<PAGE> 1
UNITED STATES
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 September 30, 2000
------------------
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 333-57925
---------
The Restaurant Company
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 62-1254388
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6075 Poplar Avenue, Suite 800, Memphis, TN 38119
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(901) 766-6400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [X] No [ ]
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Food sales $ 82,011 $ 77,351 $ 235,244 $ 219,546
Franchise and other revenue 6,130 5,738 17,276 16,432
-------- -------- --------- ---------
Total Revenues 88,141 83,089 252,520 235,978
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 22,801 21,468 65,528 60,780
Labor and benefits 27,809 26,672 82,571 77,656
Operating expenses 16,013 14,636 46,189 42,378
General and administrative 8,091 7,512 22,990 22,427
Depreciation and amortization 5,794 5,364 16,932 15,577
Interest, net 4,601 4,316 13,557 12,839
Gain on disposition of assets, net -- -- -- (427)
Asset write-down 937 -- 1,537 420
Other, net (383) (346) (1,100) (1,212)
-------- -------- --------- ---------
Total Costs and Expenses 85,663 79,622 248,204 230,438
-------- -------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 2,478 3,467 4,316 5,540
Provision for income taxes (842) (1,150) (1,467) (1,865)
-------- -------- --------- ---------
Income before cumulative effect
of change in accounting principle 1,636 2,317 2,849 3,675
Cumulative effect of change in accounting
principle, net of income tax benefit of $188 -- -- -- (340)
-------- -------- --------- ---------
NET INCOME $ 1,636 $ 2,317 $ 2,849 $ 3,335
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 3
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,171 $ 2,908
Receivables, less allowance for
doubtful accounts of $1,193 and $990 9,213 7,699
Inventories, at the lower of first-
in, first-out cost or market 5,619 5,513
Prepaid expenses and other current assets 1,609 1,193
Deferred income taxes 635 635
------------- ------------
Total current assets 21,247 17,948
------------- ------------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 140,765 135,659
INTANGIBLE ASSETS, net of accumulated
amortization of $34,305 and $32,456 35,178 34,175
NOTES RECEIVABLE, less reserve for
notes receivable of $197 and $170 1,592 2,462
DEFERRED INCOME TAXES 2,170 2,170
OTHER ASSETS 9,285 8,150
------------- ------------
$210,237 $200,564
============= ============
The accompanying notes are an integral part of
these consolidated balance sheets.
3
<PAGE> 4
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 948 $ 942
Accounts payable 13,181 15,510
Accrued expenses 22,537 20,065
------------- ------------
Total current liabilities 36,666 36,517
------------- ------------
CAPITAL LEASE OBLIGATIONS, less
current maturities 3,325 4,064
LONG-TERM DEBT 166,631 160,416
OTHER LIABILITIES 6,554 4,727
STOCKHOLDER'S INVESTMENT:
Common stock $.01 par value, 100,000 shares
authorized, 10,820 issued and outstanding 1 1
Accumulated deficit (2,940) (5,161)
------------- ------------
Total stockholder's deficit (2,939) (5,160)
------------- ------------
$ 210,237 $ 200,564
============= ============
The accompanying notes are an integral part of
these consolidated balance sheets.
