<PAGE> 1
UNITED STATES CONFORMED COPY
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 June 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
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 62-1254388
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
6075 Poplar Avenue, Suite 800, Memphis, TN 38119
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(901) 766-6400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by [X], 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 [ ]
1
<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 Six Months Ended
June 30 June 30
-------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Food sales $ 77,742 $ 73,831 $ 153,233 $ 142,195
Franchise and other revenue 5,732 5,569 11,146 10,694
-------- -------- --------- ---------
Total Revenues 83,474 79,400 164,379 152,889
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 21,521 19,973 42,727 39,312
Labor and benefits 27,969 26,411 54,762 50,984
Operating expenses 15,028 14,033 29,872 27,596
General and administrative 7,008 7,606 15,203 15,055
Depreciation and amortization 5,648 5,151 11,138 10,213
Interest, net 4,531 4,240 8,956 8,523
Gain on disposition of assets, net -- (427) -- (427)
Asset write-down 600 420 600 420
Other, net (367) (357) (717) (860)
-------- -------- --------- ---------
Total Costs and Expenses 81,938 77,050 162,541 150,816
-------- -------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 1,536 2,350 1,838 2,073
Provision for income taxes (532) (821) (625) (715)
-------- -------- --------- ---------
Income before cumulative effect
of change in accounting principle 1,004 1,529 1,213 1,358
Cumulative effect of change in accounting
principle, net of income tax benefit of $188 -- -- -- (340)
-------- -------- --------- ---------
NET INCOME $ 1,004 $ 1,529 $ 1,213 $ 1,018
======== ======== ========= =========
</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)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,438 $ 2,908
Receivables, less allowance for
doubtful accounts of $1,140 and $990 8,061 7,699
Inventories, at the lower of first-
in, first-out cost or market 5,759 5,513
Prepaid expenses and other current assets 2,078 1,193
Deferred income taxes 635 635
--------- ---------
Total current assets 18,971 17,948
--------- ---------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 141,059 135,659
INTANGIBLE ASSETS, net of accumulated
amortization of $33,723 and $32,456 35,793 34,175
NOTES RECEIVABLE, less reserve for
notes receivable of $197 and $170 2,310 2,462
DEFERRED INCOME TAXES 2,170 2,170
OTHER ASSETS 9,323 8,150
--------- ---------
$ 209,626 $ 200,564
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 933 $ 942
Accounts payable 14,072 15,510
Accrued expenses 18,475 20,065
--------- ---------
Total current liabilities 33,480 36,517
--------- ---------
CAPITAL LEASE OBLIGATIONS, less
current maturities 3,570 4,064
LONG-TERM DEBT 170,452 160,416
DEFERRED INCOME TAXES AND OTHER 6,073 4,727
STOCKHOLDER'S INVESTMENT:
Common stock $.01 par value, 100,000 shares authorized,
10,820 issued and outstanding 1 1
Accumulated deficit (3,950) (5,161)
--------- ---------
Total stockholder's deficit (3,949) (5,160)
--------- ---------
$ 209,626 $ 200,564
========= =========
</TABLE>
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 Six Months Ended
June 30 June 30
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,004 $ 1,529 $ 1,213 $ 1,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,648 5,151 11,138 10,213
Change in accounting principle -- -- -- 340
Gain on disposition of assets, net -- (427) -- (427)
Asset write-down 600 420 600 420
Other noncash income and expense items 110 135 221 314
Net changes in other operating assets and liabilities (3,558) (1,746) (3,243) (3,914)
------- ------- -------- --------
Total adjustments 2,800 3,533 8,716 6,946
------- ------- -------- --------
Net cash provided by operating activities 3,804 5,062 9,929 7,964
------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (9,192) (6,717) (13,254) (9,955)
Cash paid for acquisition of franchised restaurants -- -- (5,902) --
Proceeds from sale of property and equipment 8 -- 431 --
Payments on notes receivable 43 48 79 124
------- ------- -------- --------
Net cash used in investing activities (9,141) (6,669) (18,646) (9,831)
------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term debt 5,000 1,000 8,750 2,000
Principal payments under capital lease obligations (245) (315) (503) (611)
Purchase of minority interest -- (20) -- (32)
------- ------- -------- --------
Net cash provided by financing activities 4,755 665 8,247 1,357
------- ------- -------- --------
Net decrease in cash and cash equivalents (582) (942) (470) (510)
------- ------- -------- --------
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 3,020 3,582 2,908 3,150
------- ------- -------- --------
Balance, end of period $ 2,438 $ 2,640 $ 2,438 $ 2,640
======= ======= ======== ========
</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," "Perkins," 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 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 has 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
Perkins, 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 June 30, 2000. Although
these fees are personally guaranteed by three principals of the franchisee,
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 June
30, 2000, there were approximately $1,903,000 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 June 30, 2000, there were no borrowings outstanding
under this agreement.
