
This reduction was a result of management's efforts to reduce the cost of food
products and improve margins. We re-negotiated our agreement with a national
food distributor during the first quarter of 1998, which contributed to our
reduced food product costs in the first quarter of fiscal 1999.
Labor. Labor costs increased by $2.3 million to $4.5 million in the first
quarter of fiscal 1999 from $2.2 million in the first quarter of fiscal 1998.
Labor costs increased slightly as a percentage of restaurant sales to 31.8% in
the first quarter of fiscal 1999 from 31.7% in the first quarter of fiscal 1998.
This increase resulted from an increase in sales generated from restaurants open
less than one year. During the first quarter of fiscal 1998, $2.7 million of our
sales were generated from restaurants that were open for less than one year. In
the first quarter of fiscal 1999, $6.4 million of our sales were generated from
restaurants that were open for less than one year. Since our restaurants are
generally less efficient in their first year, the labor costs are higher as a
percentage of restaurant sales.
Direct and Occupancy. Direct and occupancy costs increased by $1.4 million to
$2.9 million in the first quarter of fiscal 1999 from $1.5 million in the first
quarter of fiscal 1998. Direct and occupancy costs decreased as a percentage of
restaurant sales to 20.2% in the first quarter of fiscal 1999 from 21.8% in the
first quarter of fiscal 1998. This decrease was a result of the 13% increase in
comparable restaurant sales. The increase in comparable restaurant sales
leveraged the fixed components of our direct and occupancy costs.
Depreciation and Amortization. Depreciation and amortization expenses increased
by $362,000 to $672,000 in the first quarter of fiscal 1999 from $310,000 in the
first quarter of fiscal 1998. This increase was the result of depreciation
recognized on capital expenditures for new restaurants.
General and Administrative Expenses. General and administrative expenses
increased by $455,000 to $1,423,000 in the first quarter of fiscal 1999 from
$968,000 in the first quarter of fiscal 1998. General and administrative
expenses decreased as a percentage of restaurant sales to 10.0% in the first
quarter of fiscal 1999 from 13.7% in the first quarter of fiscal 1998. This
increase in dollars was primarily the result of the addition of management
personnel in fiscal 1998, resulting in approximately $400,000 of additional
compensation and benefits in the first quarter of fiscal 1999 compared with the
first quarter of fiscal 1998. We expect that general and administrative expenses
will continue to increase in dollar amount in the future, but continue to
decrease as a percentage of restaurant sales because our expansion plans will
require proportionately smaller incremental increases in general and
administrative expenses.
Preopening Costs. Preopening costs remained constant at approximately $400,000
in both the first quarter of fiscal 1999 and the first quarter of fiscal 1998.
However, preopening costs decreased as a percentage of restaurant sales to 2.8%
in the first quarter of fiscal 1999 from 5.6% in the first quarter of fiscal
1998. We expect that preopening expenses in both the second and third quarters
of fiscal 1999 will increase in dollar amount over the same periods in fiscal
1998 due to the increased number of new restaurant openings.
Interest Expense. Interest expense remained constant at approximately $200,000
in both the first quarter of fiscal 1999 and the first quarter of fiscal 1998.
We expect to generate interest income each of the remaining quarters of fiscal
1999 due to the completion of our initial public offering in April 1999.
Provision / Benefit for Income Taxes. The provision for income taxes for the
first quarter of fiscal 1998 represents certain minimum state taxes based on
taxable factors other than earnings and a minor charge for federal taxes
primarily related to deferred income taxes. We did not record a tax benefit in
fiscal 1998 for the losses generated in previous years as utilization of these
losses in future periods was deemed uncertain. For the first quarter of fiscal
1999, we recognized a small tax benefit due to the expectation that we will
begin to utilize our net operating loss carry-forward. At December 27, 1998, we
had a net operating loss carry-forward of $3.5 million. The net operating loss
carry-forward begins to expire in fiscal 2003. The majority of the expected
income tax benefit derived by applying the statutory income tax rate has been
eliminated as a result of an increase in the deferred income tax asset valuation
allowance.
