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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 1998
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: 333-62775
NE RESTAURANT COMPANY INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1311266
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80A Turnpike Road, Westborough, MA 01581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 870-9200
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
None
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Title of class
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. |X|
Documents Incorporated By Reference
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None
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
All statements other than statements of historical facts included in this
Annual Report on Form 10-K, including, without limitation, statements set forth
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" regarding the Company's future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "intend," "estimate," "anticipate" or "believe"
or the negative thereof or variations thereon or similar terminology. Although
the Company believes that the expectations reflected in such forward-looking
statements will prove to have been correct, it can give no assurance that such
expectations will prove to have been correct. Investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Factors that could cause or contribute to such differences include those
discussed in the risk factors set forth in Item 7 below (the "Risk Factors") as
well as those discussed elsewhere herein.
PART I
ITEM 1. BUSINESS
Overview
The Company is an operator of full-service, casual dining restaurants in
New England. The Company develops and operates two distinct restaurant
franchises, Chili's Grill & Bar(R) ("Chili's") and On The Border Mexican Cafe(R)
("On The Border") restaurants, under franchise agreements with Brinker
International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"),
together with a proprietary restaurant concept under the name Bertucci's Brick
Oven Pizzeria(R) ("Bertucci's").
The Company is the largest Chili's franchisee and as of December 30, 1998,
the Company operated 33 Chili's and four On The Border restaurants in five New
England states. The Company was founded in 1991 as a Massachusetts corporation,
serving first as a general partner to a Massachusetts limited partnership and
then as the successor entity to such partnership and two other limited
partnerships, and was re-incorporated in Delaware on October 20, 1994. The
Company was formed to acquire 15 Chili's restaurants from a prior franchisee.
Upon its acquisition of the 15 Chili's restaurants in 1991, the Company
recruited a new management team and undertook a series of steps to enhance
operations, including reducing administrative overhead, coordinating a new
advertising campaign, introducing new menu items, renovating restaurant
facilities, installing new information systems and improving purchasing
decisions. Since 1991, the Company has grown through the addition of 18 new
Chili's and four On The Border restaurants in the New England Market. The
Company opened three Chili's restaurants in 1994, seven in 1995, four in 1996,
two in 1997 and two in 1998, and opened one On The Border restaurant in 1996,
and three more in 1998. The Company has increased the average sales per
restaurant of its Chili's restaurants from approximately $1.8 million in fiscal
1991, the final year of ownership by the prior franchisee, to $2.7 million in
fiscal 1998.
In July 1998, the Company completed its acquisition of Bertucci's, a
publicly-owned restaurant company for a purchase price, net of cash received, of
approximately $89.4 million. The first Bertucci's restaurant was opened in 1981.
In 1985 Bertucci's began expanding from its one restaurant and as of December
30, 1998, Bertucci's owned and operated 90 full-service, casual dining,
Italian-style restaurants under the name Bertucci's Brick Oven Pizzeria(R)
located primarily in the northeastern and Mid-Atlantic United States and one Sal
and Vinnie's Sicilian Steakhouse(TM) ("Sal and Vinnie's") located in
Massachusetts. Bertucci's opened 17 Bertucci's restaurants in 1994, nine in
1995, four in 1996, four in 1997 and six in 1998, and one Sal and Vinnie's
restaurant in 1997. See Note 2 to the Consolidated Financial Statements.
As a result of the Acquisition, the Company offers its targeted customer
base three distinct yet complementary casual dining menus:
"American/southwestern" at Chili's, "Tex-Mex" at On The Border and Italian at
Bertucci's.
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Concepts
The Company's restaurants are full-service restaurants, featuring
substantial portions of a variety of high quality foods at moderate prices
accompanied by quick, efficient and friendly table service. The Company's
restaurants are all casual dining concepts which are intended to fill a market
niche between the fine-dining and fast-food segments of the restaurant industry.
These restaurants are designed to appeal to a broad customer base of adults and
families with children.
Chili's. Chili's restaurants feature a variety of "All-American" foods
with a southwestern emphasis. The Chili's concept was initiated in 1975 with the
opening of the first Chili's restaurant in Dallas, Texas. As of December 30,
1998, the Chili's restaurant system consisted of 553 restaurants in 46 states,
of which 424 were Franchisor-owned and 129 were franchised. The Company holds
the exclusive rights to operate up to an aggregate of 55 Chili's restaurants
(including the 33 it currently operates) in all six New England states and in
Westchester County, New York.
On The Border. On The Border restaurants feature a Tex-Mex menu served in
a distinctive dining atmosphere reminiscent of a Mexican cantina. The On The
Border concept was initiated in 1982 with the opening of the first On The Border
restaurant in Dallas, Texas. As of December 30, 1998, the On The Border
restaurant system in the United States consisted of 77 restaurants in 19 states,
of which 57 were Franchisor-owned and 20 were franchised. The Company holds the
exclusive rights to operate up to an aggregate of 31 On The Border restaurants
(including the four it currently operates) in all six New England states and in
Westchester County and upstate New York.
Bertucci's. Bertucci's restaurants feature Italian-style entrees made from
original recipes, including gourmet pizza and specialty pasta dishes. Bertucci's
endeavors to differentiate itself from other pizzerias by offering a variety of
freshly prepared foods using high-quality ingredients and brick-oven baking
techniques. Bertucci's also seeks to distinguish itself with its contemporary
European-style, open-kitchen design. The first Bertucci's was opened in
Somerville, Massachusetts in 1981. As a proprietary concept, Bertucci's provides
the Company with significant flexibility to execute the concept as the Company
may best determine.
Restaurant Overview and Menu
The Company's restaurants are full-service, casual dining restaurants,
featuring substantial portions of high quality food at moderate prices
accompanied by quick, efficient and friendly table service designed to minimize
guest waiting time and facilitate table turnover. All of the Company's
restaurants are open for lunch and dinner seven days a week. To encourage
patronage by families with children, the Company's restaurants feature
lower-priced children's menus in addition to the standard menus.
Chili's Grill and Bar. Chili's restaurants feature a casual dining
atmosphere and a menu of "All-American" food items with a southwestern emphasis,
including a variety of hamburger, fajita, chicken, steak, seafood and vegetarian
entrees, as well as a number of sandwich, barbecue, salad, appetizer and dessert
selections, prepared fresh daily according to recipes specified by Chili's. The
Company has its own executive chef who has worked with senior management to
develop certain innovative and regional menu items to supplement the basic
Chili's menu, including a "boneless buffalo wings" appetizer, a "fish & chips"
entree and a New England clam chowder, each of which have proven popular with
the Company's guests. Each Chili's restaurant also has a fully licensed bar
serving beer, wine and cocktails. Price points for entrees generally range from
$5.99 to $10.99. For fiscal 1998, the per guest average check was $10.70.
On The Border. On The Border restaurants also feature a casual yet
distinctive dining atmosphere, focusing on the cuisine of the border region
between Texas and Mexico. The On The Border menu offers an assortment of
authentic fajita, chicken, steak, shrimp, barbecued ribs, enchilada, burrito and
other Tex-Mex specialties, prepared fresh daily according to recipes specified
by On The Border. There is a luncheon menu as well as a full dinner menu. Each
On The Border restaurant also has a full-service bar which specializes in
Tex-Mex alcoholic beverages, including a variety of popular margaritas. Price
points generally range from $4.79 to $6.79 for lunch entrees and from $6.99 to
$10.99 for dinner entrees. For fiscal 1998, the per guest average check was
$11.62 at the one Company-owned On The Border restaurant that had been operating
for at least 12 months as of December 30, 1998.
Bertucci's. Bertucci's restaurants offer a distinctive menu and a
contemporary European-style design which in the opinion of management, offer a
unique dining experience at a reasonable price. Bertucci's signature product,
gourmet pizza, is offered with a wide variety of cheese, vegetable and meat
toppings and is prepared in brick ovens. Management believes that Bertucci's
original recipes and brick-oven baking techniques combine to produce a superior
pizza that is difficult to duplicate. During Bertucci's fiscal 1998, sales of
pizza accounted for approximately 50% of net sales. In addition to pizzas,
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Bertucci's menu features a variety of pasta items, appetizers, soups, salads,
calzones and desserts that are prepared fresh daily according to Bertucci's
original recipes. Natural, fresh ingredients are a cornerstone of the Bertucci's
concept. In an effort to ensure the uniform high-quality and freshness of its
menu offerings, Bertucci's prepares all of its own dough, sauces and desserts.
Full bar service is available at most Bertucci's restaurants and beer and wine
are available at all locations. Price points generally range from $5.45 to $6.95
for lunch entrees and from $6.50 to $11.95 for dinner entrees. For fiscal 1998,
the per guest average check was $9.85. Most items on the menu may be purchased
for take-out service or delivery, which together, during Bertucci's fiscal 1998,
accounted for approximately 29% of net sales.
In addition to the Bertucci's concept, as a result of the Acquisition, the
Company also acquired one Sal and Vinnie's. The Sal and Vinnie's concept
features steak, chicken and fish entrees seasoned with Italian spices, as well
as a variety of Italian pasta dishes. The Company is evaluating the further
development of the Sal and Vinnie's concept and has made no conclusive
determinations as to whether or how it may proceed with such development.
Restaurant Design
Chili's. The Company's Chili's restaurants are prototypically
free-standing buildings (ranging from 5,300 to 7,200 square feet) that average
approximately 5,800 square feet in size and have a seating capacity of
approximately 190 people. The bar area consists of approximately 10 tables and
60 seats. The Chili's decor includes booth and table seating with table-tops
inlaid with decorative ceramic tiles, beamed ceilings, tiled or brick floors,
and wood paneled and brick walls. The walls are decorated with a variety of
nostalgic American artifacts, with a significant number of items evoking images
of the American southwest. Live cactus and other greenery are placed in clay
pots or hanging baskets throughout the restaurant.
Of the 18 new Chili's restaurants that the Company has opened since 1991,
16 have been built pursuant to a prototype designed and developed by the
Company. Management believes that its prototype, which, among other things, sets
apart the bar area to one side of the restaurant, provides an efficient use of
space. A significant portion of the Company's revenues have been from sales of
alcoholic beverages and the Company believes its prototype bar design promotes
such increased beverage sales. In fiscal 1998, such sales accounted for
approximately 19.0% of revenues among the group of the Company's Chili's
restaurants that were built pursuant to the prototype design, as compared to
approximately 17.5% of revenues among the group of the Company's Chili's
restaurants that were not built pursuant to such design. In addition, the
overall design provides management a broader view of the entire restaurant,
allowing greater supervision of customer service. Since the Company's
implementation of its prototype, the Franchisor has begun to introduce a similar
prototype.
On The Border. The Company's On The Border restaurants are free-standing
buildings averaging approximately 7,800 square feet in size with a seating
capacity of approximately 305 people. The bar area has approximately seven
tables and 60 seats. The On The Border decor includes booth and table seating,
stucco walls, some with frescoes depicting images of the Mexican "vaquero"
cowboy, wrought iron and glass light fixtures and an array of Mexican
handicrafts, many of which emphasize the "vaquero" theme. Each restaurant has a
large stone fireplace with a gas-fired flame, an authentic handmade tortilla
machine producing fresh product within the guests' view and a four-season patio
which incorporates outdoor dining as the weather permits.
Bertucci's. Bertucci's restaurants are free standing or in-line buildings
(ranging from 1,000 to 12,000 square feet) averaging approximately 6,200 square
feet in size with a seating capacity of approximately 170 people. The bar area
has approximately 12 seats. Each of Bertucci's restaurants features a
contemporary European-style, open-kitchen design centered around brick ovens.
Ingredients are displayed and food is prepared on polished granite counters
located in front of the brick ovens, in plain view of diners. Bertucci's
restaurants historically have been built in varying sizes and designs, with no
two interior decors exactly alike. Management believes that unit economics would
benefit from a standardized design which the Company expects to implement for
restaurants to be opened in the future. Bertucci's has recently begun to build
smaller restaurants. Management believes that further decreasing building size
to a range of 4,800 to 5,400 square feet with seating for approximately 150
guests would increase efficiency of Bertucci's dine-in business (71% of sales in
Bertucci's fiscal 1998) and its take-out and delivery business (29% of sales in
Bertucci's fiscal 1998). In addition, with Bertucci's moderate sale of alcoholic
beverages accounting for approximately 8% of net sales during Bertucci's fiscal
1998, the Company expects to introduce service bars in new restaurants instead
of full bar areas to further increase utilization of space. Finally, the Company
expects to introduce a more cost-efficient, standardized interior decor.
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Restaurant Economics
Chili's. During fiscal 1998, average revenue per restaurant was $2.7
million and average restaurant cash flow was $443,000 (after average rent
expense of $120,000). Corporate general and administrative costs are not
included in average restaurant cash flow. Lunch and dinner accounted for
approximately 40% and 60% of net sales, respectively, during fiscal 1998. The
percentage of net sales from alcoholic beverages for the Company's Chili's
restaurants during fiscal 1998 was approximately 18%.
On The Border. During fiscal 1998, for the one Company-owned On The Border
restaurant that had been operating for at least 12 months as of December 30,
1998, revenue was $4.8 million and cash flow was approximately $863,000 (after
rent expense of $178,000). Lunch and dinner accounted for approximately 25% and
75% of net sales, respectively, during fiscal 1998. The percentage of net sales
from alcoholic beverages for the Company's On The Border restaurants during
fiscal 1998 was approximately 29%.
Bertucci's. During Bertucci's fiscal 1998, average revenue per restaurant
was $1.7 million and average restaurant cash flow was $169,400 (after average
rent expense of $143,000). Lunch and dinner accounted for approximately 26% and
74% of net sales, respectively, during Bertucci's fiscal 1998. The percentage of
net sales from alcoholic beverages for Bertucci's restaurants during Bertucci's
fiscal 1998 was approximately 8%.
Franchise and Development Agreements
The Company operates its Chili's and On The Border restaurants under
individual franchise agreements that are part of broader exclusive development
agreements (the "Area Development Agreements") with the Franchisor. These
agreements grant the Company the exclusive right to develop up to 55 Chili's and
31 On The Border restaurants (inclusive of the 33 Chili's and four On The Border
restaurants that the Company currently operates) in New England, Westchester
County and additionally, in the case of On The Border, upstate New York markets.
The Area Development Agreements require the Company to develop a minimum of two
to three Chili's and two to five On The Border restaurants each year in
accordance with a specified schedule during the term of the agreement in order
to maintain its exclusive development rights. If the Company opens fewer
restaurants than required by the development schedule in any development
territory, the Franchisor has the right to terminate the Company's development
rights in the territory where the deficiency occurs. In addition, a breach under
an Area Development Agreement could constitute a default under the Company's
borrowing arrangements, permitting the applicable lender to declare all amounts
borrowed thereunder immediately due and payable. The Area Development Agreements
expire in 2000 in the case of Chili's and 2002 in the case of On The Border, but
are each renewable at the Company's option at the scheduled expiration date.
Under the Area Development Agreements, the Company is responsible for all
costs and expenses incurred in locating, acquiring, and developing restaurant
sites, although the Franchisor must approve each proposed restaurant site and
the related real estate purchase contract or lease agreement. The franchise
agreements convey the right to use the Franchisor's trade names, trademarks, and
service marks with respect to specific restaurant units. The Franchisor also
provides general construction specifications, designs, color schemes, signs and
equipment, recipes for food and beverage products, marketing concepts, and
materials. Generally, each new franchise agreement requires an initial $40,000
franchise fee which is, typically, in addition to a $10,000 nonrefundable
development fee per proposed restaurant, paid under the Area Development
Agreements. The franchise agreements also require payment to Brinker of a
royalty fee of 4.0% of annual net sales. In addition, pursuant to its franchise
agreements, the Company contributes 0.5% of monthly net sales from each of its
Chili's or On The Border restaurant to Brinker for advertising and marketing to
benefit all restaurants in the Chili's or On The Border system, respectively.
The Company is also required to spend at least 2.0% of annual net sales on local
advertising.
Restaurant Development
Expansion. The Company expects to continue its steady growth strategy
through the opening of new restaurants over the next several years. For a
typical new Chili's restaurant, capital expenditures (not including land costs)
approximate $1.7 million (of which approximately $190,000 are pre-opening
expenses), and for an On The Border restaurant approximate $2.2 million (of
which approximately $300,000 are pre-opening expenses). Based on the current
capital expenditures typically associated with a new Bertucci's restaurant,
management estimates that the Company will spend approximately $1.2 million (of
which approximately $100,000 will be pre-opening expenses) to open each new
Bertucci's restaurant. During fiscal 1998, the Company had spent approximately
$21.4 million (of which approximately $1.9 million were pre-
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opening expenses and approximately $1.6 million were land costs) to open two
Chili's restaurants, three On The Border restaurants and to complete
construction of six Bertucci's restaurants which were in process at the time of
the Acquisition. The Company currently plans to spend at least $13.4 million in
fiscal 1999 to open an expected four Chili's and three On The Border
restaurants. The Company expects to finance the development of its Chili's and
On The Border restaurants through borrowings under the its senior bank facility
(the "Senior Bank Facility") and loans from FFCA Acquisition Corporation (the
"FFCA Loans") and similar lenders. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Notes 5, 6 and 7 to the Consolidated Financial
Statements. During 1999, the Company does not plan to open any additional
Bertucci's restaurants. Management plans to continue to refine its' current
restaurants' operations, menu, and management teams during 1999, as well as
design a new restaurant prototypical kitchen and take-out area in preparation
for restaurant expansion of the Bertucci's concept beginning in the year 2000.