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 six months ended June 30,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
(Increase) Decrease in:
Receivables $ (84) $(1,098) $ (586) $(1,003)
Inventories (641) (494) (246) 54
Prepaid expenses and
other current assets (167) 75 (885) (236)
Other assets 200 (1,184) (1,133) (1,859)
Increase (Decrease) in:
Accounts payable 341 135 (1,438) (127)
Accrued expenses (3,566) (1,742) (1,405) (2,795)
Other liabilities 359 2,562 2,450 2,052
------- ------- ------- -------
$(3,558) $(1,746) $(3,243) $(3,914)
======= ======= ======= =======
</TABLE>
Other supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash paid for interest $ 7,036 $ 6,975 $ 7,292 $ 7,255
Income taxes paid 1,456 342 1,704 538
Income tax refunds received 1 82 2 1,083
</TABLE>
8
<PAGE> 9
Segment Reporting
The following presents revenues and other financial information by business
segment for the periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
Restaurant Franchise Manufacturing Other Totals
---------- --------- ------------- ----- ------
Three Months Ended:
-------------------
<S> <C> <C> <C> <C> <C>
June 30, 2000:
Revenues from
external customers $ 70,749 $ 5,569 $ 6,994 $ 162 $ 83,474
Intersegment revenues -- -- 2,635 -- 2,635
Segment profit (loss) 6,921 4,814 1,760 (12,491) 1,004
June 30, 1999:
Revenues from
external customers 66,735 5,414 6,942 309 79,400
Intersegment revenues -- -- 2,369 -- 2,369
Segment profit (loss) 7,841 4,673 1,544 (12,529) 1,529
Six Months Ended:
-----------------
June 30, 2000:
Revenues from
external customers 139,438 10,816 13,796 329 164,379
Intersegment revenues -- -- 4,985 -- 4,985
Segment profit (loss) 13,796 9,412 3,153 (25,148) 1,213
June 30, 1999:
Revenues from
external customers 129,059 10,380 12,819 631 152,889
Intersegment revenues -- -- 4,422 -- 4,422
Segment profit (loss) 14,077 8,947 2,548 (24,554) 1,018
</TABLE>
9
<PAGE> 10
A reconciliation of other segment loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
General and administrative expenses $ 5,780 $ 6,508 $ 12,877 $ 13,163
Depreciation and amortization expenses 1,512 1,467 2,999 2,946
Interest expense 4,531 4,240 8,956 8,523
Change in accounting principle -- -- -- 340
Gain on disposition of assets -- (427) -- (427)
Asset write-down 600 420 600 420
Income tax expense 532 821 625 715
Other (464) (500) (909) (1,126)
-------- -------- -------- --------
$ 12,491 $ 12,529 $ 25,148 $ 24,554
======== ======== ======== ========
</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 June 30, 2000 and December 31, 1999 were $3,714,000 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
second quarter of 2000, as a result of this review, the Company identified one
restaurant property which was not expected to generate undiscounted future cash
flows sufficient to cover the carrying value of the underlying assets related to
this property. As required under SFAS No. 121, the carrying amounts of the
assets associated with this restaurant property were written down to their
estimated fair market values. The resulting non-cash charge reduced second
quarter 2000 income by $600,000.
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 SECOND QUARTER AND SIX MONTHS ENDED JUNE 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 June 30, 2000, the Company
owned and operated 147 restaurants and franchised 331 restaurants. 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, it 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 six months ended
June 30, 2000, revenues from Company-operated restaurants, Foxtail and franchise
and other accounted for 84.8%, 8.4% 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 six months ended
June 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 Six Months Ended
June 30 June 30
----------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Food sales 93.1% 93.0% 93.2% 93.0%
Franchise and other revenues 6.9 7.0 6.8 7.0
------ ------ ------ ------
Total Revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Costs and Expenses:
Cost of sales:
Food cost 25.8 25.2 26.0 25.7
Labor and benefits 33.5 33.3 33.3 33.3
Operating expenses 18.0 17.7 18.2 18.0
General and administrative 8.4 9.6 9.2 9.8
Depreciation and amortization 6.8 6.5 6.8 6.7
Interest, net 5.4 5.3 5.4 5.6
Gain on disposition of assets, net -- (0.5) -- (0.3)
Asset write-down 0.7 0.5 0.4 0.3
Other, net (0.4) (0.5) (0.4) (0.5)
------ ------ ------ ------
Total Costs and Expenses 98.2 97.1 98.9 98.6
------ ------ ------ ------
Income before income taxes and cumulative
effect of change in accounting principle 1.8 2.9 1.1 1.4
Provision for income taxes (0.6) (1.0) (0.4) (0.5)
------ ------ ------ ------
Income before cumulative effect of
change in accounting principle 1.2 1.9 0.7 0.9
Cumulative effect of change in accounting
principle, net of income taxes -- -- -- (0.2)
------ ------ ------ ------
Net Income 1.2% 1.9% 0.7% 0.7%
====== ====== ====== ======
</TABLE>
Net income for the second quarter of 2000 was $1,004,000 versus net income of
$1,529,000 for the same period in 1999. For the six months ended June 30, 2000,
net income was $1,213,000 compared to $1,018,000 in the prior year. Excluding
the tax effected change in accounting principle, net income for the six months
ended June 30, 1999, was $1,358,000.