8
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Liquidity and Capital Resources
Since we were formed, we have incurred significant net losses, primarily due to
restaurant development and the costs of hiring senior management to develop and
implement our expansion strategy. We have generated income from our restaurant
operations, but have incurred aggregate net losses of $8.7 million as of March
28, 1999. We have funded our capital requirements through sales of equity
securities, debt financing, and sale-leaseback arrangements. Net cash used in
operating activities was $213,000 for the thirteen weeks ended March 28, 1999
versus $2,038,000 for the thirteen weeks ended March 29, 1998.
We use cash primarily to fund the development and construction of new
restaurants. Net cash used in investing activities was $5.9 million for the
thirteen weeks ended March 28, 1999 and $3.0 million for thirteen weeks ended
March 29, 1998. We intend to open 13 restaurants in fiscal 1999, five of which
have already opened. Total capital expenditures are expected to be approximately
$17.0 million in fiscal 1999. Each new restaurant is expected to require, on
average, a total cash investment of between $1.0 million and $1.5 million,
excluding preopening costs expected to range from $175,000 to $210,000. To date,
all of our restaurants are renovations of existing facilities ranging in size
from 4,500 to 10,200 square feet. We anticipate that future restaurants will
typically range in size from 7,000 to 9,000 square feet. In 1999, we will build
at least three restaurants based on our prototype designs. These designs are
expected to require between $1.5 million and $2.0 million in total cash
investment per restaurant. This investment represents an incremental $500,000
increase over the historical cash investment for remodeled restaurants. We plan
to refinance any purchases of land or buildings through sale-leaseback
transactions. We cannot predict whether this financing will be available when
needed or on terms acceptable to us.
Net cash provided by financing activities was $7,000 for the thirteen weeks
ended March 28, 1999 versus net cash used in financing activities of $241,000
for the thirteen weeks ended March 29, 1998. Financing activities in fiscal 1999
and fiscal 1998 consisted primarily of sales of preferred stock as well as the
obtainment of long-term debt. At March 28, 1999, we had a $7.0 million term loan
that was to expire on December 31, 2000 and bore interest at a fixed rate of
9.63%. Pursuant to our credit agreement, this term loan was repaid upon the
closing of our initial public offering in April 1999. At March 28, 1999, we
also had an $8.0 million revolving line of credit that matures on December 31,
2000, and bore interest at the bank's reference rate plus .75% to 1.25%. At
March 28, 1999 we had no amounts outstanding under the revolving line of credit.
Also pursuant to the terms of our agreement, the line of credit was reduced to
$3.0 million upon the completion of our initial public offering. The credit
agreement contains covenants that place restrictions on sales of properties,
transactions with affiliates, creations of additional debt and other customary
covenants. Borrowings under the credit agreement are collateralized by
substantially all of our assets. We do not anticipate that the above covenants
and restrictions will have a significant impact on us.
Upon completion of our initial public offering in April 1999, we obtained $35.5
million in net proceeds. The funds obtained were used to repay our $7.0 million
term loan and $2.0 million in line of credit borrowings at that date. The
remaining proceeds are expected to be used to fund operations, the opening of
additional restaurants, and for other corporate purposes.
We intend to re-negotiate our line of credit during the second or third quarter
of fiscal 1999. We believe that the lender will be willing to increase the
amount of the line of credit on terms and conditions which are comparable to
those contained in our existing line of credit, or that other financing will be
available in an amount and on terms and conditions which are adequate to meet
our currently planned working capital and liquidity needs. However, we cannot
predict whether our existing lender will ultimately agree to any increase or
whether any alternative financing will be available.
Our capital requirements, including development costs related to the opening of
additional restaurants, have been and will continue to be significant. We will
need substantial capital to finance our expansion plans, which require funds for
capital expenditures, preopening costs and initial operating losses related to
new restaurant openings. The adequacy of available funds and our future capital
requirements will depend on many factors, including the pace of expansion, the
costs and capital expenditures for new restaurant development and the nature of
contributions, loans and other arrangements negotiated with landlords. Although
we can make no assurance, we believe that cash flow from operations together
with the net proceeds from our initial public offering and available borrowings
will be sufficient to fund our capital requirements through at least the first
quarter of the year 2000. We will need to raise additional capital in fiscal
9
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2000 through public or private equity or debt financing to continue our growth.