4
<PAGE> 5
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,636 $ 2,317 $ 2,849 $ 3,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,794 5,364 16,932 15,577
Change in accounting principle -- -- -- 340
Gain on disposition of assets, net -- -- -- (427)
Asset write-down 937 -- 1,537 420
Other noncash income and expense items 111 181 333 495
Net changes in other operating assets and liabilities 3,759 2,665 516 (663)
-------- -------- -------- --------
Total adjustments 10,601 8,210 19,318 15,742
-------- -------- -------- --------
Net cash provided by operating activities 12,237 10,527 22,167 19,077
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (5,817) (5,906) (19,071) (15,861)
Cash paid for acquisition of franchised restaurants -- -- (5,902) --
Proceeds from sale of property and equipment -- -- 431 --
Payments on notes receivable 43 66 121 190
Distribution from joint venture -- 200 -- 200
-------- -------- -------- --------
Net cash used in investing activities (5,774) (5,640) (24,421) (15,471)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) long-term debt (4,500) (4,500) 4,250 (2,500)
Principal payments under capital lease obligations (230) (311) (733) (1,508)
Purchase of minority interest -- (10) -- (42)
-------- -------- -------- --------
Net cash provided by (used in) financing activities (4,730) (4,821) 3,517 (4,050)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,733 66 1,263 (444)
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 2,438 2,640 2,908 3,150
-------- -------- -------- --------
Balance, end of period $ 4,171 $ 2,706 $ 4,171 $ 2,706
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Organization
The Restaurant Company (the "Company," or "TRC") is a wholly-owned subsidiary of
The Restaurant Holding Corporation ("RHC"). TRC conducts business under the name
"Perkins Restaurant and Bakery". TRC is also the sole stockholder of TRC Realty
LLC, The Restaurant Company of Minnesota ("TRCM") and Perkins Finance Corp. RHC
is owned by Donald N. Smith ("Mr. Smith"), TRC's Chairman and Chief Executive
Officer, and BancBoston Ventures, Inc. Mr. Smith is also the Chairman and Chief
Executive Officer of Friendly Ice Cream Corporation ("FICC"), which operates and
franchises approximately 600 restaurants, located primarily in the northeastern
United States. Mr. Smith owns 9.3% of the common stock of FICC.
Basis of Presentation
The accompanying unaudited consolidated financial statements of TRC have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and notes necessary for complete financial statements in
conformity with generally accepted accounting principles. The results for the
periods indicated are unaudited but reflect all adjustments (consisting only of
normal recurring adjustments) which management considers necessary for a fair
presentation of the operating results. Results of operations for the interim
periods are not necessarily indicative of a full year of operations. The notes
to the financial statements contained in the 1999 Annual Report on Form 10-K
should be read in conjunction with these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
The Recapitalization
Prior to December 13, 1999, TRC was the sole stockholder of Perkins Restaurants,
Inc. ("PRI") which was a limited partner and indirect owner of 100% of Perkins
Family Restaurants, L.P. ("PFR") and the parent of PFR's general partner,
Perkins Management Company, Inc. ("PMC"). On December 13, 1999, PMC was merged
into PRI. On December 15, 1999, PRI was merged into TRC. As a result of these
mergers, PFR, which had been an indirect wholly-owned subsidiary of TRC, became
a direct wholly-owned subsidiary of TRC, and TRC became the general partner of
PFR.
On December 22, 1999, through a series of transactions, TRC repurchased all of
its outstanding shares other than those owned by Mr. Smith. Mr. Smith
contributed all of his shares in TRC to RHC, and PFR was merged into TRC. As a
result, TRC became a 100% owned subsidiary of RHC. No change in the Company's
management or business strategy occurred as a result of the Recapitalization.
6
<PAGE> 7
Bankruptcy of a Significant Franchisee
On October 27, 1999, Reading Restaurants, Inc. ("Reading"), a franchisee of the
Company, filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of Ohio. Of the 18 restaurants operated by Reading as of March 31,
2000, 16 were purchased by another of the Company's franchisees effective June
9, 2000. The remaining two restaurants have been closed. Reading owed the
Company approximately $500,000 in royalty fees as of September 30, 2000.
Although these fees are personally guaranteed by three principals of Reading,
collection under these guarantees is uncertain and therefore these amounts have
been fully reserved.
Contingencies
The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe it is likely that these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.
In the past, the Company has sponsored financing programs offered by certain
lending institutions to assist its franchisees in procuring funds for the
construction of new franchised restaurants and to purchase and install in-store
bakeries. The Company provides a limited guaranty of the funds borrowed. At
September 30, 2000, there were approximately $1,866,000 in borrowings
outstanding under these programs, approximately $800,000 of which are guaranteed
by the Company. No additional borrowings are available under these programs.
On June 9, 2000, the Company entered into a separate agreement to guarantee up
to $1,500,000 of borrowings for use by a franchisee to remodel and upgrade
existing restaurants. As of September 30, 2000, there were no borrowings
outstanding under this agreement.