The Company reviews its expansion plans and budget on a regular basis, in light
of opportunities that may arise, and may determine to open a smaller or larger
number of stores than currently planned.
As a market area becomes more fully developed, each restaurant normally
benefits from increased customer recognition, greater advertising capabilities,
and economies of scale with respect to food costs, advertising and promotion,
and certain other expenses. Markets which have reached this minimum level of
penetration are characterized as "efficient" and typically are more profitable
than emerging markets. The Company attempts to balance its new restaurant
development by (i) selectively locating restaurants in areas where an
appropriate level of market penetration has been achieved, (ii) increasing the
level of market penetration in territories that are not yet "efficient," and
(iii) expanding into new territory. Management believes that the Company's
existing development territory will support over 55 Chili's and 31 On The Border
restaurants (inclusive of the 37 such restaurants that the Company currently
operates) and will accommodate planned Chili's and On The Border restaurant
development for approximately five to seven years.
Site Selection and Construction. Management's site selection strategy for
new restaurants focuses on high-density, high-traffic, high-visibility free
standing sites which are, for the most part, positioned within existing markets
to take advantage of certain operational efficiencies. Management seeks out
sites with a mixture of retail, office, residential and entertainment
concentration which promote both lunch and dinner business. Management devotes
significant time and resources to identify and analyze potential sites, as it
believes that site selection is crucial to its success. Management also believes
that multiple locations focused in defined geographic areas will result in
increased market penetration, brand recognition and permit advertising,
management, purchasing and administrative efficiencies. The typical time period
required to select a site and build and open a Company restaurant is
approximately 18 months.
Quality Control
Chili's and On The Border. The Company's general and assistant managers
are responsible for assuring compliance with the Company's operating procedures.
Both the Company and the Franchisor have uniform operating standards and
specifications relating to the quality, preparation and selection of menu items,
maintenance and cleanliness of the premises, and employee conduct. Compliance
with these standards and specifications is monitored by periodic on-site visits
and inspections by area supervisors and directors of operations and by
representatives of the Franchisor. Each restaurant typically has a general
manager and three to four assistant managers who together train and supervise
employees and are, in turn, supported by Quality Assurance Managers and Regional
Directors of Operations. The Company's operational structure encourages all
employees to assume a proprietary role in ensuring that such standards and
specifications are consistently adhered to.
Bertucci's. Each Bertucci's restaurant typically has a general manager and
two to three assistant managers who are responsible for assuring compliance with
Bertucci's operating procedures and for the training and supervision of
restaurant employees. The general managers report to regional managers who
oversee six to 10 Bertucci's restaurants. The Company believes that through
improved centralized training, a consistent and independent shopper's program,
and other support for regional managers, the quality control operations of
Bertucci's can be further enhanced.
Management Incentive Programs
Since the Company's founding in 1991, management has developed a
profit-based reward system for its restaurant level managers such that their
bonus levels are directly tied to an individual restaurant's profitability. The
Company has also implemented a program whereby certain managers make modest
financial investments in the Company for which they receive a larger portion of
their restaurant's cash flow. The Company believes these incentive programs have
contributed
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significantly to the entrepreneurial spirit of its restaurants and, ultimately,
to overall guest satisfaction and Company profitability and Management has begun
to offer similar incentive programs to Bertucci's restaurant management teams.
Training
Chili's and On The Border. The Company places significant emphasis on the
proper training of its employees. To maintain its high service and quality
standards, the Company has developed its own training programs that are
coordinated through the Company's training department which is supervised by a
nine-member senior management training team. Each level of Company training is
designed to increase product quality, operational safety, overall productivity
and guest satisfaction and to foster the concept of "continuous improvement."
The Company requires new non-management employees to undergo extensive
training administered by restaurant-level managers to improve the confidence,
productivity, proficiency level and customer relations skills of such employees.
The Company also requires all of its general and restaurant managers to complete
a comprehensive 13-week management training program developed by the Company.
This program instructs management trainees in detailed, concept-specific food
preparation standards and procedures as well as administrative and human
resource functions. This training is largely conducted at specified restaurants
throughout New England which are designated as "training restaurants" and also
incorporates training manuals and other written guides. At the end of the
13-week process, trainee skills are tested by a variety of means including a
full-day written examination. Initial instruction is typically followed up by
periodic supplemental training. Following the Company's creation and successful
implementation of this management-trainee program, certain of its elements have
been adopted by the Franchisor, system-wide. When the Company opens a new
restaurant, management positions are typically staffed with personnel who have
had previous experience in a management position at another Chili's or On The
Border restaurant. In addition, a highly experienced opening team assists in
opening the restaurant. Prior to opening, all staff personnel undergo a week of
intensive training conducted by the restaurant opening team. The training
includes drills in which test meals and beverages are served.
Bertucci's. Prior to the Acquisition, Bertucci's required all of its
general and restaurant managers to participate in a 10.5-week training program
which instructs management trainees in Bertucci's detailed food preparation
standards and procedures as well as administration and human resource matters.
Since the Acquisition, the training department at Bertucci's has been
centralized and the management training program has been brought in line with
the procedures followed by both the Chili's and On the Border restaurant
concepts.
Advertising and Marketing
The Company's marketing strategy is to continue to strengthen the brand
equity of each of its restaurant groups and to increase profitability and build
revenues across all three groups. Management utilizes strategies designed to
encourage consumer trial of new products and increase the average guest check
while reinforcing each restaurant concept's distinctive dining experience. The
Company's advertising and promotion plan is designed to build awareness and
increase trial among key target audiences while increasing spending by market,
based on media cost efficiencies. The Company classifies markets based upon
restaurant penetration and the resulting advertising and promotion costs per
restaurant. The Company's three most highly-penetrated markets are supported
with regular spot television advertisements during all but the first fiscal
quarter of each year. The Company augments its marketing efforts in these
markets with radio advertising to target the lunch and dinner time periods and
to increase the frequency of the promotional message. In its secondary markets,
the Company utilizes more cost-effective localized marketing initiatives such as
radio, direct mail and newspaper advertising. The Company expects to benefit
from enhanced marketing and volume discounts as a result of additional spending
related to the Bertucci's restaurants.
Chili's. The Company determines its own marketing strategies and where to
place and how much to pay for its advertisements. Although advertisements for
television have historically been developed by the Franchisor for system-wide
use, the Company has developed its own radio advertisements. The Company expends
a significant portion (approximately 90%) of its total advertising dollars in
its areas of dominant influence--Boston, Hartford and Providence--where
management believes there is strong brand awareness of the Chili's concept
because of strong market penetration and well-placed media expenditures.
Pursuant to its franchise agreements with the Franchisor, the Company
contributes 0.5% of net sales from each Chili's restaurant to the Franchisor for
advertising and marketing to benefit all of the Franchisor's restaurants. The
Franchisor uses these funds to develop advertising and sales promotion materials
and concepts. The Company is also required to spend 2.0% of net sales from each
restaurant on local advertising. The Company's advertising expenditures
generally have exceeded the
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levels required under its agreements, ranging between 2.5% and 3.0%. During
fiscal 1998, the Company's advertising expenditures for its Chili's restaurants
were $2.8 million, or 3.3% as a percentage of Chili's net sales.
On The Border. Under the terms of its franchise agreements with the
Franchisor, the Company contributes 0.5% of net sales from each On the Border
restaurant to the Franchisor for advertising and marketing to benefit all On the
Border restaurants and is required to spend 2.0% of net sales from each
restaurant on local advertising. During fiscal 1998, the Company's advertising
expenditures for its On The Border restaurants were $0.3 million, or 3.3% as a
percentage of On The Border net sales. Due to the small number of Company-owned
On The Border restaurants to date, advertising and marketing efforts have thus
far been largely targeted towards printed materials. The Company will consider
television and radio advertising once it achieves critical mass in a market with
respect to the On The Border concept.
Bertucci's. Bertucci's has historically employed broadcast media, print
and direct mail as its primary advertising technique, together with local
restaurant promotions. During Bertucci's fiscal 1998, Bertucci's expenditures
for advertising and marketing were approximately $3.2 million, or 2.2% of
Bertucci's net sales. Management believes that the adoption of the marketing
techniques and strategies used at Chili's and On The Border will enhance the
marketing programs currently employed by Bertucci's. Although management expects
to employ consumer focus research to determine its specific marketing strategies
for Bertucci's, the Company currently expects that it will expend a majority of
its Bertucci's-related advertising dollars in Bertucci's core markets.
Purchasing
Chili's and On The Border. As a franchisee, the Company must comply with
the uniform recipe and ingredient specifications provided by the Franchisor. The
Company, however, negotiates directly with suppliers of food and beverage
products and other restaurant supplies to ensure consistent quality and
freshness of products and to obtain competitive prices. Although the Company
believes that essential restaurant supplies and products are available on short
notice from several sources, the Company's Chili's and On The Border restaurant
groups use one full-service distributor, Alliant Foodservice, Inc., for the
substantial portion of their restaurant supplies and products requirements, with
such distributor charging the Company fixed mark-ups over prevailing wholesale
prices (such distributor, the "Principal Vendor"). The Company has a two-year
contract with the Principal Vendor which is terminable by either party upon 30
days' prior notice following breach and 60 days' prior notice for any other
reason. The Company also has arrangements with several smaller and regional
distributors for the balance of its purchases. These distribution arrangements
have allowed the Company to benefit from economies of scale and resulting lower
commodity costs. Most major purchasing decisions for the Company's restaurants
are made by its senior management which includes a Vice President of Food
Purchase and Procurement. Smaller day-to-day purchasing decisions are made at
the individual restaurant level. The Company has not experienced any significant
delays in receiving food and beverage inventories or restaurant supplies.
Bertucci's. Bertucci's has maintained as much on-site preparation of food
products at its restaurants as possible in order to ensure freshness and quality
and to enhance the dining experience through the visual display of fresh
ingredients. Bertucci's has negotiated directly with manufacturers, importers,
brokers and wholesale suppliers of primary food ingredients and beverage
products to ensure consistent quality and freshness of products in its
restaurants and to obtain competitive pricing. Bertucci's has an agreement which
is terminable upon 30 days' prior notice following breach, with a full-service
distributor, Maine Food and Paper Company, through which Bertucci's currently
obtains a substantial portion of its restaurant supplies and products
requirements. The Company expects to continue to refine and consolidate the
purchasing practices of Bertucci's to conform to such practices for the
Company's Chili's and On The Border restaurants.
Information Systems and Restaurant Reporting
The Company's information systems provide detailed monthly financial
statements for each restaurant, weekly restaurant inventories, menu mix, cash
management and payroll analysis, as well as daily operating statistics such as
sales, labor, guest check and average table turns. The varying levels of systems
data are consolidated and processed by the Company at its headquarters daily,
weekly or monthly as management deems appropriate. The Company's point-of-sale
systems not only relay information within the Company, but also are linked to
the ordering system of the Principal Vendor. In addition, the Company has an
in-house payroll system which the Company believes is more efficient for
restaurant managers than third-party payroll systems. Components of the
Company's information systems, particularly its point-of-sale systems, have been
adopted by the Franchisor.
The point-of-sale system utilized by the Bertucci's restaurants are
manufactured by the same company, MICROS, as used in the Brinker concepts.
Therefore, these systems are largely compatible with the back office and
corporate systems
<PAGE>
used by the Company. The Company has begun integrating the information systems
of Bertucci's and expects to continue with the process throughout 1999.
Trademarks, Servicemarks and Other Intellectual Property
Prior to the Acquisition, the Company had no proprietary intellectual
property. As a franchisee of Brinker, the Company has contractual rights to use
certain Franchisor-owned trademarks, servicemarks and other intellectual
property relating to the Chili's and On The Border concepts.
Bertucci's has registered the names "Bertucci's," "Bertucci's Brick Oven
Pizzeria" and "Sal and Vinnie's Sicilian Steakhouse" as service marks and
trademarks with the United States Patent and Trademark Office. As a result of
the Acquisition, the Company assumed ownership of these marks. Management is
aware of names similar to that of Bertucci's used by third parties in certain
limited geographical areas. Such third-party use may prevent the Company from
licensing the use of the Bertucci's mark for restaurants in such areas. Except
for these areas, management is not aware of any infringing uses that could
materially affect the Bertucci's business. Bertucci's has filed applications
with the United States Patent and Trademark Office to register "Food Does Not
Lie" as a service mark and its olive design as a trademark and service mark.
Management intends to protect the Bertucci's service marks and trademarks by
appropriate legal action whenever necessary.
Competition
The Company's business and the restaurant industry in general are highly
competitive and are often affected by changes in consumer tastes and dining
preferences, by local and national economic conditions and by population and
traffic patterns. The Company competes directly or indirectly with all
restaurants, from national and regional chains to local establishments, as well
as with other foodservice providers. Many of its competitors are significantly
larger than the Company and have substantially greater resources.
Employees
At December 30, 1998, the Company had approximately 2,450 full-time
employees (of whom approximately 90 are based at the Company's two executive
offices) and approximately 4,975 part-time employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company believes
its relations with its employees are good.
Management believes that the Company's continued success will depend to a
large degree on its ability to attract and retain good management employees.
While the Company will continually have to address the high level of employee
attrition normal in the food-service industry, the Company has taken steps to
attract and keep qualified management personnel through the implementation of a
variety of employee benefit plans, including a management incentive plan, a
401(k) plan, and a non-qualified stock option plan for its key employees.
Government Regulations
Each of the Company's restaurants is subject to licensing and regulation
by a number of governmental authorities, which include health, safety, fire and
alcoholic beverage control agencies in the state or municipality in which the
restaurant is located. Difficulties or failures in obtaining required licenses
or approvals could delay or prevent the opening of a new restaurant in a
particular area.
In 1998, approximately 18% of the Company's Chili's, approximately 29% of
the Company's On The Border, and approximately 8% of Bertucci's sales were
attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Some of the counties in which the
Company has restaurants prohibit the sales of alcoholic beverages on Sundays.
Typically, licenses or permits must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage, and dispensing of
alcoholic beverages. The Company has obtained approvals
<PAGE>
from most liquor licensing authorities in connection with the change of control
of Bertucci's as a result of the Acquisition and is completing the approval
process for the remaining jurisdictions.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
The Company is also subject to various other federal, state and local laws
relating to the development and operation of restaurants, including those
concerning preparation and sale of food, relationships with employees (including
minimum wage requirements, overtime and working conditions and citizenship
requirements), land use, zoning and building codes, as well as other health,
sanitation, safety and environmental matters.
ITEM 2. PROPERTIES
The Company's two executive offices are located in Westborough,
Massachusetts and Wakefield, Massachusetts. The Westborough offices are occupied
under the terms of a lease covering approximately 14,000 square feet that is
scheduled to expire in 2007 and has a six year option term. Bertucci's purchased
its 60,000 square foot Wakefield office building in December 1992 and, after
renovations were completed, approximately 20,000 square feet of office and
administrative space and 40,000 square feet of storage space were created.
During 1999, the Company plans to consolidate the two corporate headquarters
into a single location to be leased in Maynard, Massachusetts. Presently, the
Wakefield property is for sale, and the Westborough location is being prepared
to sub-lease during fiscal 1999.
Restaurant Locations
The table below identifies the location of the restaurants operated by the
Company at December 30, 1998.
State Chili's On The Border Bertucci's Total
--------- ------- ------------- ---------- -----
Connecticut ..................... 9 2 9 20
Georgia ......................... -- -- 6 6
Illinois ........................ -- -- 7 7
Maine ........................... 1 -- -- 1
Maryland ........................ -- -- 5 5
Massachusetts ................... 14 1 35(a) 50
New Hampshire ................... 5 1 3 9
New York ........................ -- -- 3 3
New Jersey ...................... -- -- 5 5
Pennsylvania .................... -- -- 6 6
Rhode Island .................... 4 -- 2 6
Virginia ........................ -- -- 7 7
Washington D.C .................. -- -- 2 2
--- --- --- ---
Total ...................... 33 4 90 127
=== === === ===
- ----------
(a) Includes one Sal and Vinnie's restaurant.
During the year ended December 30, 1998, the Company opened two Chili's,
three On The Border and six Bertucci's restaurants. Although prior to the
Acquisition Bertucci's had considered developing one additional Sal and Vinnie's
restaurant, the Company has made no conclusive determinations whether to proceed
with such development. Of the 127 restaurants operated by the Company at
December 30, 1998, the Company owned the land for 11 restaurants and leased the
land for all other restaurants.