In addition, we may from time to time consider acquiring the operations of other
restaurants. We may effect additional equity or debt financing to fund such
acquisitions. The sale of additional equity or debt securities could result in
additional dilution to our shareholders. We cannot predict whether additional
capital will be available on favorable terms, if at all.
Inflation
The primary inflationary factors affecting our operations are food and labor
costs. A large number of our restaurant personnel are paid at rates based on the
applicable minimum wage, and increases in the minimum wage directly affect our
labor costs. To date, inflation has not had a material impact on our operating
results.
Year 2000 Compliance
We are aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "year 2000 problem" is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000.
We have reviewed both our information technology and our non-information
technology systems to determine whether they are year 2000 compliant, and we
have not identified any material systems that are not year 2000 compliant. We
have substantially completed year 2000 testing of our systems and have
identified those components deemed not in compliance. We have initiated formal
communications with all significant suppliers and service providers to determine
the extent to which we are vulnerable to those third parties' failure to solve
the year 2000 problem. We have received written assurances of year 2000
compliance from a majority of the third parties that we have relationships,
including our national food distributor, and payroll and credit card service
providers. Unless public suppliers of water, electricity, telephone service, and
natural gas are disrupted for a substantial period of time, we believe that our
operations will not be significantly disrupted even if third parties that we
have relationships are not year 2000 compliant. If public suppliers of water,
electricity, telephone service, and natural gas are disrupted for a substantial
period of time, our business may be materially adversely affected. We will
develop a contingency plan to deal with potential third party failure issues.
Testing and replacement of all systems is scheduled to be completed by June 30,
1999. A decision to implement a contingency plan is expected by June 30, 1999.
We estimate that we incurred approximately $100,000 in fiscal 1998 to address
year 2000 issues, principally testing our existing systems, and that we will
incur an additional $100,000 in fiscal 1999 to replace certain system components
deemed non-year 2000 compliant. These amounts do not include insurance proceeds
used to replace hardware and software systems destroyed in the recent fire at
our headquarters with new systems represented to be year 2000 compliant.
However, uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance, and we intend to continue to make
efforts to ensure that third parties with whom we have relationships are year
2000 compliant. Any year 2000 compliance problem of our vendors or ours could
materially adversely affect our business, financial condition, operating results
or cash flows, and could prohibit us from operating our restaurants.
Disclosure Regarding Forward-Looking Statements
This Form 10-Q for the first quarter ended March 28, 1999 contains forward-
looking statements within the meaning of the safe harbor provisions of Section
21E of the Securities Exchange Act of 1934. These forward-looking statements
are based on the beliefs of our management as well as on assumptions made by and
information currently available to us at the time the statements were made.
When used in this Form 10-Q, the words "anticipate", "believe", "estimate",
"expect", "intend" and similar expressions, as they relate to us, are intended
to identify the forward-looking statements. Although we believe that these
statements are reasonable, you should be aware that actual results could differ
materially from those projected by the forward-looking statements as a result of
the risk factors listed below. You should consider carefully the factors listed
below, as well as the other information and data contained in this Form 10-Q.
We caution you, however, that the list of factors contained below may not be
exhaustive and that those or other factors, many of which are outside of our
control, could have a material adverse effect on us and our results of
operations. All forward-looking statements attributable to persons acting on our
10
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behalf or us are expressly qualified in their entirety by the cautionary
statements set forth here. We assume no obligation to publicly release the
results of any revision or updates to these forward-looking statements to
reflect future events or unanticipated occurrences.