Related Party Transaction
During the third quarter of 2000, the Company forgave approximately $625,000 in
previously accrued interest on a note receivable from Mr. Smith. The note
forgiveness was recorded as a reduction of equity on the Company's balance
sheet. The remaining principal balance on the note as of September 30, 2000 was
$400,000.
The Restaurant Company of Minnesota
On September 30, 2000, the Company contributed all of the restaurant, office and
related assets owned by the Company and used in its operations in Minnesota and
North Dakota and all of the Company's trademarks and service marks to The
Restaurant Company of Minnesota, a newly created, wholly-owned subsidiary of the
Company. TRCM was formed to conduct the Company's operations in Minnesota and
North Dakota as well as manage the rights and responsibilities related to the
contributed trademarks and service marks. TRCM granted TRC a license to use, and
the right to license others to use, the trademarks and service marks used in the
Perkins system.
7
<PAGE> 8
Supplemental Cash Flow Information
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three and nine months ended September
30, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(Increase) Decrease in:
Receivables $ (1,263) $ (975) $ (1,848) $ (2,019)
Inventories 140 (172) (106) (118)
Prepaid expenses and
other current assets 469 (21) (416) (269)
Other assets 82 (97) (1,049) (2,316)
Increase (Decrease) in:
Accounts payable (891) 1,276 (2,329) 1,149
Accrued expenses 4,062 3,449 2,472 1,266
Other liabilities 1,160 (795) 3,792 1,644
--------------- ---------------- ---------------- ----------------
$ 3,759 $ 2,665 $ 516 $ (663)
=============== ================ ================ ================
</TABLE>
Other supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash paid for interest $ 432 $ 194 $ 7,725 $ 7,449
Income taxes paid 1,654 3,013 3,358 3,355
Income tax refunds received -- 21 2 103
</TABLE>
8
<PAGE> 9
Segment Reporting
The following presents revenues and other financial information by business
segment for the periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- ----- ------
<S> <C> <C> <C> <C> <C>
Three Months Ended:
September 30, 2000:
Revenues from
external customers $ 72,929 $ 5,970 $ 9,082 $ 160 $ 88,141
Intersegment revenues -- -- 2,319 -- 2,319
Segment profit (loss) 8,973 5,007 1,926 (14,270) 1,636
September 30, 1999:
Revenues from
external customers 69,221 5,625 8,028 215 83,089
Intersegment revenues -- -- 2,352 -- 2,352
Segment profit (loss) 8,613 4,932 1,765 (12,993) 2,317
Nine Months Ended:
September 30, 2000:
Revenues from
external customers 212,367 16,786 22,877 490 252,520
Intersegment revenues -- -- 7,304 -- 7,304
Segment profit (loss) 22,769 14,419 5,079 (39,418) 2,849
September 30, 1999:
Revenues from
external customers 198,280 16,005 20,847 846 235,978
Intersegment revenues -- -- 6,774 -- 6,774
Segment profit (loss) 22,690 13,879 4,313 (37,547) 3,335
</TABLE>
9
<PAGE> 10
A reconciliation of other segment loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General and administrative expenses $ 6,848 $ 6,562 $ 19,725 $ 19,725
Depreciation and amortization expenses 1,544 1,485 4,543 4,431
Interest expense 4,601 4,316 13,557 12,839
Change in accounting principle -- -- -- 340
Gain on disposition of assets -- -- -- (427)
Asset write-down 937 -- 1,537 420
Income tax expense 842 1,150 1,467 1,865
Other (502) (520) (1,411) (1,646)
-------- -------- -------- --------
$ 14,270 $ 12,993 $ 39,418 $ 37,547
======== ======== ======== ========
</TABLE>
Preopening Expenses
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company adopted in 1999. SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. Prior to 1999, new store
preopening costs were deferred and amortized over twelve months starting when a
restaurant opened. Upon adoption of SOP 98-5, the Company recorded a cumulative
effect of a change in accounting principle of $340,000, net of income tax
benefit, to write off unamortized preopening costs that existed on the balance
sheet at December 31, 1998.