All but six of its existing Chili's and On The Border restaurant locations
are leased by the Company, with lease terms expiring between 2003 and 2016 with
an average unexpired lease term of 14 years (not including additional option
terms). The leases for most of the existing restaurants are for terms of 20
years and provide for additional option terms and, in the case of a limited
number of leases, a specified annual rental plus additional rents based on sales
volumes exceeding specified levels. Leases for future restaurants will likely
include similar rent provisions. The Sal and Vinnie's restaurant is leased from
Joseph Crugnale, who until consummation of the Acquisition was president and
chief executive officer of
<PAGE>
Bertucci's. Initial Bertucci's restaurant lease terms range from two years to 40
years. The majority of such leases provide for an option to renew for additional
terms ranging from five years to 20 years. All of Bertucci's leases provide for
a specified annual rental and most leases call for additional rent based on
sales volumes exceeding specified levels. Generally, the leases are net leases
that require Bertucci's or the Company, as applicable, to pay all taxes,
insurance and maintenance costs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. In the opinion of management, any
ultimate liability arising out of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
Management is not aware of any litigation to which the Company is a party
that is likely to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of March 15, 1999, there was no established public trading market for
any class of common equity security of the Company.
Record Holders
As of March 15, 1999, there were approximately 70 holders of Common Stock
of the Company, $.01 par value per share. As of March 15, 1999, the Company did
not have any other class of common equity security issued and outstanding.
Dividends
In August 1997, the Company made a dividend and return of capital payout
to shareholders of $8.31 per share from additional paid-in capital, with the
excess payout being charged to retained earnings. In addition, the Company
repurchased 716,429 shares of common stock at $11.63 per share. The Company's
repurchase of shares of common stock was recorded as treasury stock, at cost,
and resulted in a reduction of Stockholders' (Deficit) Equity.
Other than the aforementioned dividend, the Company has not paid any other
dividends to date. Furthermore, the Company does not foresee declaring or paying
any cash dividends in the immediate future. Moreover, certain of the Company's
borrowing arrangements prohibit the payment of cash dividends without the
lender's approval.
Recent Sales of Unregistered Securities
In April 1998, a director of the Company transferred the option to
purchase 5,510 shares of the Company's Common Stock to certain of his
affiliates. In May 1998, the affiliates exercised such option to purchase an
aggregate of 5,510 shares of the Company's Common Stock at an exercise price of
$11.63 per share.
In May 1998, a director of the Company exercised options to purchase an
aggregate of 5,510 shares of the Company's Common Stock at an exercise price of
$11.63 per share.
<PAGE>
Between July 21, 1998 and October 19, 1998, Company employees exercised
options to purchase an aggregate of 17,027 shares of the Company's Common Stock
at an exercise price of $17.51.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data for fiscal years ended 1994 through 1998 are derived from audited
financial statements of the Company. Selected consolidated financial data should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Form 10-K. Historical results
are not necessarily indicative of results to be expected in the future. The
Acquisition of Bertucci's in 1998 affects the comparability of results on a
year-to-year basis.
<TABLE>
<CAPTION>
Fiscal Years Ended December 31, December 30,
1994 1995 1996 1997 1998
Income Statement Data (Amounts in thousands except Earnings per share)
<S> <C> <C> <C> <C> <C>
NET SALES $ 46,588 $ 60,300 $ 70,094 $ 81,364 $ 160,805
COST AND EXPENSES:
Cost of sales 13,451 18,095 21,203 23,384 44,377
Operating expenses 23,130 30,101 34,268 40,932 84,540
General and administrative expenses 3,359 3,449 3,679 4,207 8,204
Deferred rent, Depreciation and amortization 1,684 3,201 3,679 3,911 10,921
Taxes other than income 2,142 2,871 3,207 3,829 7,490
--------- --------- --------- --------- ---------
Total costs of sales and expenses 43,766 57,717 66,037 76,263 155,532
--------- --------- --------- --------- ---------
Operating income (loss) 2,822 2,583 4,057 5,101 5,273
--------- --------- --------- --------- ---------
Interest expense, net 90 463 1,053 1,918 8,004
Income/(loss) before income tax expense/(benefit) 2,732 2,120 3,005 3,183 (2,731)
--------- --------- --------- --------- ---------
Income tax expense/(benefit) 1,122 699 1,047 1,083 (902)
--------- --------- --------- --------- ---------
Net income/(loss) $ 1,610 $ 1,421 $ 1,958 $ 2,100 $ (1,829)
========= ========= ========= ========= =========
Basic and Diluted Earnings per Share 0.80 0.71 0.98 1.22 (0.89)
Other Financial Data:
Ratio of earnings to fixed charges (a) 3.7x 2.5x 2.5x 2.0x 0.8x
EBITDA (in thousands) (b) $ 4,506 $ 5,784 $ 7,737 $ 9,012 $ 16,194
EBITDA margin (c) 9.7% 9.6% 11.0% 11.1% 10.1%
Cash flows from operating activities (in thousands) $ 3,865 $ 5,604 $ 5,630 $ 8,517 $ 17,222
Cash flows from (used in) investing activities (in thousands) (9,037) (11,758) (8,898) (5,212) (110,971)
Cash flows from (used in) financing activities (in thousands) 5,280 6,290 3,282 (3,468) 98,957
Capital expenditures (in thousands) 7,989 10,359 7,946 4,479 19,354
Operating Statistics:
Number of restaurants (end of period) - Brinker 19 26 30 32 37
Number of restaurants (end of period) - Bertucci's 90
Average annual revenue figures in thousands:
Average annual revenue per restaurant - Brinker concepts 2,623 2,589 2,518 2,614 2,777
Average annual revenue per restaurant - Bertucci's concepts 1,685
Comparable restaurant sales - Brinker concepts (d) 6.6% -1.6% -0.4% 2.7% 5.2%
Comparable restaurant sales - Bertucci's concepts (d) -0.1%
Balance Sheet Data (at end of period, in thousands):
Working capital (deficit) (3,750) (4,524) (4,996) (8,406) (18,188)
Total assets 18,162 27,848 34,340 37,337 186,732
Long-term debt, including current portion 5,280 11,570 15,273 37,908 129,219
Shareholders' equity/(deficit) (e) 6,078 7,499 9,457 (13,107) 14,112
</TABLE>
<PAGE>
Notes to Summary Financial Data
(a) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense and the estimated
interest portion of rental payments on operating leases.
(b) "EBITDA" is defined as income from operations before deferred rent,
depreciation and amortization. EBITDA is not a measure of performance
defined by Generally Accepted Accounting Principles ("GAAP"). EBITDA
should not be considered in isolation or as a substitute for net income or
the statement of cash flows which have been prepared in accordance with
GAAP. The Company believes EBITDA provides useful information regarding
the Company's ability to service its debt and the Company understands that
such information is considered by certain investors to be an additional
basis for evaluating a company's ability to pay interest and repay debt.
The EBITDA measures presented herein may not be comparable to similarly
titled measures of other companies.
(c) EBITDA margin represents EBITDA divided by net sales.
(d) The Company defines comparable restaurant sales as net sales from
restaurants that have been open for at least one full fiscal year.
(e) In August 1997, the Company paid a dividend and return of capital
distribution to shareholders of $8.31 per share, in the aggregate amount
of approximately $16,670,000. In addition, the Company repurchased 716,429
shares of common stock at $11.63 per share, for an aggregate amount of
approximately $8,332,000. The Company's repurchase of shares of common
stock was recorded as treasury stock, at cost, and resulted in a reduction
of shareholders' (deficit) equity. These transactions were funded from the
proceeds of the FFCA Loans. See "Description of Other Indebtedness."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Item 1.
Business," "Item 6. Selected Financial Data," the Company's Consolidated
Financial Statements and Notes thereto and the information described under the
caption "Risk Factors" below.
General
NE Restaurant Company, Inc. (together with its subsidiaries, the
"Company") is a leading operator of full-service, casual dining restaurants in
New England. The Company develops and operates two distinct restaurant
franchises, Chili's Grill & Bar(R) ("Chili's") and On The Border Mexican Cafe(R)
("On The Border") restaurants, under franchise agreements with Brinker
International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"),
together with a proprietary restaurant concept under the name Bertucci's Brick
Oven Pizzeria(R) ("Bertucci's"). As of December 30, 1998, the Company operated
33 Chili's and four On The Border restaurants in five New England states, and
owned and operated 89 Bertucci's restaurants located primarily in the
northeastern and Mid-Atlantic United States and one Sal and Vinnie's Sicilian
Steakhouse ("Sal and Vinnie's") restaurant located in Massachusetts.
The Company has entered into franchise and development agreements with
Brinker to operate the 37 Chili's and On The Border restaurants ("Brinker
concept restaurants") and to exclusively develop additional restaurants in New
England and Westchester County and additionally, in the case of On The Border,
upstate New York. The Company acquired the Bertucci's and Sal and Vinnie's
concepts pursuant to the terms of an Agreement and Plan of Merger dated as of
May 13, 1998, whereby the Company (through a wholly-owned subsidiary) acquired
on July 21, 1998 all of the issued and outstanding shares of common stock of
Bertucci's, Inc. for an aggregate purchase price of approximately $89.4 million
(the "Acquisition"). The Company financed the Acquisition primarily through the
issuance of $100 million of 10 3/4% senior notes due 2008 (the "Senior Notes").
These Senior Notes were exchanged for Senior Notes with the same terms pursuant
to a registered exchange offer that was completed in November 1998. The
Company's results of operations for fiscal 1998 include the operations of
Bertucci's from and after July 21, 1998, approximately five months. See Notes 2
and 7 to the Consolidated Financial Statements.
The acquisition of Bertucci's included 90 Bertucci's restaurants and one
Sal & Vinnie's restaurant. The Company has decided to close certain
underperforming Bertucci's restaurants. In addition, the Company has decided to
sell the
<PAGE>
former Bertucci's headquarters located in Massachusetts. The assets related to
these locations, which are primarily property and equipment, have been assigned
a value of approximately $6.6 million based on estimated sale proceeds. From the
date of the Acquisition to December 30, 1998, these locations had combined net
sales of approximately $7.0 million and a combined approximate $0.7 million loss
from operations. None of these locations' results during the period from date of
the Acquisition to December 30, 1998 have been excluded from the consolidated
income statement and accounted for as an adjustment to the carrying amount of
assets, as the operating locations to be sold had not been identified at the
date of the Acquisition. It is anticipated that the closing and sale of the
above assets will be completed by the fall of 1999.
The Company is a successor to a series of limited partnerships formed in
1991 to acquire 15 Chili's restaurants originally developed by another
franchisee. Upon its acquisition of the 15 Chili's restaurants in 1991, the
Company recruited a new management team and undertook a series of steps to
enhance operations, including reducing administrative overhead, coordinating a
new advertising campaign, introducing new menu items, renovating restaurant
facilities, installing new information systems and improving purchasing
decisions. These efforts resulted in significant increases in comparable
restaurant sales. During the Company's first three full years of operation, same
store sales increased over the prior year by 10.0%, 14.5%, and 6.6%,
respectively. From fiscal 1991, the final year of operations by the prior
franchisee, to fiscal 1998 average sales per restaurant for the Company's
Chili's restaurants increased over 48.1% to $2.7 million from $1.8 million.
Additionally, over the same period net sales and EBITDA increased from $27.5
million and $0.3 million to $94.1 million and $10.6 million, respectively.
For all the Company's restaurants, net sales consist of food, beverage
and alcohol sales. For fiscal 1998, with respect to the Company's Chili's
restaurants, food accounted for approximately 74%, alcoholic beverages
approximately 18%, and non-alcoholic beverages approximately 8%, of net
sales. For fiscal 1998, with respect to the Company's On The Border
restaurants, food accounted for approximately 65%, alcoholic beverages for
approximately 29%, and non-alcoholic beverages for approximately 6% of total
sales. The larger bar area for On The Border restaurants combined with a
four-season patio contribute to the higher liquor mix in this concept. For
fiscal 1998 subsequent to the date of the Acquisition, with respect to the
Company's Bertucci's restaurants, food and non-alcoholic beverages combined
accounted for approximately 92% and alcoholic beverages for approximately 8%
of total sales. The higher percentage of take out and delivery sales and the
decision to operate with only beer and wine licenses (in lieu of full liquor
licenses) in many locations contributes to the higher food mix in this
concept. Cost of sales consists of food, beverage and alcohol costs. Total
operating expenses consist of five primary categories: (i) labor expenses;
(ii) restaurant operations; (iii) facility costs; (iv) office expenses; and
(v) non-controllable expenses, which include such items as Brinker's royalty
and advertising fees, rent, insurance, and real estate and personal property
taxes. General and administrative expenses include costs associated with
those departments of the Company that assist in restaurant operations and
management of the business, including accounting, management information
systems, training, executive management, purchasing and construction.
Results of Operations
The following table sets forth the percentage-relationship to net sales,
unless otherwise indicated, of certain items included in the Company's income
statement, as well as certain operating data, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31, December 31, December 30,
1996 1997 1998
<S> <C> <C> <C>
Income Statement Data:
NET SALES ............................................. 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of sales ...................................... 30.2 28.7 27.6
Operating expenses ................................. 48.9 50.3 53.0
General and administrative expenses ................ 5.2 5.2 5.8
Depreciation and amortization ...................... 5.2 4.8 5.9
Taxes other than income ............................ 4.6 4.7 4.6
----- ----- -----
Total costs of sales and expenses ............... 94.2 93.7 97.0
----- ----- -----
Operating income (loss) ......................... 5.8 6.3 3.0
----- ----- -----
Interest expense, net ................................. 1.5 2.4 5.0
Income/(loss) before income tax expense/(benefit) 4.3 3.9 (2.0)
----- ----- -----
Income tax expense/(benefit) .......................... 1.5 1.3 (0.7)
----- ----- -----
Net income/(loss) ............................... 2.8 2.6 (1.2)
===== ===== =====
</TABLE>
<PAGE>
Year Ended December 30, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased $79.4 million, or 97.6%, to $160.8 million
in fiscal 1998, from $81.4 million in fiscal 1997. Most of the increase ($67.0
million) was attributable to the Acquisition. The remaining increase was a
result of five new Brinker concept restaurant openings and increased Brinker
concept sales compared to the same period in fiscal 1997. Comparable restaurant
sales for Brinker locations opened prior to 1997 increased 5.2% from fiscal 1997
to fiscal 1998. Menu price increases averaged about 1.5% during the periods
under comparison. Average sales per Brinker concept restaurant increased 6.2% to
$2.78 million, from $2.61 million the previous year. Comparable restaurant sales
for Bertucci's decreased by 0.1% from fiscal 1997 to fiscal 1998. The Company
attributes the decrease primarily to a reduction of planned advertising in the
last two quarters of 1998. Menu price increases in Bertucci's restaurants
averaged approximately 2.0% during fiscal 1998. Average sales per Bertucci's
restaurant decreased 1.1% to $1.69 million in fiscal 1998, from $1.71 million in
fiscal 1997.
Cost of Sales. Cost of sales increased by $21.0 million, or 89.8%,to $44.4
million in fiscal 1998 from $23.4 million in fiscal 1997. Expressed as a
percentage of net sales, cost of sales decreased to 27.6% in fiscal 1998 from
28.7% in fiscal 1997. This decrease was primarily attributable to the addition
of Bertucci's sales, following the Acquisition, and to improved margins from the
Brinker concept restaurants. Cost of sales of the Bertucci's restaurants as a
percentage of net sales were 25.2% of net sales in fiscal 1998. The Brinker
concept restaurants' cost of sales as a percentage of net sales decreased to
28.5% in fiscal 1998 from 28.7% in fiscal 1997. This percentage decrease was
primarily due to a new broadline food supplier for the Brinker concept
restaurants, a more efficient, automated ordering system implemented during the
fourth quarter of 1997, which resulted in overall decreased product costs for
the Brinker concept restaurants. Cost of sales of the Bertucci's restaurants
increased to 25.2% of net sales in fiscal 1998 from 24.5% of net sales in fiscal
1997 . Higher commodity prices of cheese during the last three quarters of 1998
and a change of the Bertucci's broadline supplier in July 1998 were the main
factors for the increase.
Operating Expenses. Operating expenses increased by $43.6 million, or
106.5%, to $84.5 million in fiscal 1998 from $40.9 million in fiscal 1997.
Expressed as a percentage of net sales, operating expenses increased to 52.6% in
fiscal 1998 from 50.3% in fiscal 1997. The dollar increase was primarily
attributable to the Acquisition. The percentage increase was primarily
attributable to increased hourly labor costs driven by a tight labor market and
mandated Federal and state minimum wage increases, as well as to increased labor
costs arising from increased staffing of restaurant-level management implemented
to strengthen restaurant operations.
General and Administrative Expenses. General and administrative expenses
increased $4.0 million, or 95.0%, to $8.2 million in fiscal 1998 from $4.2
million in fiscal 1997. Expressed as a percentage of net sales, general and
administrative expenses decreased to 5.1% in 1998 from 5.2% in fiscal 1997. The
dollar increase was primarily due to the Acquisition. The percentage decrease
was primarily attributable to general and administrative staffing efficiencies
achieved as a result of the addition of sales from the Bertucci's restaurants
and reductions in Bertucci's management following the Acquisition. These
efficiencies were partially offset by increases in payroll, training and
recruitment costs related to hiring additional restaurant managers to better
staff the Bertucci's restaurants.
Deferred Rent, Depreciation and Amortization. Deferred rent,
depreciation and amortization expenses increased by $7.0 million, or 179.2%,
to $10.9 million in fiscal 1998 from $3.9 million in fiscal 1997. Expressed
as a percentage of net sales, deferred rent, depreciation and amortization
increased to 6.8% in fiscal 1998 from 4.8% in fiscal 1997. The increase was
due to the Acquisition, opening five additional Brinker concept restaurants,
opening two Bertucci's restaurants and amortization of approximately $1.0
million of the $34.0 million of goodwill associated with the Acquisition.