Risk Factors
We May Be Unable to Achieve Profitability
Since we were formed, we have incurred net losses of approximately $8.7 million
through March 28, 1999, primarily due to new restaurant opening expenses and the
costs of hiring senior management to develop and implement our expansion
strategy. We intend to continue to expend significant financial and management
resources on the development of additional restaurants. We cannot predict
whether we will be able to achieve or sustain revenue growth, profitability or
positive cash flow in the future. Failure to achieve these objectives may cause
our stock price to decline and make it difficult to raise additional capital.
Our Business Could Be Materially Adversely Affected if We Are Unable to Expand
in a Timely and Profitable Manner
To continue to grow, we must open new BUCA di BEPPO restaurants on a timely and
profitable basis. We have experienced delays in restaurant openings from time to
time and may experience delays in the future. Delays or failures in opening new
restaurants could materially adversely affect our business, financial condition,
operating results or cash flows. We expanded from 11 restaurants at the end of
fiscal 1997 to 19 restaurants at the end of fiscal 1998. We expect to open an
additional 13 restaurants during fiscal 1999, five of which are already open.
Our ability to expand successfully will depend on a number of factors, some of
which are beyond our control, including the:
. identification and availability of suitable restaurant sites;
. competition for restaurant sites;
. negotiation of favorable leases;
. timely development in certain cases of commercial, residential, street
or highway construction near our restaurants;
. management of construction and development costs of new restaurants;
. securing required governmental approvals and permits;
. recruitment of qualified operating personnel, particularly Paisano
Partners and kitchen managers;
. competition in new markets; and
. general economic conditions.
In addition, we contemplate entering new markets in which we have no operating
experience. These new markets may have different demographic characteristics,
competitive conditions, consumer tastes and discretionary spending patterns than
our existing markets, which may cause our new restaurants to be less successful
in these new markets than in our existing markets.
We May Not Be Able to Achieve and Manage Planned Expansion
We face many business risks associated with rapidly growing companies, including
the risk that our existing management, information systems and financial
controls will be inadequate to support our planned expansion. We cannot predict
whether we will be able to respond on a timely basis to all of the changing
demands that our planned expansion will impose on management and these systems
and controls. If we fail to continue to improve management, information systems
and financial controls or encounter unexpected difficulties during expansion,
our business, financial condition, operating results or cash flows could be
materially adversely affected.
Furthermore, we may seek to acquire the operations of other restaurants. To do
so successfully, we would need to identify suitable acquisition candidates,
obtain financing on acceptable terms, and negotiate acceptable acquisition
terms. Even if we are successful in completing acquisitions, they may have a
material adverse effect on our operating results, particularly in the fiscal
quarters immediately following the completion of an acquisition, while the
acquisition is being integrated into our operations. We do not currently have
any definitive agreements, arrangements or understandings regarding any
particular acquisition.
11
<PAGE>
Fluctuations in Our Operating Results
Our operating results will fluctuate significantly because of several factors,
including the timing of new restaurant openings and related expenses,
profitability of new restaurants, increases or decreases in comparable
restaurant sales, general economic conditions, consumer confidence in the
economy, changes in consumer preferences, competitive factors and weather
conditions. As a result, our operating results may fall below the expectations
of public market analysts and investors.
In the past, our preopening costs have varied significantly from quarter to
quarter primarily due to the timing of restaurant openings. We typically incur
most preopening costs for a new restaurant within the two months immediately
preceding, and the month of, its opening. In addition, our labor and operating
costs for a newly opened restaurant during the first three to six months of
operation are materially greater than what can be expected after that time, both
in aggregate dollars and as a percentage of restaurant sales. Accordingly, the
volume and timing of new restaurant openings in any quarter has had and is
expected to continue to have a significant impact on quarterly preopening costs
and labor and direct and occupancy costs. We anticipate that preopening costs,
labor and direct and occupancy costs will significantly increase as a percent of
restaurant sales in the second and third quarters of fiscal 1999. Due to these
factors, results for a quarter may not indicate results to be expected for any
other quarter or for a full fiscal year.