Deferred Compensation
Effective January 1, 1999, the Company established a Deferred Compensation Plan
under which officers and key employees of the Company may defer specified
percentages of their salaries, annual incentives and long-term compensation
payments. The Company also makes matching contributions of the lesser of 3% of
eligible compensation or $5,100 for 2000. Amounts deferred are excluded from the
participant's taxable income and are held in trust with a bank, where the funds
are invested at the direction of the participant. The total amounts held in
trust as of September 30, 2000 and December 31, 1999 were $3,914,000 and
$2,115,000, respectively, and are included in other assets and other liabilities
in the accompanying balance sheets of the Company.
10
<PAGE> 11
Asset Write-down (SFAS No. 121)
As required by Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company evaluates the recoverability of assets (including
intangibles) based upon their related undiscounted estimated future cash flows
when events and circumstances indicate that assets might be impaired. During the
third quarter of 2000, the Company identified two properties which were not
expected to generate undiscounted future cash flows sufficient to cover the
carrying value of the underlying assets related to these properties. The Company
also identified one underperforming property during the second quarter. As
required under SFAS No. 121, the carrying amounts of the assets associated with
these restaurant properties were written down to their estimated fair market
values. The resulting non-cash charges reduced third quarter and year-to-date
income by $937,000 and $1,537,000, respectively.
During the second quarter of 1999, the company recorded a $420,000 charge
primarily to write-off the carrying value of leasehold improvements for a
property on which the company did not exercise lease options. In addition,
development of two prospective restaurant sites was discontinued.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 2000
RESULTS OF OPERATIONS
Overview:
The Company is a leading operator and franchisor of mid-scale restaurants
located in 35 states and 4 Canadian provinces. As of September 30, 2000, the
Company owned and operated 145 restaurants and franchised 337 restaurants. Both
the Company operated restaurants and franchised restaurants operate under the
names "Perkins Restaurant and Bakery," "Perkins Family Restaurant," "Perkins
Family Restaurant and Bakery," or "Perkins Restaurant" and the mark "Perkins."
The Company also manufactures and distributes bakery products which are sold to
Company-operated restaurants, franchisees, third-party bakers and food
distributors. The business of Perkins was founded in 1958, and since then
Perkins has continued to adapt its menus, product offerings, building designs
and decor to meet changing consumer preferences. Perkins is a highly recognized
brand in the geographic areas it serves.
The Company's revenues are derived primarily from the operation of Company-owned
restaurants, the sale of bakery products produced by its manufacturing division,
Foxtail Foods ("Foxtail"), and franchise fees. In order to ensure consistency
and availability of Perkins' proprietary products to each unit in the system,
Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and other food
products to Company-operated and franchised restaurants through food service
distributors. Additionally, Foxtail produces a variety of non-proprietary
products for sale in various retail markets. Sales to Company-operated
restaurants are eliminated in the accompanying statements of operations. In the
nine months ended September 30, 2000, revenues from Company-operated
restaurants, Foxtail and franchise and other accounted for 84.1%, 9.1% and 6.8%
of total revenues, respectively.
TRC leases an executive aircraft through TRC Realty LLC. The aircraft is
operated for the benefit of, and all operating costs are reimbursed by, TRC and
FICC. Revenue received from FICC is included in franchise and other revenues in
the accompanying statements of operations.
11
<PAGE> 12
A summary of the Company's results for the three months and the nine months
ended September 30 is presented in the following table. All revenues, costs and
expenses are expressed as a percentage of total revenues. Certain prior year
amounts have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Food sales 93.0 % 93.1 % 93.2 % 93.0 %
Franchise and other revenues 7.0 6.9 6.8 7.0
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and Expenses:
Cost of sales:
Food cost 25.9 25.8 25.9 25.8
Labor and benefits 31.5 32.1 32.7 32.9
Operating expenses 18.1 17.6 18.3 18.0
General and administrative 9.2 9.0 9.1 9.5
Depreciation and amortization 6.5 6.5 6.7 6.6
Interest, net 5.2 5.2 5.4 5.4
Gain on disposition of assets, net -- -- -- (0.2)
Asset write-down 1.1 -- 0.6 0.2
Other, net (0.4) (0.4) (0.4) (0.5)
----- ----- ----- -----
Total Costs and Expenses 97.1 95.8 98.3 97.7
----- ----- ----- -----
Income before income taxes and cumulative
effect of change in accounting principle 2.9 4.2 1.7 2.3
Provision for income taxes (1.0) (1.4) (0.6) (0.8)
----- ----- ----- -----
Income before cumulative effect of
change in accounting principle 1.9 2.8 1.1 1.5
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- (0.1)
----- ----- ----- -----
Net Income 1.9 % 2.8 % 1.1 % 1.4 %
===== ===== ===== =====
</TABLE>
Net income for the third quarter of 2000 was $1,636,000 versus net income of
$2,317,000 for the same period in 1999. For the nine months ended September 30,
2000, net income was $2,849,000 compared to $3,335,000 in the prior year.