12
<PAGE> 13
Revenues:
Total revenues for the second quarter and first six months of 2000 increased
5.1% and 7.5% 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 1.9% over the second quarter
and 3.2% over the first six months of 1999 due primarily to selective menu price
increases and guest trends toward higher-priced entrees. 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 3.0% for the second quarter and 1.2% for the first six months.
Revenues from Foxtail increased approximately 0.7% and 7.6% over the three and
six months ended June 30, 1999, and constituted approximately 8.4% of the
Company's revenue for both periods. The year-to-date increase is primarily due
to higher sales levels inside the Perkins system as a result of bakery
promotions during the first quarter of the current year and price increases
taken in mid and late 1999.
Franchise and other revenues increased 2.9% over the second quarter of 1999 and
4.2% over the first six months of 1999. During the first six months of 2000,
nine new franchised restaurants opened, seven franchised restaurants closed and
four formerly franchised restaurants were converted to Company-operated
restaurants. In the first six months of 1999, eleven franchised restaurants were
opened and 36 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. Franchise revenue increased
for both periods due to higher average sales in 20 new restaurants which have
opened since June 30, 1999. In addition, year-to-date royalty revenue increased
due to a slight improvement in franchise comparable store sales and the impact
of leap year.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three and six months ended June
30, 2000, increased 0.6 and 0.3 percentage points, respectively, over the same
periods in 1999. Restaurant division food cost increased primarily due to higher
commodity costs for pork, red meat and fish, the successful promotion of entree
items with higher than historical food cost and certain product upgrades. These
increases were partially offset by decreases in dairy and egg pricing. Foxtail's
food cost decreased due to stable commodity costs and a significant increase in
sales of higher gross margin products.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 0.2
percentage points for the second quarter and was flat for the six months
compared with the same periods in 1999. A higher average wage rate and lower
productivity in corporate restaurants were partially offset by reduced
restaurant division incentive compensation expense. The favorable impact of
increased operational efficiencies at Foxtail partially mitigated increased
labor and benefits expense in corporate restaurants.
13
<PAGE> 14
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 0.3
and 0.2 percentage points for the three and six months ended June 30, 2000,
respectively. The increase for the quarter was due to increased cost of
utilities, local advertising and restaurant supplies. The year-to-date increase
is due to increased restaurant operating expenses.
General and administrative:
General and administrative expenses decreased 7.9% and increased 1.0% over the
three and six months ended June 30, 1999, respectively. Current quarter
incentive costs decreased as a result of operating results falling below planned
incentive levels. An increase in administrative support and an increase in
promotional expenses associated with Foxtail's sales partially offset the
decrease. The increase for the six months is due to increased administrative
support and promotional expenses at Foxtail partially offset by reduced
incentive costs.
Depreciation and amortization:
Depreciation and amortization expense for the three and six months ended June
30, 2000 increased 9.6% and 9.1% 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 6.9% for the three months and 5.1% for the six months
ended June 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.
Other
The Company recorded an asset write-down under Statement of Financial Accounting
Standards No. 121 totaling $600,000 during the second quarter of 2000. This
charge was the result of an underperforming property which management intends to
close during the third quarter.
Results of operations for the six months ended June 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.
14
<PAGE> 15
CAPITAL RESOURCES AND LIQUIDITY
The principal uses of cash during the second quarter and first six months ended
June 30, 2000, 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 six 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 six months ended
June 30, 2000 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
2000 1999
------- ------
<S> <C> <C>
Maintenance $ 1,911 $1,936
New restaurants 10,276 3,860
Manufacturing 275 574
Remodeling and Reimaging 4,792 2,446
Other 1,902 1,139
------- ------
Total Capital Expenditures $19,156 $9,955
======= ======
</TABLE>
The Company's capital budget for 2000 is $41.6 million. The Company plans to add
one or two additional Company-operated restaurants by year end. The remaining
capital budget will be primarily applied to remodels of existing restaurants,
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 June 30, 2000, $17,500,000
in borrowings and approximately $1,253,000 of letters of credit were outstanding
under the facility.
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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, 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.
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. The Company has
in place a $50,000,000 line of credit facility which matures on January 1, 2005.
All borrowings under the facility bear interest at floating rates based on the
agent's base rate or Eurodollar rates. The Company had $17,500,000 outstanding
under the line of credit facility at June 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.
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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: August 14, 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
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27 Financial Data Schedule
19