We May Be Unable to Fund Our Significant Future Capital Needs and We May Need
Additional Funding Sooner Than Anticipated
We will need substantial capital to finance our expansion plans, which require
funds for capital expenditures, preopening costs and potential initial operating
losses related to new restaurant openings. We may not be able to obtain
additional financing on acceptable terms. If adequate funds are not available,
we will have to curtail projected growth, which could materially adversely
affect our business, financial condition, operating results or cash flows.
We estimate that capital expenditures during fiscal 1999 will be approximately
$17.0 million and that capital expenditures during future years will exceed this
amount. Although we expect that the net proceeds from our public offering in
April 1999, combined with other resources, will be sufficient to fund our
capital requirements through at least March 2000, this may not be the case. We
may be required to seek additional capital earlier than anticipated if:
. future actual cash flows from operations fail to meet our
expectations;
. costs and capital expenditures for new restaurant development exceed
anticipated amounts;
. we are unable to obtain sale-leaseback financing of certain
restaurants;
. landlord contributions, loans and other incentives are lower than
expected; or
. we are required to reduce prices to respond to competitive pressures.
Because of Our Small Restaurant Base, Our Operating Results Could Be Materially
Adversely Affected By The Negative Performance of a Small Number of Restaurants
We currently operate 24 restaurants, eleven of which opened in the last 12
months. Due to our small restaurant base, poor operating results at any one or
more restaurants could materially adversely affect our business, financial
condition, operating results or cash flows. Our operating results achieved to
date may not be indicative of our future operating results with a larger number
of restaurants.
Increased Food Costs Could Materially Adversely Affect Our Operating Results
Our profitability depends in part on our ability to anticipate and react to
changes in food costs. We rely on SYSCO Corporation, a national food
distributor, as the primary distributor of our food. Although we believe that
alternative distribution sources are available, any increase in distribution
prices or failure to perform by SYSCO could cause our food costs to increase.
Further, various factors beyond our control, including adverse weather
conditions and governmental regulation, may affect our food costs. We cannot
predict whether we will be able to anticipate and react to changing food costs
by adjusting our purchasing practices and menu prices, and a failure to do so
could materially adversely affect our business, financial condition, operating
results or cash flows.
12
<PAGE>
Changes in Consumer Preferences or Discretionary Consumer Spending Could
Negatively Impact Our Results
Our restaurants feature immigrant Southern Italian cuisine served family-style.
Our continued success depends, in part, upon the popularity of this type of
Italian cuisine and this style of informal dining. Shifts in consumer
preferences away from our cuisine or dining style could materially adversely
affect our future profitability. Also, our success depends to a significant
extent on numerous factors affecting discretionary consumer spending, including
economic conditions, disposable consumer income and consumer confidence.
Adverse changes in these factors could reduce guest traffic or impose practical
limits on pricing, either of which could materially adversely affect our
business, financial condition, operating results or cash flows.
We May Be Unable To Compete With Larger, More Established Competitors
The restaurant industry is highly competitive. Due to our limited financial
resources and operating history, we may be unable to compete effectively with
our larger, more established competitors, which have substantially greater
financial resources and operating histories than we do. We will likely face
direct competition with these competitors in each of the markets we enter.
We Could Face Potential Labor Shortages
Our success depends in part upon our ability to attract, motivate and retain a
sufficient number of qualified employees, including restaurant managers, kitchen
staff and wait staff, necessary to keep pace with our expansion schedule.
Qualified individuals needed to fill these positions are in short supply in
certain areas. The inability to recruit and retain such individuals may delay
the planned openings of new restaurants or result in high employee turnover in
existing restaurants which could have a material adverse effect on our business,
financial condition, operating results or cash flows. Additionally, competition
for qualified employees could require us to pay higher wages to attract
sufficient employees, which could result in higher labor costs.
Our Operations Depend on Governmental Licenses and We May Face Liability Under
Dram Shop Statutes
Our business depends on obtaining and maintaining required food service and
liquor licenses for each of our restaurants. If we fail to hold all necessary
licenses, we may be forced to delay or cancel new restaurant openings and close
or reduce operations at existing locations. In addition, our sale of alcoholic
beverages subjects us to "dram shop" statutes in some states. These statutes
allow an injured person to recover damages from an establishment that served
alcoholic beverages to an intoxicated person. If we receive a judgment
substantially in excess of our insurance coverage, or if we fail to maintain our
insurance coverage, our business, financial condition, operating results or cash
flows could be materially and adversely affected.