Excluding the tax effected change in accounting principle, net income for the
nine months ended September 30, 1999, was $3,675,000.
12
<PAGE> 13
Revenues:
Total revenues for the third quarter and first nine months of 2000 increased
6.1% and 7.0% over the same periods last year due primarily to sales from stores
which were not open during 1999, higher comparable restaurant sales and
increased Foxtail sales.
Same store comparable sales increased approximately 0.9% over the third quarter
and 2.4% over the first nine months of 1999 due to selective menu price
increases, guest trends toward higher-priced entrees and implementation of a new
suggestive selling program. The shift in customer preference to higher-priced
entrees can be attributed to the Company's development and promotion of
higher-priced menu items. The current year also included an additional day in
February. These increases were partially offset by stores that have closed since
January 1999 as well as decreases in comparable guest visits of 5.2% for the
third quarter and 2.3% for the first nine months.
Revenues from Foxtail increased approximately 13.1% and 9.7% over the three and
nine months ended September 30, 1999, and constituted approximately 10.3% and
9.1%, respectively, of the Company's total revenues. Foxtail's increased revenue
is attributable to sales outside of the Perkins system and price increases taken
in mid and late 1999.
Franchise and other revenues increased 6.8% over the third quarter of 1999 and
5.1% over the first nine months of 1999. Franchise revenue increased for both
periods due to higher average sales in 22 new restaurants which have opened
since September 30, 1999 and increased initial franchise fees. In addition,
year-to-date royalty revenue increased due to a slight improvement in franchise
comparable store sales and the impact of leap year. During the first nine months
of 2000, 15 new franchised restaurants opened, seven franchised restaurants
closed and four formerly franchised restaurants were converted to
Company-operated restaurants. In the first nine months of 1999, 14 franchised
restaurants were opened and 39 were closed. The franchised restaurants which
closed in 1999 included 31 Perk Development Corporation restaurants which closed
February 28, 1999, as a result of a bankruptcy liquidation sale.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three months and nine months ended
September 30, 2000 was 0.1 percentage points higher than the same period in the
prior year. Restaurant division food cost increased primarily due to higher
commodity costs for pork and red meat, certain seafood product upgrades and the
successful promotion of entree items with higher than historical food cost.
These increases were partially offset by decreases in dairy pricing. Foxtail's
food cost decreased due to stable commodity costs and an increase in sales of
higher gross margin products.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, decreased 0.6 and
0.2 percentage points for the third quarter and nine months ended September 30,
2000, respectively. For the restaurant division, labor and benefits decreased
0.7 percentage points expressed in terms of total restaurant revenue for the
quarter. This decrease was the result of the impact of a 7.0% increase in
average guest check and reduced group insurance costs which were partially
offset by increases in average wage rate and lower productivity at corporate
restaurants. The impact of higher wage rates at Foxtail was partially offset by
efficiencies realized through continuing modernization of equipment and
procedures.
13
<PAGE> 14
Year-to-date for the restaurant division, labor and benefits decreased 0.3
percentage points expressed in terms of total restaurant revenue. This decrease
was due to the impact of a 5.4% increase in average guest check, reduced group
insurance costs and reduced restaurant division incentive compensation expenses.
The decreases were partially offset by increases in average wage rate and a
slight decrease in productivity in company-operated restaurants. Additionally,
higher average wage rates have mildly impacted Foxtail's labor costs.