Taxes Other Than Income Taxes. Taxes, other than income taxes, increased
$3.7 million, or 95.6%, to $7.5 million in fiscal 1998 from $3.8 million in
fiscal 1997. Taxes, other than income taxes remained flat as a percentage of net
sales at 4.7% in both fiscal 1997 and fiscal 1998.
Interest Expense. Interest expense increased $6.1 million, or 317.4%, to
$8.0 million in fiscal 1998 from $1.9 million in fiscal 1997. This increase was
attributable to the sale of the Senior Notes in July 1998 and to the FFCA Loans
entered into since August 1997. Interest was approximately $4.9 million on the
Senior Notes, $2.3 million on the FFCA Loans and $0.8 million from the Company's
line of credit during fiscal 1998.
Income Tax Expense. In fiscal 1998, the Company's realized an income tax
benefit of 33.0% of loss before income tax expense, compared to an income tax
expense of 34.0% of income before income tax expense in fiscal 1997.
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased by $11.3 million, or 16.1%, to $81.4
million during fiscal 1997 from $70.1 million during fiscal 1996. The increase
in net sales was primarily attributable to the opening of two Chili's
restaurants during fiscal 1997 and the full year impact of three Chili's and one
On The Border restaurant opened during fiscal 1996. Comparable restaurant sales
for locations opened prior to 1996 increased 2.7% in fiscal 1997 as compared to
fiscal 1996. Average sales per restaurant increased 4.0% to $2.6 million during
fiscal 1997 from $2.5 million during fiscal 1996. Approximately four-fifths of
the increases in comparable restaurant sales and average sales per restaurant
reflected an increase in menu prices by an average of 0.5% in March 1997 and
another 1.0% in July 1997, and approximately one-fifth reflected an increase in
guest counts by 0.8% resulting from improved advertising and operations in the
restaurants.
Cost of Sales. Cost of sales increased by $2.2 million, or 10.3%, to $23.4
million during fiscal 1997 from $21.2 million during fiscal 1996. Expressed as a
percentage of net sales, cost of sales decreased to 28.7% during fiscal 1997
from 30.2% during fiscal 1996. Approximately one-third of the decrease was
attributable to reduced pricing from a new broadline food supplier and
substantially all of the remainder was due to a more efficient, automated
ordering system implemented during the fourth fiscal quarter 1997.
Operating Expenses. Operating expenses increased by $6.6 million, or
19.2%, to $40.9 million during fiscal 1997 from $34.3 million during fiscal
1996. Expressed as a percentage of net sales, operating expenses increased to
50.3% during fiscal 1997 from 48.9% during fiscal 1996. Nearly half of the
increase was due to increased advertising expenditures and substantially all of
the remainder was due to increased payroll costs as a result of federal minimum
wage increases during fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased by $0.5 million, or 13.5%, to $4.2 million during fiscal 1997 from
$3.7 million during fiscal 1996. The increase was attributable to increases in
the Company's headcount and related expenses at the administrative and
divisional levels. As a percentage of net sales, general and administrative
expenses were 5.2% of net sales in both years.
Deferred Rent, Depreciation and Amortization. Deferred rent, depreciation
and amortization expenses increased by $0.2 million, or 5.4%, to $3.9 million
during fiscal 1997 from $3.7 million during fiscal 1996. Expressed as a
percentage of sales, deferred rent, depreciation and amortization decreased to
4.8% during fiscal 1997 from 5.2% during fiscal 1996. Amortization expense was
impacted because of a reduction in amortization costs associated with new
restaurant openings as fewer restaurants were opened during fiscal 1997 than
during fiscal 1996.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased
by $0.6 million, or 18.8%, to $3.8 million during fiscal 1997 from $3.2 million
during fiscal 1996. Expressed as a percentage of net sales, taxes, other than
income taxes, increased to 4.7% during fiscal 1997 from 4.6% during fiscal 1996.
The increase was primarily due to higher payroll taxes resulting from increased
payroll costs associated with minimum wage increases enacted during fiscal 1997.
Interest Expense. Interest expense increased by $0.8 million to $1.9
million during fiscal 1997 from $1.1 million during fiscal 1996. The increase
was primarily attributable to borrowings under the FFCA Loans during fiscal 1997
as discussed below under "--Liquidity and Capital Resources."
Income Taxes. The effective income tax rate decreased to 34.0% during
fiscal 1997 from 34.8% during fiscal 1996.
Liquidity and Capital Resources
The Company has generally met its capital expenditures and working capital
needs through a combination of operating cash flow, borrowings under the FFCA
Loans, bank borrowings, the sale of the Senior Notes and the sale of Common
Stock.
<PAGE>
Fiscal Year Ended December 30, 1998. Net cash flows from operating
activities were $17.2 million for fiscal 1998 as compared to $8.5 million for
fiscal 1997. This increase was primarily due to a decrease in working capital
needs for newly developed restaurant locations and for the Bertucci's
restaurants acquired during fiscal 1998. Net loss from operations for this
period was $1.8 million and the non-cash reconciling item of deferred rent,
depreciation and amortization increased cash flows by $10.9 million. Accrued
expenses increased by $8.9 million. The increase was due to a combination of
increases in payroll and benefits accruals, accrued taxes, accrued interest and
other working capital. Net cash used in investing activities for fiscal 1998 was
$111.0 million. Approximately $89.4 million was used for the Acquisition and the
remainder was used for developing, building and opening new restaurants and
capital additions at existing restaurants. Net cash provided by financing
activities was $99.0 million for fiscal 1998. During this period, $5.7 million
was borrowed from FFCA Acquisition Corporation ("FFCA") for new restaurant
mortgages, $7.9 million was used for financing costs, $27.0 million was used to
pay principle on the Senior Bank Facility, approximately $29.0 million was
raised through equity financing and $100 million was raised in the issuance
of the Senior Notes.
Year Ended December 31, 1997. Net cash provided from operating activities
was $8.5 million for fiscal 1997. Net income from operations provided $2.1
million, the adjustment from deferred rent, depreciation and amortization
provided $3.9 million and changes to working capital provided $2.5 million
during this period. Net cash used from investing activities was $5.1 million for
fiscal 1997. Net cash used was for developing, building and opening new
restaurants and capital improvement of existing restaurants, which accounted for
$4.5 million of the cash used. During fiscal 1997, net cash used in financing
activities was $3.5 million. During fiscal 1997 $24.3 million in cash was
provided from the financing of properties through mortgage loans, while $8.3
million was used to purchase treasury stock and a cash dividend of $12.2 million
was paid out. In addition, proceeds from the loans were used to return capital
of $4.4 million and financing expenses of $1.4 million. In addition, $1.4
million of repayments were made on the line of credit.
Year Ended December 31, 1996. Net cash provided by operating activities
for fiscal 1996 was $5.7 million. Net income for fiscal 1996 accounted for $2.0
million and the non-cash adjustment of deferred rent, depreciation and
amortization accounted for an additional $3.4 million. Net cash used investing
in fiscal 1996 was $9.0 million, of which $8.9 million was used to develop,
build and open new restaurants and add capital to existing restaurants. Net cash
provided from financing activities was $3.3 million in fiscal 1996, which was
borrowed from the available bank line of credit.
The Company's capital expenditures were $7.9 million, $4.5 million and
$19.4 million, for fiscal 1996, 1997 and 1998, respectively. In fiscal 1998,
capital expenditures for routine maintenance and repair of the Company's
restaurants were approximately $2.8 million. Under its Area Development
Agreements, the Company is required to open at least four Chili's and two On The
Border restaurants in 1999. Based on its current estimates, the Company would be
required to expend approximately $7.8 million in fiscal 1999 to meet its minimum
development requirements. The Company currently expects to exceed these minimum
requirements by opening a total of four Chili's and three On The Border
restaurants in fiscal 1999, requiring capital expenditures of approximately
$13.4 million. The Company does not expect to open any new Bertucci's
restaurants in fiscal 1999.
In August 1997, the Company paid a dividend and return of capital
distribution to shareholders of approximately $16.7 million from additional
paid-in capital, with the excess payout being charged to retained earnings. In
addition, as part of such transaction, the Company repurchased a portion of its
capital stock, for an aggregate amount of approximately $8.3 million. The
Company's repurchase of shares of common stock was recorded as treasury stock,
at cost, and resulted in a reduction of shareholders' equity. These payments
were funded through the use of proceeds from the FFCA Loan.
As of December 30, 1998, the Company had approximately $129.2 million of
consolidated indebtedness, including $100.0 million of indebtedness pursuant to
the Senior Notes, $29.0 million of borrowings under the FFCA Loans and $0.2
million of capital lease obligations. In addition, the Company has a Senior Bank
Facility in the amount of $20.0 million. As a December 30, 1998, the Company had
no amounts outstanding under this facility. Significant liquidity demands will
arise from debt service on the Senior Notes, the FFCA Loans and borrowings, if
any, under the Senior Bank Facility. In addition to its debt service
obligations, the Company has determined that it will require $20.5 million to
complete all planned capital expenditures (which includes the aforementioned
$13.4 million that is expected to be used for new restaurant development plus an
additional $7.1 million expected to be used for capital improvements to existing
locations), $0.1 million for lease obligations and $(0.4) million for general
working capital needs in 1999.
The Senior Notes bear interest at the rate of 10 3/4% per annum, payable
semi-annually on January 15 and July 15, with payments commencing on January 15,
1999. The Senior Notes are due in full on July 15, 2008. From July 15, 2003
through July 15, 2006, the Company may, at its option, redeem any or all of the
Senior Notes at face value, plus a declining premium, which begins at
approximately 5%. After July 15, 2006, the Senior Notes may be redeemed at face
value. In addition, anytime through July 15, 2001, the Company may redeem up to
35% of the Senior Notes, subject to restrictions,
<PAGE>
with the net proceeds of one or more equity offerings, meeting certain criteria,
at a redemption price of 110.75% of their principal amount. Additionally, under
certain circumstances, including a change of control or following certain asset
sales, the holders of the Senior Notes may require the Company to repurchase the
Senior Notes, at a redemption price of 101%. See Note 7 to the Consolidated
Financial Statements.
On August 6, 1997, the Company's wholly owned limited partnership NERC
Limited Partnership ("NERCLP") entered into a loan agreement with FFCA in the
aggregate amount of $22,400,000, evidenced by promissory notes maturing on
various dates from September 2002 through September 2017, with interest at 9.67%
per annum. NERCLP mortgaged 17 restaurant properties to FFCA as collateral for
these initial FFCA Loans. On or about August 28, 1997, NERCLP obtained
additional financing from FFCA in the aggregate amount of $1,850,000, evidenced
by promissory notes maturing on various dates from September 2007 through
September 2017, with interest at 9.701% per annum. These additional FFCA Loans
were collateralized by mortgages on three restaurant properties. Between July 2,
1998 and December 10, 1998, a second wholly owned limited partnership of the
Company, NERC Limited Partnership II, obtained additional financing from FFCA in
the aggregate amount of $5,677,000, evidenced by promissory notes maturing on
various dates from January 2006 to January 2019, with interest rates ranging
from 8.440% to 9.822% per annum. These 1998 FFCA Loans were collateralized by
mortgages on four restaurant properties. See Note 7 to the Consolidated
Financial Statements.
The Senior Bank Facility consists of a revolving credit facility providing
for revolving loans to the Company in an aggregate principal amount not to
exceed $20.0 million and includes a $1.0 million sub-limit for the issuance of
letters of credit for the account of the Company. The Senior Bank Facility
expires in August 2001 and is secured by tangible and intangible assets of the
Company but is not secured by a security interest in any liquor licenses held by
the Company or any of its subsidiaries (or in the equity securities of any such
subsidiary directly holding such licenses). See Note 5 to the Consolidated
Financial Statements.
The Company believes that the cash flow generated from its operations,
together with available borrowings under the Senior Bank Facility and under the
FFCA Loans and similar secured indebtedness, should be sufficient to fund its
debt service requirements, lease obligations, working capital needs, current
expected capital expenditures and other operating expenses. The Company's future
operating performance and ability to service or refinance the Senior Notes, the
FFCA Loans and the Senior Bank Facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
Impact of Inflation
Inflationary factors such as increases in labor, food or other operating
costs could adversely affect the Company's operations. The Company does not
believe that inflation has had a material impact on its financial position or
results of operations for the periods discussed above. Management believes that
through the proper leveraging of purchasing size, labor scheduling, and
restaurant development analysis, inflation will not have a material adverse
effect on income during the foreseeable future. There can be no assurance that
inflation will not materially adversely affect the Company.
Seasonality
The Company's quarterly results of operations have fluctuated and are
expected to continue to fluctuate depending on a variety of factors, including
the timing of new restaurant openings and related pre-opening and other startup
expenses, net sales contributed by new restaurants, increases or decreases in
comparable restaurant sales, competition and overall economic conditions. The
Company's business is also subject to seasonal influences of consumer spending,
dining out patterns and weather. As is the case with many restaurant companies,
the Company typically experiences lower net sales and net income during the
first and fourth fiscal quarters. Because of these fluctuations in net sales and
net income (loss), the results of operations of any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year or any
future quarter.
Effect of Recently Issued Accounting Standards
In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP
98-5"), Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998, although early
<PAGE>
application is encouraged. Initial application of SOP 98-5 should be as of the
beginning of the fiscal year in which it is first adopted and should be reported
as a cumulative effect of a change in accounting principle.
The Company has adopted SOP 98-5 as of January 1, 1999. Upon adoption, the
Company incurred a cumulative effect of a change in accounting principle of
approximately $1.1 million. This write off was primarily for unamortized
preopening costs which were previously amortized over the 12-month period
subsequent to a restaurant opening.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. SFAS No. 130 is effective
for fiscal years beginning after December 31, 1997. This new standard does not
have an impact on the Company's financial statements based on the current
structure and operations.
Segment and Enterprise-Wide Reporting
In July 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable operating segment of an enterprise, as defined. Based on the
criteria set forth in SFAS No. 131, the Company currently operates in one
operating segment, casual dining restaurants. The Company's restaurant segment
derives its revenues from the sale of food and beverages to restaurant
customers. SFAS No. 131 also requires that certain enterprise-wide disclosures
be made related to products and services, geographic areas and major customers.
The Company derives substantially all of its revenues from the sale of one group
of similar products and services.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, within the next year, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has been assessing the potential impact of Year 2000 on the
processing of date-sensitive information by the Company's automated information
and point-of-sale systems and Bertucci's computerized information systems. While
there can be no assurance that Year 2000 matters will be satisfactorily
identified and resolved, the Company currently believes that Year 2000 issues
will not have a material adverse effect on the Company.
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff and is designed to ensure that there are no adverse
effects on the Company's ability to conduct business at the restaurant level and
to process and support restaurant activity at the corporate level. The
initiative covers restaurant point-of-sale systems, back office software,
including labor, menu and inventory management software, ordering systems, the
corporate office network and financial systems, payroll processing, corporate
computers and telephone systems. In addition, the project includes a review of
the Year 2000 compliance efforts of the Company's key suppliers and other
principal business partners and, as appropriate, the development of joint
business support and continuity plans for Year 2000 issues. The Year 2000
project is divided into the following phases: inventory, assessment,
remediation, testing, deployment and monitoring. In addition, selected Year 2000
upgrades are slated to undergo testing in a controlled environment that
replicates the current network and is equipped to simulate the turn of the
century and leap year dates.
Under its current Year 2000 plan, the Company has brought a number of its
systems into Year 2000 compliance, subject to additional Year 2000 testing and
responsive actions. The Company's accounts receivable system is expected to be
compliant by June 1999 and the point-of-sale systems in seven remaining Chili's
restaurants are expected to be compliant by September 1999. The Company's
ability to meet the target dates is dependent upon the timely provision of
necessary upgrades and modifications by its suppliers and contractors. In some
instances, third party upgrades or modifications are not expected to be
available until the middle of 1999; accordingly, the Company's testing and
redeployment of affected items may be delayed into mid-1999. The Company has
established a supplier compliance program, and is working with its key suppliers
and the Franchisor to minimize such risks. Based upon information obtained from
the Company's two principal vendors of restaurant supplies and products (which
together account for approximately 75% to 80% of its supplies), the Company
believes that the vendors' systems that could affect the Company's business are
Year 2000 compliant. While the Company believes that its relationships with its
smaller suppliers and the Franchisor, as such relationships relate to Year
<PAGE>
2000 issues, are less significant, it is continuing to assess these
relationships and to develop contingency plans with such suppliers and expects
that such efforts will be completed by June 1, 1999. The Company currently
estimates that it will incur expenses of approximately $230,000 through 1999 in
connection with its anticipated Year 2000 efforts. The timing and amount of the
Company's expenses may vary and are not necessarily indicative of readiness
efforts or progress to date.