Complaints or Litigation from Guests May Materially Adversely Affect Us
We are from time to time the subject of complaints or litigation from guests
alleging illness, injury or other food quality, health or operational concerns.
Adverse publicity resulting from these allegations may materially adversely
affect us and our restaurants, regardless of whether the allegations are valid
or whether BUCA is liable. These claims may divert our financial and management
resources that would otherwise be used to benefit the future performance of our
operations.
We Face Uncertainty Regarding Risk of Year 2000 Compliance
BUCA and third parties with which we do business rely on numerous computer
programs for day to day operations. We cannot predict whether we will be able to
effectively address our year 2000 issues in a timely and cost-efficient manner
and without interruption to our business. We have initiated discussions with our
significant suppliers regarding their plans to solve year 2000 issues where
their systems interface with our systems or otherwise impact our operations. We
cannot predict whether year 2000 difficulties encountered by our suppliers and
other third parties with which we do business will have a material adverse
impact on our business, financial conditions, operating results or cash flows.
13
<PAGE>
We Could Face Consolidated Tax Group Liability
We were a member of the consolidated tax group of Parasole Restaurant Holdings,
Inc. prior to our spin-off in late fiscal 1996. Under the Internal Revenue
Code, as a former member of the consolidated tax group, we could be held liable
for unpaid federal tax liabilities, if any, of the consolidated tax group
through the end of 1996 in the event of nonpayment by Parasole.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates on borrowings under
our revolving line of credit that bears interest from time to time at the
lending bank's reference rate plus 0.75% to 1.25%. Because we do not believe
that the maximum available borrowings under the revolving line of credit are
material, we do not believe this risk will be material.
We have no derivative financial instruments or derivative commodity instruments
in our cash and cash equivalents and investments. We invest our cash and cash
equivalents and investments in investment grade, highly liquid investments,
consisting of money market instruments, bank certificates of deposit, overnight
investments in commercial paper, and short term government and corporate bonds.
We have invested the net proceeds from our public offering in similar investment
grade and highly liquid investments.
Many of the food products purchased by us are affected by commodity pricing and
are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties and other factors which are outside our control.
To control this risk in part, we have fixed price purchase commitments with
terms of one year or less for food and supplies from vendors who supply our
national food distributor. In addition, we believe that substantially all of our
food and supplies are available from several sources, which helps to control
food commodity risks. We believe we have the ability to increase menu prices, or
vary the menu items offered, if needed in response to a food product price
increases. To compensate for a hypothetical price increase of 10% for food and
supplies, we would need to increase menu prices by an average of 3%, which is
consistent with our average price increase of 3% in fiscal 1998 and 2% in fiscal
1997. Accordingly, we believe that a hypothetical 10% increase in food product
costs would not have a material effect on our operating results.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are currently subject to various legal actions arising in the normal course
of business, none of which are expected to have a material effect on our results
of operations, financial condition or cash flows.
ITEM 2. Changes in Securities and Use of Proceeds
We registered and sold 3,537,213 shares of common stock, par value $0.01, on
registration statement number 333-72593 at an aggregate offering price of
$42,446,556 (or $12.00 per share), which was declared effective on April 20,
1999. Of the shares sold in the offering, 351,838 were sold by selling
shareholders for an aggregate offering price of $4,222,056 and the remaining
3,185,375 shares were sold by us for an aggregate-offering price of $38,224,500.
The offering has terminated. The co-managing underwriters in the offering were
U.S. Bancorp Piper Jaffray Inc. and NationsBanc Montgomery Securities LLC.