The wage rates of the Company's hourly employees are impacted by Federal and
state minimum wage laws. Certain states do not allow tip credits for servers
which results in higher payroll costs as well as greater exposure to increases
in minimum wage rates. In the past, the Company has been able to offset
increases in labor costs through selective menu price increases and improvements
in labor productivity. However, there is no assurance that future increases can
be mitigated through raising menu prices.
Operating expenses:
Operating expenses, expressed as a percentage of total revenues increased 0.6
and 0.3 percentage points for the three and nine months ended September 30,
2000, respectively. The increases for the third quarter and year-to-date were
due to increased costs associated with opening new franchise restaurants, higher
distribution costs at Foxtail, higher credit card services fees and utility
costs for the restaurants, and investment spending for advertising in the
Cincinnati market.
General and administrative:
General and administrative expenses increased 7.7% and 2.5% over the three and
nine months ended September 30, 1999, respectively. The increase is due to
increased administrative support and promotional expenses at Foxtail partially
offset by reduced incentive compensation costs. Additionally, third quarter
expenses include certain legal, accounting and consulting costs associated with
the formation of TRCM.
Depreciation and amortization:
Depreciation and amortization expense for the three and nine months ended
September 30, 2000 increased 8.0% and 8.7% over the same periods last year due
primarily to the addition of seven new Company-operated restaurants and the
Company's continuing program to upgrade and maintain existing restaurants.
Interest, net:
Interest expense increased 6.6% for the three months and 5.6% for the nine
months ended September 30, 2000, over the same periods last year. The increases
were primarily a result of increased average borrowings to fund capital
expenditures and higher variable interest rates on the Company's revolving line
of credit. These increases were partially offset by decreased interest expense
related to capital leases.
14
<PAGE> 15
Other
The Company recorded asset write-downs under SFAS No. 121 totaling $937,000
during the third quarter of 2000. These write-downs were taken to reflect the
permanent closing of one underperforming store and the planned conversion of
another property into an alternative concept. The Company also recorded a
$600,000 asset write-down in the second quarter of 2000 for an underperforming
property that the Company closed during the third quarter.
Results of operations for the nine months ended September 30, 1999 reflect a
$340,000 cumulative effect of change in accounting principle charge against
earnings, net of income taxes, related to the adoption of SOP 98-5. Prior to
1999, the Company deferred new store preopening costs and amortized them over
the twelve months following the opening of the restaurant. During the second
quarter of 1999, the Company recognized a gain of $427,000 related to the early
termination of a lease obligation and losses for asset write-downs totaling
$420,000. The losses primarily related to a property for which the Company did
not exercise lease options. As a result, the related leasehold improvements were
written off. In addition, development of two prospective restaurant sites was
discontinued.
CAPITAL RESOURCES AND LIQUIDITY
The principal uses of cash during the third quarter were capital expenditures
and net payments on the Company's revolving line of credit. Principal uses of
cash during the first nine months were capital expenditures and interest
payments on the Company's Senior Notes. Capital expenditures consisted primarily
of the purchase of four restaurants from franchisees, land, building and
equipment for new Company-operated restaurants and costs related to remodels of
existing restaurants. In addition to the four new restaurants that were acquired
from franchisees, the Company opened three new restaurants in the first nine
months of 2000. The Company's primary sources of funding were cash provided by
operations and revolving credit borrowings.
The following table summarizes capital expenditures for the nine months ended
September 30, 2000 and 1999, respectively (in thousands):
Nine Months Ended
September 30
----------------------------
2000 1999
---------- ----------
Maintenance $ 3,312 $ 3,492
New restaurants 5,286 6,667
Acquisition of Franchise Restaurants 5,902 --
Manufacturing 508 699
Remodeling and Reimaging 7,419 3,316
Other 2,546 1,687
---------- ----------
Total Capital Expenditures $ 24,973 $ 15,861
========== ==========
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The Company plans to complete construction of one additional Company-operated
restaurant by year end. The remaining capital budget will be primarily applied
to remodels of existing restaurants, development of restaurants opening in 2001,
restaurant maintenance and improvements to the Company's infrastructure
equipment. The primary source of funding for these projects is expected to be
cash provided by operations and borrowings under the Company's line of credit.