As part of its Year 2000 initiative, the Company is evaluating scenarios
that may occur as a result of the century change and is in the process of
developing contingency and business continuity plans tailored for Year
2000-related occurrences. The Company believes that most of its significant
hardware and software systems are already Year 2000 compliant. However, for
those systems which are not yet compliant, the Company is currently in the
process of evaluating alternative vendors from whom they may obtain upgrades in
the event that the vendors who are expected to deliver such upgrades do not meet
the anticipated delivery dates. The Company believes that the most reasonably
likely worst case scenario of failure by the Company or its suppliers to
adequately resolve Year 2000 issues would arise from a complete failure of its
point-of-sale and ordering systems. Such a failure would require the Company to
resort to "non-computerized" means to undertake such restaurant functions as
placing customer orders, preparing customer checks, accounting of restaurant
receipts, recording and ordering restaurant inventory and supplies, evaluating
menu mix and analyzing other operating statistics. While the Company believes
that it is equipped to operate in such a "non-computerized" mode to address such
a failure, there can be no assurance that the Company would not, as a result of
such or any other unanticipated Year 2000 failure, suffer from lost revenues,
increased operating costs, loss of customers or other business interruptions of
a material nature.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other resources,
third party modification actions and other factors. Given the complexity of
these issues and possible as yet unidentified risks, actual results may vary
materially from those anticipated and discussed above. Specific factors that
might cause such differences include, among others, the availability and cost of
personnel trained in this area, the ability to locate and correct all affected
computer code, the timing and success of remedial efforts of the Company's third
party suppliers and similar uncertainties.
Risk Factors
This Report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report
should be read as being applicable to all forward looking statements wherever
they appear in this Report. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in this Report.
Substantial Leverage; Potential Inability to Service Indebtedness. As a
result of the Acquisition, the Company is highly leveraged. At the end of fiscal
1998, the Company's aggregate outstanding indebtedness was $129.2 million, the
Company's shareholders' equity was $14.1 million and the Company's working
capital deficit, deficiency of earnings to fixed charges and losses were $18.2
million, $4.2 million and $1.8 million, respectively.
The Company's high degree of leverage could have important consequences to
holders of Senior Notes, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for its
operations and other purposes, including investments in development and capital
spending; (iii) the Company may be substantially more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage; and
(iv) the Company's substantial degree of leverage may limit its flexibility to
adjust to changing market conditions, reduce its ability to withstand
competitive pressures and make it more vulnerable to a downturn in general
economic conditions or in its business. The Company's ability to repay or to
refinance its obligations with respect to its indebtedness will depend on its
future financial and operating performance, which, in turn, will be subject to
prevailing economic and competitive conditions and to certain financial,
business, legislative, regulatory and other factors, many of which are beyond
the Company's control. These factors could include operating difficulties,
increased operating costs, product pricing pressures, the response of
competitors, regulatory developments, and delays in implementing strategic
projects. The Company's ability to meet its debt service and other obligations
may depend in significant part on the extent to which the Company can implement
successfully its business strategy. There can be no assurance that the Company
will be able to implement its strategy fully or that the anticipated results of
its strategy will be realized.
<PAGE>
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital,
or to refinance or restructure its debt. There can be no assurance that the
Company's cash flow and capital resources will be sufficient for payment of
principal of, and premium, if any, and interest on, its indebtedness in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its scheduled debt service obligations. In addition,
because the Company's obligations under the Senior Bank Facility bear interest
at floating rates, an increase in interest rates could adversely affect, among
other things, the Company's ability to meet its debt service obligations.
If the Company is required to reduce or delay capital expenditures, the
Company may fail to meet its obligations under its Area Development Agreements,
under which the Company is required to open two to three new Chili's restaurants
each year in accordance with a specified schedule over approximately the next
three years and two to four new On The Border restaurants each year in
accordance with a specified schedule over approximately the next six years. A
breach under the Area Development Agreements may cause the Company to lose its
exclusive right to develop Chili's and On The Border restaurants in Connecticut,
New Hampshire, Maine, Massachusetts, Rhode Island, Vermont, Westchester County,
and additionally, in the case of On The Border, upstate New York. A breach under
the Area Development Agreements could also constitute a default under the Senior
Bank Facility and the FFCA Loans, permitting the applicable lender to declare
all amounts due thereunder immediately due and payable
Restrictive Debt Covenants. The Indenture for the Senior Notes (the
"Indenture"), the Senior Bank Facility and the FFCA Loans impose significant
operating and financial restrictions on the Company (and its subsidiaries). Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
pay dividends or make other distributions, make certain investments, create
certain liens, sell certain assets, enter into certain transactions with
affiliates, or engage in certain mergers or consolidations involving the
Company. In addition, the Senior Bank Facility and the FFCA Loans contain other
and more restrictive covenants and require the Company (and its subsidiaries) to
maintain specified financial ratios and satisfy certain financial tests. The
Company's ability to meet such financial ratios and tests may be affected by
events beyond its control, and there can be no assurance that the Company will
meet such tests. These restrictions could limit the ability of the Company to
obtain future financing, make needed capital expenditures, withstand a future
downturn in its business or the economy, or otherwise conduct necessary
corporate activities. A failure by the Company to comply with the restrictions
contained in the Indenture, the FFCA Loans or the Senior Bank Facility could
lead to a default under the terms of the Indenture, the FFCA Loans or the Senior
Bank Facility. In the event of a default, the applicable lender could elect to
declare all amounts borrowed pursuant thereto, and all amounts due under other
instruments (including but not limited to the Indenture, the FFCA Loans or the
Senior Bank Facility, as applicable) that may contain cross-acceleration or
cross-default provisions may also be declared to be, immediately due and
payable, together with accrued and unpaid interest, and the lenders could
terminate all commitments thereunder. In such event, there can be no assurance
that the Company would be able to make such payments or borrow sufficient funds
from alternative sources to make any such payment. Even if additional financing
could be obtained, there can be no assurance that it would be on terms that are
favorable or acceptable to the Company. In addition, the indebtedness of the
Company or its subsidiaries under the FFCA Loans and Senior Bank Facility is
secured by a substantial portion of the assets of the Company or its
subsidiaries and, upon the occurrence of a default and the acceleration of such
indebtedness, the holders of such indebtedness could seize such assets and sell
them as a means to satisfy all or part of such indebtedness. The Senior Bank
Facility also contains provisions that prohibit any modification of the
Indenture in any manner adverse to the senior lenders and that limit the
Company's ability to refinance the Senior Notes without the consent of such
senior lenders.
Expected Benefits of Combined Business May Not Be Achieved. Acquisitions
are subject to a number of special risks, including, without limitation, those
associated with adverse short-term effects on the Company's reported operating
results, diversion of management's attention, standardization of accounting
systems, dependence on retaining, hiring and training key personnel and
unanticipated problems or legal liabilities. Achieving the anticipated benefits
of the Acquisition will depend in part upon whether the integration of the
businesses of the companies can be accomplished in an efficient and effective
manner, and there can be no assurance that this will occur. The combination of
the two companies will necessitate, among other things, integration of
management philosophies, personnel and arrangements with third party vendors,
standardization of training programs, realization of economies of scale, and
effective coordination of sales, marketing and financial reporting efforts.
There can be no assurance that such integration will be accomplished smoothly or
successfully. Failure to successfully accomplish the integration of the
operations of the two companies would have a material adverse effect on the
Company.
Potential Inability to Manage Increased Size of Company. As a result of
the Acquisition, the size of the Company's combined operations is more than
double the pre-Acquisition size. The Company's future operating results will
depend largely upon its ability to manage a growing business profitably such
that it continues the successful operation of its existing
<PAGE>
restaurants and also successfully implements its operating strategies for the
Bertucci's restaurants it acquired as a result of the Acquisition as well as any
new restaurants the Company may open or acquire in the future. Any failure of
the Company to manage successfully and profitably the growth of its business may
have a material adverse effect on the Company.
Consent of Franchisor to Acquisition Subject to Continuing Compliance with
Certain Agreements. The Franchisor's consent to the Acquisition was granted
subject to the terms and conditions of its franchise agreements and Area
Development Agreements with the Company, including, without limitation, the
development schedule and menu restrictions contained in such agreements. Under
these agreements, the Company is prohibited from directly or indirectly engaging
in the operation of any restaurant which utilizes or duplicates the menu, trade
secrets or service marks of either Chili's or On The Border restaurants. In
addition, the Company is obligated to use its "best efforts" to promote and
develop the Chili's and On The Border concepts. Although it has no present
intention of doing so, the Company, among other things, would be prevented from
developing menu items for the Bertucci's concept in violation of such
agreements.
No Prior Ownership of a Restaurant Concept. Although the Company's
management has significant experience in the casual dining segment of the
restaurant industry, the Company has no prior experience as an owner of its own
restaurant concept. There can be no assurance that the Company will be able to
successfully assume the ownership, and undertake execution, of the Bertucci's
concept. As the Company has not had prior experience as the owner of a
restaurant concept, there may be new challenges and risks associated with such
ownership that the Company cannot fully anticipate at this time and which may
have a material adverse effect on the Company.
Potential Inability to Manage Geographic Expansion. All of the restaurants
operated by the Company prior to the Acquisition were located in New England. As
a result of consummation of the Acquisition, nearly one-third of the Company's
restaurants are outside of New England. The ability of the Company's management
to effectively recognize and account for diverse regional conditions and to
manage restaurants that are geographically remote will be critical to the
success of the Company. Any inability of the Company to successfully manage its
geographic expansion may have a material adverse effect on the Company.
Potential Inability to Expand Successfully. Pursuant to its Area
Development Agreements with the Franchisor, the Company is currently obligated
to open two to three new Chili's restaurants each year in accordance with a
specified schedule over approximately the next three years and two to four new
On The Border restaurants each year in accordance with a specified schedule over
approximately the next six years. Failure to adhere to the development schedules
contained in each of the Area Development Agreements would constitute a breach
of those agreements. In the event of such a breach, the Franchisor would be able
to terminate the territorial exclusivity granted to the Company. In addition, a
breach under any of the Company's Area Development Agreements could constitute a
default under the Senior Bank Facility and FFCA Loans, permitting the applicable
lender to declare all amounts borrowed thereunder immediately due and payable.
For the past several years, the Company has satisfied these minimum development
requirements, having opened 18 new Company-owned Chili's restaurants since May
1993 and four new Company-owned On The Border restaurants since November 1996.
Although there can be no assurance that it will continue to be able to do so,
the Company expects to continue its steady growth strategy over the next several
years. In fiscal 1998, the Company opened two Chili's, three On The Border and
six Bertucci's restaurants.
During fiscal 1998, the Company spent approximately $19.8 million for
capital expenditures (not including approximately $1.6 million of land costs)
including approximately $2.0 million of pre-opening expenses relating to new
restaurant openings. The Company currently plans to spend approximately $13.4
million in fiscal 1999 to complete construction of an expected four Chili's,
three On The Border restaurants and no additional Bertucci's restaurants. The
Company reviews its expansion plans and budget on a regular basis, in light of
circumstances and opportunities that may arise, and may determine to open a
smaller or larger number of stores than currently planned.
The Company's future operating results will depend largely upon its
ability to open and operate new or newly acquired restaurants successfully and
to manage a growing business profitably. This will depend on a number of factors
(some of which are beyond the control of the Company), including (i) selection
and availability of suitable restaurant locations, (ii) negotiation of
acceptable lease or financing terms, (iii) securing of required governmental
permits and approvals, (iv) timely completion of necessary construction or
remodeling of restaurants, (v) hiring and training of skilled management and
personnel, (vi) successful integration of new or newly acquired restaurants into
the Company's existing operations and (vii) recognition and response to regional
differences in guest menu and concept preferences.
The Company identifies and sources its real estate through a third-party
consultant who specializes in New England and Mid-Atlantic real estate. This
consultant is retained by the Company on an exclusive basis to facilitate sites
in Connecticut and substantially all of Massachusetts. The consultant is paid by
the Company on a contingency basis.
<PAGE>
Although the Company believes that it would be able to replace such consultant
if it were required to do so, any disruption in the services of such consultant
or the Company's inability to replace such consultant, when required, may have a
material adverse effect on the Company.
There can be no assurance that the Company's expansion plans can be
achieved on a timely and profitable basis or that it will be able to achieve
results similar to those achieved in existing locations in prior periods or that
such expansion will not result in reduced sales at existing restaurants that
have been recently opened or newly acquired restaurants. Any failure to
successfully and profitably execute its expansion plans could have a material
adverse effect on the Company.
Changes in Food Costs and Supplies; Key Supplier. The Company's
profitability is dependent on, among other things, its continuing ability to
offer fresh, high quality food at moderate prices. Various factors beyond the
Company's control, such as adverse weather, labor disputes or other unforeseen
circumstances, may affect its food costs and supplies. While management has been
able to anticipate and react to changing food costs and supplies to date through
its purchasing practices and menu price adjustments, there can be no assurance
that it will be able to do so in the future.
The Company obtains approximately 75% to 80% of its supplies for its
Chili's and On The Border restaurants through a single vendor pursuant to a
contract for delivery and distribution, with the vendor charging fixed mark-ups
over prevailing wholesale prices. The Company has a two-year contract with this
vendor which expires in October 1999 and is otherwise terminable by either party
upon 30 days' prior notice following breach of such contract and 60 days' prior
notice for any other reason. The Company has similar supply arrangements for
Bertucci's, obtaining 75% to 80% through a single vendor with an agreement that
is terminable upon 30 days' prior notice following breach of such contract. The
Company believes that it would be able to replace either such vendor if it were
required to do so; however, any disruption in supply from such vendors or the
Company's inability to replace such vendors, when required, may have a material
adverse effect on the Company.
Possible Adverse Impact of Economic, Regional and Other Business
Conditions on the Company. The Company's business is sensitive to guests'
spending patterns, which in turn are subject to prevailing regional and national
economic conditions such as interest rates, taxation and consumer confidence.
Most of the restaurants owned by the Company are located in the northeastern and
Mid-Atlantic United States, with a large concentration in New England. In
addition, the Company anticipates substantially all restaurants to be opened in
fiscal 1999 will be in states where the Company presently has operations or in
contiguous states. As a result, the Company is, and will continue to be,
susceptible to changes in regional economic conditions, weather conditions,
demographic and population characteristics, consumer preferences and other
regional factors.
Dependence Upon Key Personnel. The Company's business depends upon the
efforts, abilities and expertise of its executive officers and other key
employees, including Dennis Pedra, its President and Chief Executive Officer.
The Company has no long-term employment contracts with, and does not maintain
"key-man" life insurance for, any of its executive officers or key employees.
The loss of the services of certain of these executive officers or key employees
or the inability to retain key personnel required to effect a successful
integration of the Bertucci's business with the Company's business existing
prior to the Acquisition would have a material adverse effect on the Company.
Competition. The restaurant industry is intensely competitive with respect
to, among other things, price, service, location and food quality. The Company
competes with many well-established national, regional and locally-owned
foodservice companies with substantially greater financial and other resources
and longer operating histories than the Company, which, among other things, may
better enable them to react to changes in the restaurant industry. With respect
to quality and cost of food, size of food portions, decor and quality service,
the Company competes with casual dining, family-style restaurants offering
eat-in and take-out menus, including Applebee's International, Inc., TGI
Friday's Inc., a subsidiary of Carlson Hospitality Worldwide, Ruby Tuesday Inc.,
and as a result of the Acquisition, also competes with Italian-style restaurant
concepts such as Uno Restaurant Corp. and Olive Garden Restaurants, a division
of Darden Restaurants Inc. Many of the Company's restaurants are located in
areas of high concentration of such restaurants. Among other things, the Company
also competes with its competitors in attracting guests, in obtaining premium
locations for restaurants (including shopping malls and strip shopping centers)
and in attracting and retaining employees.
Possible Adverse Impact of Government Regulation on the Company. The
restaurant business is subject to extensive federal, state and local laws and
regulations relating to the development and operation of restaurants, including
those concerning alcoholic beverage sales, preparation and sale of food,
relationships with employees (including minimum wage requirements, overtime and
working conditions and citizenship requirements), land use, zoning and building
codes, as well as other health, sanitation, safety and environmental matters.
Compliance with such laws and regulations can impede the operations of existing
Company restaurants and may delay or preclude construction and completion of new
Company
<PAGE>
restaurants. The Company is subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance. In addition, the
Company may also in certain jurisdictions be required to comply with regulations
limiting smoking in restaurants.
Reliance on Information Systems. The Company relies on various information
systems to manage its operations and regularly makes investments to upgrade,
enhance or replace such systems. The Company has found that its basic
information systems will be largely compatible with those of Bertucci's.
However, any delays or difficulties in transitioning the two systems or in
implementing new systems, or any other disruption affecting the Company's
information systems, could have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
The Company has market risk associated with interest rate risk. The
Company manages its exposure through its regular financing activities. Interest
rate changes would result in a change in the fair value of the Company's debt
facilities due to the difference between the market interest rate and the rate
at the date of issuance of the debt facilities. Furthermore, the Company has no
exposure to specific risks related to derivatives or other "hedging" types of
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Part IV,
Item 14 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Benjamin R. Jacobson............. 54 Chairman of the Board of Directors and Treasurer
Dennis D. Pedra.................. 46 President, Chief Executive Officer and Director
Paul V. Hoagland................. 46 Executive Vice President--Finance, Chief Financial Officer and Director
Raymond P. Barbrick.............. 45 Vice President--Operations of Chili's
Richmond A. Brittingham.......... 50 Regional Director--South Region
Gary S. Schwab................... 42 Vice President - Finance
Stephen F. Mandel, Jr............ 43 Director
James J. Morgan.................. 56 Director
David A. Roosevelt............... 28 Director
Thomas Devlin.................... 51 Director
James Parish.................. 52 Director
</TABLE>
<PAGE>
Benjamin R. Jacobson. Mr. Jacobson has served as Chairman of the Board of
Directors of the Company since 1991. Since 1989, Mr. Jacobson has served as the
Managing General Partner of Jacobson Partners, which specializes in direct
equity investments. Mr. Jacobson is a director of Childtime, Inc. and a number
of privately-held corporations.