We incurred the following expenses in connection with the issuance and
distribution of the shares as discussed above:
<TABLE>
<S> <C>
Underwriters' discount............... $ 2,676,000
Other expenses (audit, legal, etc.).. 1,100,000
-----------
Total expenses....................... $ 3,776,000
===========
</TABLE>
Our proceeds from the offering were $35.5 million before other expenses. We
have used $9.0 million of the net proceeds to pay debt. The remaining funds
will be used to develop new restaurants and for other corporate purposes. No
direct or indirect payments of the proceeds received by us from the offering
were made to our directors, officers, stockholders or affiliates.
14
<PAGE>
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
At a special meeting of our shareholders held on March 17, 1999, the
shareholders took the following action:
(a) Approved and adopted our Amended and Restated Articles of Incorporation.
The proposal received the affirmative vote of 1,978,172 shares of common
stock, 1,422,221 shares of Series A Convertible Preferred Stock, 1,207,404
shares of Series B Convertible Preferred Stock and 1,730,431 shares of
Series C Convertible Preferred Stock. (The preferred stock converted into
common stock in connection with the initial public offering). No votes
were cast against the proposal and 198 shares of common stock abstained
from voting. There were no broker non-votes.
(b) Approved and adopted our Amended and Restated By-Laws. The proposal
received 6,338,426 votes for and no votes against. There were no
abstentions or broker non-votes.
(c) Approved and adopted an amendment to the 1996 Stock Incentive Plan of BUCA,
Inc. and Affiliated Companies. The proposal received 6,338,426 votes for
and no votes against. There were no abstentions or broker non-votes.
(d) Approved and adopted our Employee Stock Purchase Plan. The proposal
received 6,338,426 votes for and no votes against. There were no
abstentions or broker non-votes.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit NO. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation Incorporated By
of the Company/(1)/ Reference
3.2 Amended and Restated Bylaws of the Company/(2)/ Incorporated By
Reference
4.1 Specimen Common Stock Certificate/(3)/ Incorporated By
Reference
27.1 Financial Data Schedule for the quarter ended Electronic
March 28, 1999 Transmission
</TABLE>
/(1)/ Incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-72593).
/(2)/ Incorporated by reference to Exhibit 3.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-72593).
/(3)/ Incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
72593).
15
<PAGE>
(b) Valuation and Qualifying Accounts:
None
(c) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter ended March
28, 1999.
16
<PAGE>
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.
BUCA, Inc.
----------
(Registrant)
Date: June 3, 1999 By: /s/ Joseph P. Micatrotto
------------------------
Joseph P. Micatrotto,
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 3, 1999 By: /s/ Greg A. Gadel
-----------------
Greg A. Gadel
Chief Financial Officer
17
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit NO. Description Method of Filing
----------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company/(1)/ Incorporated By
Reference
3.4 Restated Bylaws of the Company/(2)/ Incorporated By
Reference
4.1 Specimen Common Stock Certificate/(3)/ Incorporated By
Reference
27.1 Financial Data Schedule for the quarter ended March 28, 1999 Electronic
Transmission
</TABLE>
/(1)/ Incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-72593).
/(2)/ Incorporated by reference to Exhibit 3.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-72593).
/(3)/ Incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-
72593).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> MAR-28-1999
<CASH> 432
<SECURITIES> 0
<RECEIVABLES> 1,117
<ALLOWANCES> 0
<INVENTORY> 971
<CURRENT-ASSETS> 3,805
<PP&E> 32,867
<DEPRECIATION> 3,397
<TOTAL-ASSETS> 37,884
<CURRENT-LIABILITIES> 6,928
<BONDS> 8,194
32,849
0
<COMMON> 19
<OTHER-SE> (10,549)
<TOTAL-LIABILITY-AND-EQUITY> 37,884
<SALES> 14,173
<TOTAL-REVENUES> 14,173
<CGS> 3,922
<TOTAL-COSTS> 11,975
<OTHER-EXPENSES> 1,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 172
<INCOME-TAX> 6
<INCOME-CONTINUING> 178
<DISCONTINUED> 0
<EXTRAORDINARY> (1,313)
<CHANGES> 0
<NET-INCOME> (1,135)
<EPS-BASIC> (.67)
<EPS-DILUTED> (.67)
</TABLE>