Capital spending could vary significantly from planned amounts as certain of
these expenditures are discretionary in nature.
On December 22, 1997, the Company obtained a secured $50,000,000 revolving line
of credit facility (the "Credit Facility") with a sublimit for up to $5,000,000
of letters of credit. The Credit Facility was amended on March 31, 2000 to
modify covenant requirements to reflect the Recapitalization and extend the
maturity date to January 1, 2005. As a result of extending the maturity date and
covenant adjustments, borrowing rates were increased to current market rates.
All amounts under the facility will bear interest at floating rates based on the
agent's base rate or Eurodollar rates as defined in the agreement. All
indebtedness under the Credit Facility is secured by a first priority lien on
substantially all of the assets of the Company. As of September 30, 2000,
$13,000,000 in borrowings and approximately $1,253,000 of letters of credit were
outstanding under the facility.
The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness,
or to fund planned capital expenditures will depend on the Company's future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations, management
believes that cash flow from operations and available cash, together with
available borrowings under the Credit Facility, will be adequate to meet the
Company's liquidity needs for the foreseeable future. The Company may, however,
need to refinance all or a portion of the principal of its senior notes on or
prior to maturity. There can be no assurance that the Company will generate
sufficient cash flow from operations, or that future borrowings will be
available in an amount sufficient to enable the Company to service its
indebtedness or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.
SEASONALITY
Company revenues are subject to seasonal fluctuations. Customer traffic (and
consequently revenues) are highest in the summer months and lowest during the
winter months because of the high proportion of restaurants located in states
where inclement weather adversely affects guest visits.
FORWARD-LOOKING STATEMENTS
This discussion and the discussion following contain forward-looking statements
within the meaning of The Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations that are subject to
known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Such factors include, but are not limited to, the following: general
economic conditions, legislative and regulatory activity, competitive factors,
consumer taste and preferences and adverse weather conditions. The Company does
not undertake to publicly update or revise the forward-looking statements even
if experience or future changes make it clear that the projected results
expressed or implied therein will not be realized.
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ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company currently has market risk sensitive instruments related to interest
rates. The Company is not subject to significant exposure for changing interest
rates on its senior notes because the interest rates are fixed. All borrowings
under the Credit Facility bear interest at floating rates based on the agent's
base rate or Eurodollar rates. The Company had $13,000,000 outstanding under the
Credit Facility at September 30, 2000. While changes in market interest rates
would affect the cost of funds borrowed in the future, the Company believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on the Company's consolidated financial position, results of operations or cash
flows would not be material.
Commodity Price Risk
Many of the food products purchased by the Company 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
the control of the Company. The majority of the Company's supplies and raw
materials are available from several sources and the Company is not dependent
upon any single source for these items. If any existing suppliers fail, or are
unable to deliver in quantities required by the Company, the Company believes
that there are sufficient other quality suppliers in the marketplace that its
sources of supply can be replaced as necessary. At times, the Company enters
into purchase contracts of one year or less or purchases bulk quantities for
future use of certain items in order to control commodity pricing risks. Certain
significant items that could be subject to price fluctuations are beef, pork,
coffee, eggs, wheat products and corn products. The Company believes it will be
able to pass through increased commodity costs by adjusting menu pricing in most
cases. Additionally, the Company's product offerings and marketing events are
relatively diverse. Therefore the Company has the flexibility to adjust its
product mix to take advantage of or limit exposure to commodity cost
fluctuations. The Company believes that any changes in commodity pricing which
cannot be offset by changes in menu pricing, or other product delivery
strategies, would not be material.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto as
page 19 and made a part hereof.
(b) Reports on Form 8-K - None
Signature
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.
THE RESTAURANT COMPANY
DATE: November 13, 2000 BY: /s/ Steven R. McClellan
----------------- ---------------------------
Steven R. McClellan
Executive Vice President, Chief
Financial Officer and Director
BY: /s/ Louis C. Jehl
---------------------------
Louis C. Jehl
Vice President and Controller
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Exhibit Index
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
19