Dennis D. Pedra. Mr. Pedra has been employed in the restaurant industry
for 24 years and has served as President, Chief Executive Officer and a director
of the Company since its inception in 1991. From 1984 to 1991, Mr. Pedra was
President of UNO Concepts, Inc., a multi-unit Pizzeria Uno franchisee. From 1980
to 1984, Mr. Pedra was employed by PepsiCo/Taco Bell Restaurants, first as
regional operations manager for the southeastern and then for the northeastern
United States. From 1974 to 1980, Mr. Pedra held various management positions
with Sambo's Restaurants, Big Wheel, Inc. and Marriott Corporation. Mr. Pedra
also serves as a director of Lakeview Savings Bank.
Paul V. Hoagland. Mr. Hoagland has been employed in the restaurant
industry for 18 years and has served as the Company's Executive Vice President
since 1992 and its Chief Financial Officer and a director since the Company's
inception in 1991. Mr. Hoagland is also responsible for all administrative and
new restaurant development functions within the Company. Prior to joining the
Company, Mr. Hoagland was employed by Burger King Corporation from 1981 to 1990,
where he held various positions over time, including Vice President of
Operations, Vice President of Finance for Europe, and Regional Controller for
New England. From 1974 to 1981, Mr. Hoagland was employed by I.T.T. Continental
Baking Company first as a financial manager and then as controller.
Raymond P. Barbrick. Mr. Barbrick has been employed in the restaurant
industry for 29 years and has served as the Company's Vice President of
Operations for Chili's since January 1998. Prior to that, he served as Senior
Director of Operations, from 1992 through 1997, with responsibility for all of
the Company's Chili's restaurants in Connecticut and western Massachusetts.
Prior to joining the Company, Mr. Barbrick was employed by Back Bay Restaurant
Group, where he held the position of director of regional operations from 1989
to 1992.
Richmond A. Brittingham. Mr. Brittingham has been employed in the
restaurant industry for 30 years and has served as the Company's Regional
Director for the South Region since 1992. In such capacity, he is responsible
for the operational performance of all the Company's Chili's restaurants in
southeastern Massachusetts and Rhode Island. Prior to joining the Company, Mr.
Brittingham served as director of operations for Legal Sea Foods Company.
Gary S. Schwab. Mr. Schwab has been employed in the restaurant industry
for 12 years and has served as a Vice President of the Company since 1996 and as
its Controller since 1991. Mr. Schwab's present responsibilities include
oversight of all accounting, financial analysis and planning, information
systems, cash management and tax compliance. Prior to joining the Company, Mr.
Schwab was employed from 1985 to 1990 by Trefz Corporation/McDonald's, one of
the largest McDonald's franchisees in the United States, where he held the
positions of Accounting Manager and Controller.
Stephen F. Mandel, Jr. Mr. Mandel has served as a director of the Company
since December 1997. Since July 1997, Mr. Mandel has served as managing
director, portfolio manager and consumer retail/analyst at Lone Pine Capital
LLC, a hedge fund which he founded. Prior to that, he served as senior managing
director and consumer analyst at Tiger Management Corporation from 1990 to 1997
and served on that company's management committee, as director of equities and
portfolio manager. Prior to 1990, Mr. Mandel served as a vice president and
mass-market retailing analyst at Goldman, Sachs and Co.
James J. Morgan. Mr. Morgan has served as a director of the Company since
December 1997. From 1963 until his retirement in 1997, Mr. Morgan was employed
by Philip Morris U.S.A. where he served as President and Chief Executive Officer
from 1994 until his retirement in 1997. Prior to 1994, Mr. Morgan served in
various capacities at Philip Morris including Senior Vice President of
Marketing, and Corporate Vice President of Marketing Planning of the Philip
Morris Companies Inc.
David A. Roosevelt. Mr. Roosevelt has served as a director of the Company
since December 1997. Mr. Roosevelt has been an associate at Jacobson Partners
since 1996. Prior to that he was a principal of General Gas Company, a natural
gas marketing company from 1995 to 1996 and a financial analyst in the account
management group of Blackrock Financial Management from 1993 to 1995.
Thomas R. Devlin. Mr. Devlin has served as a director of the Company since
July 1998. Since 1987, Mr. Devlin has served as Chief Executive Officer of
Devlin Enterprises, which owns positions in numerous operating companies. Mr.
Devlin is a director of a number of privately-held corporations. Mr. Devlin
previously served as a director of the Company from October 1991 through August
1997.
<PAGE>
James R. Parish. Mr. Parish has been employed in the restaurant industry
for 23 years and has served as a director of the Company since July 1998. Since
1991, Mr. Parish has served as Chief Executive Officer of Parish Partners, Inc.
From 1995 to 1996, Mr. Parish served as Chief Executive Officer of Sfuzzi, Inc.
From 1983 to 1991, Mr. Parish served as Executive Vice President and Chief
Financial Officer of Chili's Inc. (now named Brinker International, Inc.).
Term of Directors
The Company's directors serve in such capacity until the next annual
meeting of the shareholders of the Company or until their successors are duly
elected and qualified.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table summarizes the compensation for fiscal 1998 for the
Company's Chief Executive Officer and each of its four other most highly
compensated executive officers (the Chief Executive Officer and such other
officers, collectively, the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Other
Annual Securities
Compensation Underlying
Name and Principal Position Salary($) Bonus($) ($) Options(#)
--------------------------- --------- -------- --- ----------
<S> <C> <C> <C> <C>
Dennis D. Pedra ..........................................1998 $288,982(a) $ 79,646 $ 99,308(c) 122,948
President and Chief Executive Officer 1997 $212,508(a) $100,000 $ 70,698(c) 99,198
Paul V. Hoagland .........................................1998 $171,576(b) $ 38,514 $ 77,392(c) 41,635
Executive Vice President and Chief Financial Officer 1997 $150,242(b) $ 75,000 $ 52,275(c) 33,068
Raymond P. Barbrick ......................................1998 $116,354 $ 50,495 -- 24,568
Vice President--Operations of Chili's 1997 $ 89,720 $ 66,431 -- 21,268
Richmond A. Brittingham ..................................1998 $ 88,949 $ 58,414 -- 17,034
Regional Director--South Region 1997 $ 85,787 $ 69,217 $ 7 14,178
Gary S. Schwab ...........................................1998 $101,575 $ 44,965 -- 24,768
Vice President and Controller 1997 $ 95,204 $ 27,720 -- 21,268
</TABLE>
- ----------
(a) Includes $33,404 payable for fiscal 1998 but deferred and $100,000 payable
for fiscal 1997 but deferred pursuant to the Non-qualified Deferred
Compensation Plan. See "--Stock Option and Other Plans for
Employees--Non-qualified Deferred Compensation Plan."
(b) Includes $3,252 payable for fiscal 1998 but deferred and $103,496 payable
for fiscal 1997 but deferred pursuant to the Non-qualified Deferred
Compensation Plan. See "--Stock Option and Other Plans for
Employees--Non-qualified Deferred Compensation Plan."
(c) Reflects compensation to cover certain taxes incurred by such officer in
connection with the payment by the Company in August 1997 of a dividend
and return of capital contribution to shareholders of $8.31 per share and
the related repurchase by the Company of certain shares of common stock at
$11.63 per share.
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth information concerning options granted
during fiscal 1998 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Number of Stock Price
Securities Appreciation for
Underlying % of Total Option Term(c)
Options Granted in Exercise Expiration -----------------
Name Granted(a) Fiscal 1998 Price(b) Date 5% 10%
---------- ----------- -------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Dennis D. Pedra 23,750 40.65% $17.51 7/21/03 $114,902.50 $261,558.75
Paul V. Hoagland 8,567 14.66% $17.51 7/21/03 $ 41,447.15 $ 94,348.37
Raymond P. Barbrick 3,300 5.65% $17.51 7/21/03 $ 15,965.40 $ 36,342.90
Richmond A. Brittingham 2,856 4.89% $17.51 9/15/03 $ 13,817.33 $ 31,453.13
Gary S. Schwab 3,500 5.99% $17.51 7/21/03 $ 16,933.00 $ 38,545.50
</TABLE>
- ----------
(a) Each of the options granted becomes exercisable at the rate of 25% on or
after each of the second, third, fourth and fifth anniversaries of the
date of grant. Each of the options expires 90 days following the fifth
anniversary of the date of the grant. See "--Stock Option and Other Plans
for Employees--Stock Option Plan."
(b) The exercise price was fixed at the date of the grant and represented the
fair market value per share of common stock on such date.
(c) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and do not reflect the Company's estimates or projections
of future prices of the Company's common stock. The gains shown are net of
the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise. Actual gains, if any, on
stock option exercises will depend on the future performance of the
Company's common stock, the option holders' continued employment through
the option period, and the date on which the options are exercised.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information concerning option exercises
during fiscal 1998, and the fiscal year-end value of unexercised options for
each of the Named Executive Officers.
<TABLE>
<CAPTION>
Value Of
Number Of Unexercised
Securities In-The-Money
Underlying At Options At
Shares Fiscal Year-End Fiscal Year-End
Acquired on Exerciseable/ Exerciseable/
Name Exercise Value Realized(1) Unexerciseable Unexerciseable(2)
-------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Dennis D. Pedra 0 0 0/122,948 0/583,284.24
Paul V. Hoagland 0 0 0/41,635 0/194,439.84
Raymond P. Barbrick 0 0 0/24,568 0/125,055.84
Richmond A. Brittingham 2,778 0 0/17,034 0/ 83,366.64
Gary S. Schwab 0 0 0/24,768 0/125,055.84
</TABLE>
(1) The amount "realized" reflects the appreciation on the date of exercise
(based on the fair market value of the shares on the date of exercise over
the exercise price).
(2) Based upon a price of $17.51.
<PAGE>
Employment Agreements
Executive officers of the Company are elected by the Board of Directors
and serve at the discretion of the Board or pursuant to an employment agreement.
The Company is party to certain short-term employment agreements with certain
executive officers as described below:
Dennis D. Pedra. Mr. Pedra's employment agreement (as amended, the "Pedra
Agreement") provides that he will serve as President and Chief Operating Officer
of the Company until such time as such agreement is terminated by either party
upon six months' prior written notice or pursuant to the other termination
provisions of the Pedra Agreement. If Mr. Pedra's employment is terminated, the
Pedra Agreement provides that he may not engage in a competing business within a
ten mile radius of a Company-owned restaurant, for a period of one year
following his termination.
Mr. Pedra's fiscal 1998 base salary of $289,000 may be increased, from
time to time, in the Company's sole discretion. In addition to his base salary,
Mr. Pedra is entitled to receive (i) an annual performance bonus in the amount
of up to fifty (50%) percent of his base salary which will be based on a bonus
plan tied to the combined operating results of the Company as such plan may be
revised from time to time, (ii) a $790 per month automobile allowance and
reimbursement of reasonable expenses, including insurance and repairs, and (iii)
certain insurance and other benefits to be maintained and paid by the Company.
Paul V. Hoagland. Mr. Hoagland's employment agreement (as amended, the
"Hoagland Agreement") provides that he will serve as Vice President and Chief
Financial Officer of the Company until such time as such agreement is terminated
by either party upon six months' prior written notice or pursuant to the other
termination provisions of the Hoagland Agreement. If Mr. Hoagland's employment
is terminated, the Hoagland Agreement provides that he may not engage in a
competing business within a ten mile radius of a Company-owned restaurant, for a
period of one year following his termination.
Mr. Hoagland's fiscal 1998 base salary of $172,000 may be increased, from
time to time, in the Company's sole discretion. In addition to his base salary,
Mr. Hoagland is entitled to receive (i) an annual performance bonus in the
amount of up to fifty (50%) percent of his base salary which will be based on a
bonus plan tied to the combined operating results of the Company as such plan
may be revised from time to time, (ii) a $650 per month automobile allowance and
reimbursement of reasonable expenses, including insurance and repairs, and (iii)
certain insurance and other benefits to be maintained and paid by the Company.
Stock Option and Other Plans for Employees
Stock Option Plan. On September 15, 1997, the Board of Directors of the
Company established the 1997 Equity Incentive Plan, which includes a
nonqualified stock option plan (the "Stock Option Plan"), for certain key
employees and directors. The Stock Option Plan is administered by the Board of
Directors of the Company and may be modified or amended by the Board of
Directors in any respect.
Options granted to employees under the Stock Option Plan are generally
exercisable cumulatively at the rate of 25% on or after each of the second,
third, fourth and fifth anniversaries of the date of grant and options granted
to directors thereunder are generally exercisable immediately upon grant.
Options granted under the Stock Option Plan to date expire 90 days following the
fifth anniversary of the date of the grant. Between September 15, 1997 and
December 31, 1997, 331,123 options were granted at a price of $11.63 per share
under the Stock Option Plan (of which 11,020 options have been exercised
December 30, 1998). In addition, between July 21, 1998 and October 19, 1998,
58,429 options were granted at a price of $17.51 per share under the Stock
Option Plan of which none have been exercised as of December 30, 1998. At
December 31, 1997, there were 1,316,656 shares of common stock of the Company
outstanding. An additional 1,660,370 such shares were issued pursuant to the
Equity Investment resulting in 2,977,026 shares of common stock outstanding at
December 30, 1998.
Management Incentive Plan. Certain management employees of the Company,
including directors of operations, managing partners (who are senior general
managers), general managers and assistant managers are eligible, at the
discretion of the Company, to participate in the Company's management incentive
plan that incentivizes and rewards the performance of such personnel with bonus
awards that reflect a percentage of each restaurant's cash contribution.
Payments under the management incentive plan are payable monthly or in
accordance with the then current payroll cycle of the Company. During fiscal
1998, these awards ranged from $8,000 to $60,000 and aggregate payments under
this plan amounted to $2.3 million for the Brinker concepts and approximately
$0.6 million for the Bertucci's concept.
<PAGE>
Non-qualified Deferred Compensation Plan. The Company has established the
NE Restaurant Company Deferred Compensation Plan (the "Non-qualified Deferred
Compensation Plan") pursuant to which certain eligible executives of the Company
may elect to defer a portion of their salary. The Company maintains an
irrevocable grantor trust (also known as a "rabbi trust") which has been
established by the Company, as grantor, pursuant to The Merrill Lynch
Non-qualified Deferred Compensation Plan Trust Agreement, dated December 21,
1993, by and between the Company and Merrill Lynch Trust Company of America, an
Illinois corporation, as trustee, for the purpose of paying benefits under the
Non-qualified Deferred Compensation Plan.
The trust assets are held separately from other funds of the Company, but
remain subject to claims of the Company's general creditors in the event of the
Company's insolvency. As of December 30, 1998, trust account balances for Paul
Hoagland and Dennis Pedra were $409,751 and $760,292, respectively.
Compensation of Directors
Each of the Company's directors is reimbursed for any expenses incurred by
such director in connection with such director's attendance at a meeting of the
Board of Directors, or committee thereof. In addition, all directors are
eligible to receive options under the Company's stock option plans. Directors
receive no other compensation from the Company for serving on the Board of
Directors.
Compensation Committee Interlocks and Insider Participation
Effective as of January 1, 1998, the Board of Directors has appointed a
Compensation Committee comprising Messrs. Jacobson, Mandel, Morgan and Devlin
and an Audit Committee comprising Messrs. Jacobson, Mandel, Parish and
Roosevelt.
Prior to 1998, the Board of Directors of the Company did not have a formal
compensation committee and decisions with respect to executive officer
compensation for Messrs. Pedra and Hoagland were made by Mr. Jacobson and other
non-management directors, and for other executive officers by Messrs. Pedra and
Hoagland. Mr. Jacobson has in the past and will in the future provide certain
consulting services to the Company. See "Item 13. Certain Relationships And
Related Transactions."
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information at March 15, 1999, with respect
to ownership of the Company's common stock $0.01 par value per share (the
"Company Common Stock"), by (i) each beneficial owner of five percent or more of
the Company's Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers and (iv) all directors and officers as a group. For the
purpose of computing the percentage of the shares of Company Common Stock owned
by each person or group listed in this table, shares which are subject to
options exercisable within 60 days after March 15, 1999 have been deemed to be
outstanding and owned by such person or group, but have not been deemed to be
outstanding for the purpose of computing the percentage of the shares of Company
Common Stock owned by any other person. Except as indicated in the footnotes to
this table, the persons named in the table have sole voting and investment power
with respect to all shares of Company Common Stock shown as beneficially owned
by them.
<TABLE>
<CAPTION>
Shares
Beneficially Percent
Name and Address of Beneficial Owner Owned of Class
- ------------------------------------ ----- --------
<S> <C> <C>
Puma Limited Partnership(1)..................................................... 727,012 24.32%
101 Park Avenue
New York, New York 10176
Thomas R. Devlin(2)............................................................. 234,504 7.84%
1313 North Webb Road
P.O. Box 782170
Wichita, Kansas 67206
Benjamin R. Jacobson(3) ........................................................ 691,872 23.14%
595 Madison Avenue
New York, New York 10022
Stephen F. Mandel, Jr.(4)....................................................... 89,602 3.00%
James J. Morgan(5).............................................................. 19,162 *
David A. Roosevelt.............................................................. 2,856 *
Dennis D. Pedra(6).............................................................. 190,670 6.41%
80A Turnpike Road
Westborough, Massachusetts 01581
Paul V. Hoagland(7)............................................................. 114,132 3.84%
Raymond P. Barbrick............................................................. 7,467 *
Richmond A. Brittingham......................................................... 8,412 *
Gary S. Schwab.................................................................. 7,667 *
All directors and executive officers as a group (10 persons).................... 1,130,252 37.80%
</TABLE>
- ----------
* Less than 1%.
(1) Puma Limited Partnership, a New York limited partnership ("Puma")
previously held its interest in the Company through Puma's wholly-owned
subsidiary Holdings Group, Inc., a Delaware holding company ("HGI"). To
permit Puma to directly hold such shares, HGI was merged with and into the
Company pursuant to a merger agreement dated as of August 31, 1996 among
HGI, Puma and the Company.
(2) Includes 53,207 shares of Company Common Stock held by J.P. Acquisition
Fund II, L.P., a Delaware limited partnership ("JPAF II"), representing
Mr. Devlin's pro rata interest as a limited partner of JPAF II.
(3) Includes (a) 481,016 shares of Company Common Stock held by JPAF II, (b)
49,599 shares of Company Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days after September 30,
1998 held by Jacobson Partners and (c) 13,800 shares of Company Common
Stock held by trusts for the benefit of Mr. Jacobson's children, with
respect to which a third party is trustee and has voting control. JPAF,
Inc., a Delaware corporation, is the general partner of JPAF II and Mr.
Jacobson is president of JPAF, Inc. Mr. Jacobson is a general partner of
Jacobson Partners, which is the sole shareholder of JPAF, Inc. Mr.
Jacobson disclaims beneficial ownership of the shares described (i) in
clause (a) above, except to the extent of his general partnership interest
in JPAF II, and (ii) in clause (c) above.
(4) Includes 2,596 shares of Company Common held by Lone Spruce, L.P., 6,812
shares of Company Common Stock held by Lone Balsam, L.P. 6,812 shares of
Company Common Stock held by Lone Sequoia, L.P. and 73,382 shares of
Company Common Stock held by Lone Cypress, Ltd. Each of Lone Spruce, L.P.,
Lone Balsam, L.P. and Lone Sequoia, L.P., is a Delaware limited
partnership of which Lone Pine Associates LLC is the general partner. Mr.
Mandel is the managing member of Lone Pine Associates LLC. Lone Cypress
Ltd. is a Cayman Islands company of which Lone Pine Capital LLC is
<PAGE>
the investment manager. Mr. Mandel is the managing member of Lone Pine
Capital LLC. Mr. Mandel disclaims beneficial ownership of all such shares.
(5) Includes 6,651 shares of Company Common Stock held by JPAF II,
representing Mr. Morgan's pro rata interest as a limited partner of JPAF
II.
(6) Includes 30,000 shares of Company Common Stock held by trusts for the
benefit of Mr. Pedra's children, with respect to which Mr. Pedra's sister
is trustee and has sole voting control. Mr. Pedra disclaims beneficial
ownership of all such shares.
(7) Includes 14,000 shares of Company Common Stock held in custodial accounts
for the benefit of Mr. Hoagland's children, with respect to which Mr.
Hoagland is custodian and has sole voting control. Mr. Hoagland disclaims
beneficial ownership of all such shares.
Stockholders Agreement
The Company and the current stockholders of the Company are parties to a
Shareholders' Agreement, dated as of December 31, 1993 (the "Stockholders
Agreement").
The Stockholders Agreement provides, among other things, that (i) a
stockholder may not transfer his or its shares in the Company, whether
voluntarily or by operation of law, other than in certain limited circumstances
specified therein, including transfers through a right of first refusal
procedure, distributions by a partnership to its partners, and gifts, trust
contributions or bequests to or in favor of family members, (ii) the Company
shall have the option to purchase the shares of any stockholder who is a manager
of the Company following the termination of such stockholder's employment with
the Company for any reason at a purchase price equal to book value or fair
market value depending upon the reason for such termination as permitted under
the Indenture, (iii) if the Company fails to exercise its option to purchase as
described in the immediately preceding clause (ii), the remaining stockholders
shall have the option to purchase the applicable shares, (iv) in certain
circumstances, a stockholder seeking to transfer shares shall have the option to
require the Company to purchase such stockholder's shares, (v) no transfer of
shares may occur unless the transferee thereof agrees to be bound by the terms
of the Stockholders Agreement and (vi) all share certificates shall bear
customary legends and all share transfers must be in compliance with applicable
securities laws.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Acquisition, in consideration of certain financial advisory
services provided by Benjamin R. Jacobson to the Company, Mr. Jacobson received
from the Company a consulting fee with reimbursement of certain travel and other
incidental expenses. The amounts paid to Mr. Jacobson for financial consulting
fees were $330,000 for the year ended December 30, 1998 and $160,000 for each of
the two years ended December 31, 1997, and 1996. In addition, Jacobson was paid
$400,000 for consulting fees associated with obtaining the above mentioned
mortgages. In connection with the Acquisition, and in lieu of the Company's
arrangement with Mr. Jacobson, the Company entered into a financial advisory
services agreement with Jacobson Partners, Limited Partnership ("Jacobson
Partners") , a limited partnership of which Mr. Jacobson is the managing general
partner. Under this agreement, Jacobson Partners will provide various financial
advisory services to the Company, including, among other things, assistance in
preparing internal budgets, performing cash management activities, maintaining
and improving accounting and other management information systems, negotiating
financing arrangements, complying with public reporting and disclosure
requirements and communicating with creditors and investors. In consideration of
these services, Jacobson Partners will receive a consulting fee of $500,000 per
year together with reimbursement of certain travel and other incidental
expenses. The amounts paid to Jacobson for financial consulting fees were
$330,000 for the year ended December 30, 1998. The Company believes the
financial advisory services agreement was made on terms that are no less
favorable to the Company than those which could be obtained from an unrelated
party. In addition, Jacobson Partners received from the Company a $1.0 million
cash fee as compensation for Jacobson Partners' services as financial advisors
in connection with the Acquisition and related financing. Jacobson Partners is
the sole shareholder of the corporate general partner of JPAF II, which owns
approximately 16.1% of the outstanding common stock of the Company. Mr. Jacobson
is the Chairman of the Board of Directors of the Company. David A. Roosevelt, an
associate with Jacobson Partners, is a Director of the Company.
The Company has a nonqualified deferred compensation plan (the "Plan") for
certain officers and management personnel, which allows them to defer receiving
a portion of their compensation. This compensation is not taxable to the
employee or deductible to the Company for tax purposes until the compensation is
paid. An officer of the Company, who is also a participant in the Plan, is the
trustee of the Plan.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
(1) Financial Statements :
Consolidated Balance Sheets as of December 30, 1998 and December 31,
1997
Consolidated Statements of Operations for each of the years ended
December 30, 1998, December 31, 1997 and December 31, 1996.
Consolidated Statements of Stockholders' Equity for each of the
years ended December 30, 1998, December 31, 1997 and December 31,
1996.
Consolidated Statements of Cash Flows for each of the years ended
December 30, 1998, December 31, 1997 and December 31, 1996.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) Financial Statement Schedules:
Schedule II: Valuation and Qualifying Accounts
<PAGE>
(3) Listing of Exhibits
- --------------------------------------------------------------------------------
Exhibit
No. Description
--- -----------
- --------------------------------------------------------------------------------
2.1* Agreement and Plan of Merger, dated as of May 13, 1998 among
Bertucci's, Inc., NE Restaurant Company, Inc. ("NERCO") and
NERC Acquisition Corp.
- --------------------------------------------------------------------------------
3.1* Certificate of Incorporation of NERCO.
- --------------------------------------------------------------------------------
3.2* Certificate of Amendment of Certificate of Incorporation of
NERCO, dated August 1, 1998.
- --------------------------------------------------------------------------------
3.3* Certificate of Amendment of Certificate of Incorporation of
NERCO, dated August 20, 1998.
- --------------------------------------------------------------------------------
3.4* By-laws of NERCO.
- --------------------------------------------------------------------------------
3.5* Articles of Incorporation of Bertucci's of Baltimore County,
Inc., as amended.
- --------------------------------------------------------------------------------
3.6* Bylaws of Bertucci's of Baltimore County, Inc.
- --------------------------------------------------------------------------------
3.7* Articles of Incorporation of Bertucci's of White Marsh, Inc.
- --------------------------------------------------------------------------------
3.8* Bylaws of Bertucci's of White Marsh, Inc.
- --------------------------------------------------------------------------------
3.9* Articles of Incorporation of Bertucci's of Columbia, Inc.
- --------------------------------------------------------------------------------
3.10* Bylaws of Bertucci's of Columbia, Inc.
- --------------------------------------------------------------------------------
3.11* Articles of Incorporation of Bertucci's of Anne Arundel
County, Inc.
- --------------------------------------------------------------------------------
3.12* Bylaws of Bertucci's of Anne Arundel County, Inc.
- --------------------------------------------------------------------------------
3.13* Articles of Incorporation of Bertucci's of Bel Air, Inc.
- --------------------------------------------------------------------------------
3.14* Bylaws of Bertucci's of Bel Air, Inc.
- --------------------------------------------------------------------------------
3.15* Articles of Organization of Sal & Vinnie's Sicilian
Steakhouse, Inc.
- --------------------------------------------------------------------------------
3.16* By-Laws of Sal & Vinnie's Sicilian Steakhouse, Inc.
- --------------------------------------------------------------------------------
3.17* Articles of Organization of Berestco, Inc., as amended
- --------------------------------------------------------------------------------
3.18* By-Laws of Berestco, Inc.
- --------------------------------------------------------------------------------
3.19* Articles of Organization of Bertucci's Restaurant Corp., as
amended
- --------------------------------------------------------------------------------
3.20* By-Laws of Bertucci's Restaurant Corp.
- --------------------------------------------------------------------------------
3.21* Articles of Organization of Bertucci's, Inc., as amended
- --------------------------------------------------------------------------------
3.22* By-Laws of Bertucci's, Inc.
- --------------------------------------------------------------------------------
3.23* Articles of Organization of Bertucci's Securities Corporation
- --------------------------------------------------------------------------------
3.24* By-Laws of Bertucci's Securities Corporation
- --------------------------------------------------------------------------------
4.1* Indenture, date July 20, 1998 between NERCO and United States
Trust Company of New York ("U.S. Trust") as Trustee (including
the form of 10 3/4% Senior Note due July 15, 2008).
- --------------------------------------------------------------------------------
4.2* Supplemental Indenture, dated as of July 21, 1998 by and among
Bertucci's, Inc., Bertucci's Restaurant Corp., Bertucci's
Securities Corporation, Berestco, Inc., Sal & Vinnie's
Sicilian Steakhouse, Inc., Bertucci's of Anne Arundel County,
Inc., Bertucci's of Columbia, Inc., Bertucci's of Baltimore
County, Inc., Bertucci's of Bel Air, Inc. and Bertucci's of
White Marsh, Inc. (collectively, the "Guarantors"), NERCO and
U.S. Trust
- --------------------------------------------------------------------------------
4.3* Purchase Agreement, dated July 13, 1998 by and among NERCO,
Chase Securities Inc. and BancBoston Securities Inc.
- --------------------------------------------------------------------------------
4.4* Amendment No. 1 to the Purchase Agreement, dated July 21, 1998
by and among NERCO, Chase Securities Inc., BancBoston
Securities Inc. and the Guarantors
- --------------------------------------------------------------------------------
4.5* Exchange and Registration rights Agreement, dated July 20,
1998 by and among NERCO, Chase Securities Inc. and BancBoston
Securities Inc.
- --------------------------------------------------------------------------------
4.6* Amendment No. 1 to Exchange and Registration Rights Agreement,
dated July 21, 1998 by and among NERCO, Chase Securities Inc.,
BancBoston Securities Inc. and the Guarantors.
- --------------------------------------------------------------------------------
4.7* Form of Stockholders Agreement, dated as of December 31, 1993
between the stockholders of NERCO and NERCO.
- --------------------------------------------------------------------------------
4.8* Form of Stockholders Agreement, dated September 15, 1997 by
and among certain stockholders of NERCO and NERCO.
- --------------------------------------------------------------------------------
10.1* 1997 Equity Incentive Plan of NERCO, dated September 15, 1997
for certain key employees and directors of NERCO.
- --------------------------------------------------------------------------------
10.2* Form of NE Restaurant Company, Inc. 401(k) profit Sharing
Plan, dated January 1, 1996.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Exhibit
No. Description
--- -----------
- --------------------------------------------------------------------------------
10.3* Form of NE Restaurant Company Deferred Compensation Plan for
certain eligible executives of NERCO.
- --------------------------------------------------------------------------------
10.4* Employment Agreement by and between NE Restaurant Company
Limited Partnership, NE Restaurant (Glastonbury) Limited
Partnership and NE Restaurant (Cambridge) Limited
Partnership(collectively, the "Partnerships"), the respective
general partners of the Partnerships, NERCO, NE Restaurant
(Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and
Dennis D. Pedra, dated September 30, 1991 (the "Pedra
Employment Agreement").
- --------------------------------------------------------------------------------
10.5* Employment Agreement by and between NE Restaurant Company
Limited Partnership, NE Restaurant (Glastonbury) Limited
Partnership and NE Restaurant (Cambridge) Limited Partnership
(collectively, the "Partnerships"), the respective general
partners of the Partnerships, NERCO, NE Restaurant
(Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and
Paul V. Hoagland, dated September 30, 1991 (the "Hoagland
Employment Agreement").
- --------------------------------------------------------------------------------
10.6* Amendment to the Pedra Employment Agreement, dated December
31, 1993.
- --------------------------------------------------------------------------------
10.7* Amendment to the Hoagland Employment Agreement, dated December
31, 1993.
- --------------------------------------------------------------------------------
10.8* Form of Chili's Grill & Bar Restaurant Development Agreement,
dated May 17, 1994 between Brinker International, Inc. and
NERCO.
- --------------------------------------------------------------------------------
10.9* On The Border Restaurant Development Agreement, dated June 23,
1997 between Brinker International, Inc. and NERCO (including
form of Franchise Agreement)
- --------------------------------------------------------------------------------
10.10* Lease of Headquarters of the Company at 80A Turnpike Road,
Westborough, Massachusetts, dated September 30, 1997, as
amended on March 25, 1998.
- --------------------------------------------------------------------------------
10.11* Form of Credit Agreement among BankBoston, N.A., Chase Bank of
Texas, N.A. NERCO, the Guarantors and Bertucci's of Montgomery
County, Inc., dated as of July 21, 1998.
- --------------------------------------------------------------------------------
10.12* Form of Management Incentive Agreement.
- --------------------------------------------------------------------------------
10.13* Loan Agreement, dated August 6, 1997 by and between FFCA
Acquisition Corporation and NERC Limited Partnership.
- --------------------------------------------------------------------------------
10.14* First Amendment to Loan Agreement, dated August 6, 1997 by and
between FFCA Acquisition Corporation and NERC Limited
Partnership.
- --------------------------------------------------------------------------------
10.15* Form of Promissory Note between FFCA Acquisition Corporation
and NERC Limited Partnership.
- --------------------------------------------------------------------------------
10.16* Custom Distribution Agreement between Bertucci's Restaurant
Corp., Inc. and Ferraro Foods, Inc. dated May 13, 1998.
- --------------------------------------------------------------------------------
10.17* Distribution Agreement between NE Restaurant Company, Inc. and
Alliant Foodservice, Inc., dated June 25, 1997.
- --------------------------------------------------------------------------------
10.18* Form of Amendment to NE Restaurant Company, Inc. 401(k) Profit
Sharing Plan, dated April 29, 1996.
- --------------------------------------------------------------------------------
10.19* Form of Amendment of Chili's Grill & Bar Restaurant
Development Agreement, dated as of June 1, 1997 by and between
Brinker International, Inc. and NE Restaurant Company, Inc.
- --------------------------------------------------------------------------------
10.20* Form of Chili's Grill & Bar Restaurant Franchise Agreement
between Brinker International, Inc. and NE Restaurant Company,
Inc.
- --------------------------------------------------------------------------------
10.21* Financial Advisory Services Agreement, dated July 21, 1998 by
and between the Company and Jacobson Partners.
- --------------------------------------------------------------------------------
10.22* Loan Agreement, dated June 30, 1998 by and between FFCA
Acquisition Corporation and NERC Limited Partnership II.
- --------------------------------------------------------------------------------
10.23* Form of Promissory Note between FFCA Acquisition Corporation
and NERC Limited Partnership II.
- --------------------------------------------------------------------------------
10.24** Form of Sales contract between Berestco, Inc. and Pinnacle
Properties Management, Inc.
- --------------------------------------------------------------------------------
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
- --------------------------------------------------------------------------------
21.1* Subsidiaries of Registrant.
- --------------------------------------------------------------------------------
27.1(1) Financial Data Schedule
- --------------------------------------------------------------------------------
<PAGE>
- ----------
* Filed as an Exhibit, with the same Exhibit number, to Amendment No. 3 to
the Registrant's registration statement on Form S-4 filed with the
Securities and Exchange Commission on November 12, 1998.
** Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(1) Filed herewith.
(b) The Company did not file a Current Report on Form 8-K during the 4th
Quarter of fiscal 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NE RESTAURANT COMPANY, INC.
Registrant
By: /s/ Dennis Pedra
--------------------------------
Dennis Pedra, President
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Benjamin Jacobson Chairman of the Board, Director March 30, 1999
- ----------------------
Benjamin Jacobson
/s/ Dennis Pedra President, Director (Principal Executive March 30, 1999
- ---------------------- Officer)
Dennis Pedra
/s/ Paul Hoagland Vice President-Finance, Treasurer, March 30, 1999
- ---------------------- Director, (Principal Financial Officer),
Paul Hoagland (Principal Accounting Officer)
/s/ David Roosevelt Director March 30, 1999
- ----------------------
David Roosevelt
/s/ James Morgan Director March 30, 1999
- ----------------------
James Morgan
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
No. Description
--- -----------
- --------------------------------------------------------------------------------
2.1* Agreement and Plan of Merger, dated as of May 13, 1998 among
Bertucci's, Inc., NE Restaurant Company, Inc. ("NERCO") and
NERC Acquisition Corp.
- --------------------------------------------------------------------------------
3.1* Certificate of Incorporation of NERCO.
- --------------------------------------------------------------------------------
3.2* Certificate of Amendment of Certificate of Incorporation of
NERCO, dated August 1, 1998.
- --------------------------------------------------------------------------------
3.3* Certificate of Amendment of Certificate of Incorporation of
NERCO, dated August 20, 1998.
- --------------------------------------------------------------------------------
3.4* By-laws of NERCO.
- --------------------------------------------------------------------------------
3.5* Articles of Incorporation of Bertucci's of Baltimore County,
Inc., as amended.
- --------------------------------------------------------------------------------
3.6* Bylaws of Bertucci's of Baltimore County, Inc.
- --------------------------------------------------------------------------------
3.7* Articles of Incorporation of Bertucci's of White Marsh, Inc.
- --------------------------------------------------------------------------------
3.8* Bylaws of Bertucci's of White Marsh, Inc.
- --------------------------------------------------------------------------------
3.9* Articles of Incorporation of Bertucci's of Columbia, Inc.
- --------------------------------------------------------------------------------
3.10* Bylaws of Bertucci's of Columbia, Inc.
- --------------------------------------------------------------------------------
3.11* Articles of Incorporation of Bertucci's of Anne Arundel
County, Inc.
- --------------------------------------------------------------------------------
3.12* Bylaws of Bertucci's of Anne Arundel County, Inc.
- --------------------------------------------------------------------------------
3.13* Articles of Incorporation of Bertucci's of Bel Air, Inc.
- --------------------------------------------------------------------------------
3.14* Bylaws of Bertucci's of Bel Air, Inc.
- --------------------------------------------------------------------------------
3.15* Articles of Organization of Sal & Vinnie's Sicilian
Steakhouse, Inc.
- --------------------------------------------------------------------------------
3.16* By-Laws of Sal & Vinnie's Sicilian Steakhouse, Inc.
- --------------------------------------------------------------------------------
3.17* Articles of Organization of Berestco, Inc., as amended
- --------------------------------------------------------------------------------
3.18* By-Laws of Berestco, Inc.
- --------------------------------------------------------------------------------
3.19* Articles of Organization of Bertucci's Restaurant Corp., as
amended
- --------------------------------------------------------------------------------
3.20* By-Laws of Bertucci's Restaurant Corp.
- --------------------------------------------------------------------------------
3.21* Articles of Organization of Bertucci's, Inc., as amended
- --------------------------------------------------------------------------------
3.22* By-Laws of Bertucci's, Inc.
- --------------------------------------------------------------------------------
3.23* Articles of Organization of Bertucci's Securities Corporation
- --------------------------------------------------------------------------------
3.24* By-Laws of Bertucci's Securities Corporation
- --------------------------------------------------------------------------------
4.1* Indenture, date July 20, 1998 between NERCO and United States
Trust Company of New York ("U.S. Trust") as Trustee (including
the form of 10 3/4% Senior Note due July 15, 2008).
- --------------------------------------------------------------------------------
4.2* Supplemental Indenture, dated as of July 21, 1998 by and among
Bertucci's, Inc., Bertucci's Restaurant Corp., Bertucci's
Securities Corporation, Berestco, Inc., Sal & Vinnie's
Sicilian Steakhouse, Inc., Bertucci's of Anne Arundel County,
Inc., Bertucci's of Columbia, Inc., Bertucci's of Baltimore
County, Inc., Bertucci's of Bel Air, Inc. and Bertucci's of
White Marsh, Inc. (collectively, the "Guarantors"), NERCO and
U.S. Trust
- --------------------------------------------------------------------------------
4.3* Purchase Agreement, dated July 13, 1998 by and among NERCO,
Chase Securities Inc. and BancBoston Securities Inc.
- --------------------------------------------------------------------------------
4.4* Amendment No. 1 to the Purchase Agreement, dated July 21, 1998
by and among NERCO, Chase Securities Inc., BancBoston
Securities Inc. and the Guarantors
- --------------------------------------------------------------------------------
4.5* Exchange and Registration rights Agreement, dated July 20,
1998 by and among NERCO, Chase Securities Inc. and BancBoston
Securities Inc.
- --------------------------------------------------------------------------------
4.6* Amendment No. 1 to Exchange and Registration Rights Agreement,
dated July 21, 1998 by and among NERCO, Chase Securities Inc.,
BancBoston Securities Inc. and the Guarantors.
- --------------------------------------------------------------------------------
4.7* Form of Stockholders Agreement, dated as of December 31, 1993
between the stockholders of NERCO and NERCO.
- --------------------------------------------------------------------------------
4.8* Form of Stockholders Agreement, dated September 15, 1997 by
and among certain stockholders of NERCO and NERCO.
- --------------------------------------------------------------------------------
10.1* 1997 Equity Incentive Plan of NERCO, dated September 15, 1997
for certain key employees and directors of NERCO.
- --------------------------------------------------------------------------------
10.2* Form of NE Restaurant Company, Inc. 401(k) profit Sharing
Plan, dated January 1, 1996.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Exhibit
No. Description
--- -----------
- --------------------------------------------------------------------------------
10.3* Form of NE Restaurant Company Deferred Compensation Plan for
certain eligible executives of NERCO.
- --------------------------------------------------------------------------------
10.4* Employment Agreement by and between NE Restaurant Company
Limited Partnership, NE Restaurant (Glastonbury) Limited
Partnership and NE Restaurant (Cambridge) Limited
Partnership(collectively, the "Partnerships"), the respective
general partners of the Partnerships, NERCO, NE Restaurant
(Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and
Dennis D. Pedra, dated September 30, 1991 (the "Pedra
Employment Agreement").
- --------------------------------------------------------------------------------
10.5* Employment Agreement by and between NE Restaurant Company
Limited Partnership, NE Restaurant (Glastonbury) Limited
Partnership and NE Restaurant (Cambridge) Limited Partnership
(collectively, the "Partnerships"), the respective general
partners of the Partnerships, NERCO, NE Restaurant
(Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and
Paul V. Hoagland, dated September 30, 1991 (the "Hoagland
Employment Agreement").
- --------------------------------------------------------------------------------
10.6* Amendment to the Pedra Employment Agreement, dated December
31, 1993.
- --------------------------------------------------------------------------------
10.7* Amendment to the Hoagland Employment Agreement, dated December
31, 1993.
- --------------------------------------------------------------------------------
10.8* Form of Chili's Grill & Bar Restaurant Development Agreement,
dated May 17, 1994 between Brinker International, Inc. and
NERCO.
- --------------------------------------------------------------------------------
10.9* On The Border Restaurant Development Agreement, dated June 23,
1997 between Brinker International, Inc. and NERCO (including
form of Franchise Agreement)
- --------------------------------------------------------------------------------
10.10* Lease of Headquarters of the Company at 80A Turnpike Road,
Westborough, Massachusetts, dated September 30, 1997, as
amended on March 25, 1998.
- --------------------------------------------------------------------------------
10.11* Form of Credit Agreement among BankBoston, N.A., Chase Bank of
Texas, N.A. NERCO, the Guarantors and Bertucci's of Montgomery
County, Inc., dated as of July 21, 1998.
- --------------------------------------------------------------------------------
10.12* Form of Management Incentive Agreement.
- --------------------------------------------------------------------------------
10.13* Loan Agreement, dated August 6, 1997 by and between FFCA
Acquisition Corporation and NERC Limited Partnership.
- --------------------------------------------------------------------------------
10.14* First Amendment to Loan Agreement, dated August 6, 1997 by and
between FFCA Acquisition Corporation and NERC Limited
Partnership.
- --------------------------------------------------------------------------------
10.15* Form of Promissory Note between FFCA Acquisition Corporation
and NERC Limited Partnership.
- --------------------------------------------------------------------------------
10.16* Custom Distribution Agreement between Bertucci's Restaurant
Corp., Inc. and Ferraro Foods, Inc. dated May 13, 1998.
- --------------------------------------------------------------------------------
10.17* Distribution Agreement between NE Restaurant Company, Inc. and
Alliant Foodservice, Inc., dated June 25, 1997.
- --------------------------------------------------------------------------------
10.18* Form of Amendment to NE Restaurant Company, Inc. 401(k) Profit
Sharing Plan, dated April 29, 1996.
- --------------------------------------------------------------------------------
10.19* Form of Amendment of Chili's Grill & Bar Restaurant
Development Agreement, dated as of June 1, 1997 by and between
Brinker International, Inc. and NE Restaurant Company, Inc.
- --------------------------------------------------------------------------------
10.20* Form of Chili's Grill & Bar Restaurant Franchise Agreement
between Brinker International, Inc. and NE Restaurant Company,
Inc.
- --------------------------------------------------------------------------------
10.21* Financial Advisory Services Agreement, dated July 21, 1998 by
and between the Company and Jacobson Partners.
- --------------------------------------------------------------------------------
10.22* Loan Agreement, dated June 30, 1998 by and between FFCA
Acquisition Corporation and NERC Limited Partnership II.
- --------------------------------------------------------------------------------
10.23* Form of Promissory Note between FFCA Acquisition Corporation
and NERC Limited Partnership II.
- --------------------------------------------------------------------------------
10.24** Form of Sales contract between Berestco, Inc. and Pinnacle
Properties Management, Inc.
- --------------------------------------------------------------------------------
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
- --------------------------------------------------------------------------------
21.1* Subsidiaries of Registrant.
- --------------------------------------------------------------------------------
27.1(1) Financial Data Schedule
- --------------------------------------------------------------------------------
<PAGE>
- ----------
* Filed as an Exhibit, with the same Exhibit number, to Amendment No. 3 to
the Registrant's registration statement on Form S-4 filed with the
Securities and Exchange Commission on November 12, 1998.
** Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(1) Filed herewith.
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 30,
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 247,675 $ 5,456,110
Credit card receivables 297,221 1,115,925
Inventories 592,143 2,063,964
Prepaid expenses and other current assets 184,494 866,643
Prepaid and current deferred income taxes 111,504 10,530,585
Pre-opening costs, net of accumulated amortization 159,728 1,135,055
------------- -------------
Total current assets 1,592,765 21,168,282
------------- -------------
Property and Equipment, at cost:
Land and land right 3,792,524 8,190,477
Buildings 4,216,126 11,676,629
Leasehold improvements 16,623,160 65,525,594
Furniture and equipment 15,155,666 38,436,293
------------- -------------
39,787,476 123,828,993
Less - Accumulated depreciation (9,992,744) (16,340,923)
------------- -------------
29,794,732 107,488,070
Construction work in process 1,157,813 3,309,822
------------- -------------
Net property and equipment 30,952,545 110,797,892
Deferred Taxes, noncurrent 62,388 --
Goodwill, net -- 32,958,037
Deferred Finance Costs, net 1,415,402 9,116,719
Assets Held for Sale -- 6,601,000
Liquor licenses 1,195,887 3,138,464
Restricted investments 931,676 1,170,043
Other assets, net 1,186,163 1,781,168
------------- -------------
TOTAL ASSETS $ 37,336,826 $ 186,731,605
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of mortgage loan and bonds payable $ 632,538 $ 843,708
Accounts payable 3,987,794 10,649,346
Accrued expenses 5,298,000 27,790,614
Capital lease obligation- current portion 79,997 72,647
------------- -------------
Total current liabiliites 9,998,329 39,356,315
Line of Credit Loans 13,500,000 --
Capital lease obligation, net of current portion 232,490 150,739
Mortgage Loan Payable, net of current portion 23,463,313 28,151,894
Bonds Payable, net of current portion -- 100,000,000
Deferred Rent and Other Long-Term Liabilites 3,249,548 4,960,790
------------- -------------
Total liabilities 50,443,680 172,619,738
Commitments and Contingencies
Stockholders' Equity:
Common stock, $01 par value
Authorized 4,000,000 shares
Issued - 2,006,000 shares at December 31, 1998
and 3,666,370 shares at December 31, 1998 20,060 36,664
Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070)
Additional paid in capital 22,440 29,053,920
Accumulated deficit (5,132,284) (6,961,647)
------------- -------------
Total stockholders' equity (deficit) (13,106,854) 14,111,867
------------- -------------
$ 37,336,826 $ 186,731,605
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-1
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended:
December 31, December 31, December 30,
------------- ------------- -------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales $ 70,094,027 $ 81,363,751 $ 160,805,177
------------- ------------- -------------
Cost of Sales and Expenses
Cost of sales 21,203,336 23,383,851 44,376,765
Operating expenses 34,267,183 40,931,889 84,540,209
General and administrative expenses 3,678,875 4,206,862 8,203,830
Deferred rent, depreciation and
amortization 3,679,095 3,910,946 10,920,968
Taxes other than income 3,207,253 3,828,798 7,490,316
------------- ------------- -------------
Total cost of sales and expenses 66,035,742 76,262,346 155,532,088
------------- ------------- -------------
Income from operations 4,058,285 5,101,405 5,273,089
Interest Expense, net 1,053,432 1,917,605 8,004,260
------------- ------------- -------------
Income (loss) before income tax expense (benefit) 3,004,853 3,183,800 (2,731,171)
Income Tax Expense (Benefit) 1,046,407 1,083,470 (901,808)
------------- ------------- -------------
Net Income (Loss) $1,958,446 $2,100,330 $(1,829,363)
============= ============= =============
Basic and Diluted Earnings (Loss) per Share $ 0.98 $ 1.22 $ (0.89)
Weighted Average Shares Outstanding 2,000,000 1,722,918 2,053,692
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-2
<PAGE>
NE RESTAURANT COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 30, 1998, December 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Common Stock Treasury Stock
----------------------------------------------------------
Number of $.01 per Number of
Shares Share Shares Amount
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1995 2,000,000 $ 20,000 -- $ --
Net Income -- -- -- --
------------ ------------ ------------ ------------
Balance December 31, 1996 2,000,000 20,000 -- --
Net Income -- -- -- --
Issuance of common stock 6,000 60 -- --
Cash dividend and return of capital -- -- -- --
Purchase of treasury stock -- -- (716,429) (8,332,069)
Sale of treasury stock -- -- 27,085 314,999
------------ ------------ ------------ ------------
Balance December 31, 1997 2,006,000 20,060 (689,344) (8,017,070)
Net Loss -- -- -- --
Additional Stock Issued and Paid
in Capital 1,660,370 16,604 -- --
------------ ------------ ------------ ------------
Balance December 31, 1998 3,666,370 $ 36,664 (689,344) $ (8,017,070)
============ ============ ============ ============
<CAPTION>
(Accumulated Total
Deficit) Stockholders'
Additional Paid Retained Equity
In Capital Earnings (Deficit)
<S> <C> <C> <C>
Balance December 31, 1995 $ 4,447,933 $ 3,030,867 $ 7,498,800
Net Income -- 1,958,446 1,958,446
------------ ------------ ------------
Balance December 31, 1996 4,447,933 4,989,313 9,457,246
Net Income -- 2,100,330 2,100,330
Issuance of common stock 22,440 -- 22,500
Cash dividend and return of capital (4,447,933) (12,221,927) (16,669,860)
Purchase of treasury stock -- -- (8,332,069)
Sale of treasury stock -- -- 314,999
------------ ------------ ------------
Balance December 31, 1997 22,440 (5,132,284) (13,106,854)
Net Loss -- (1,829,363) (1,829,363)
Additional Stock Issued and Paid in Capital 29,031,480 -- 29,048,084
------------ ------------ ------------
Balance December 31, 1998 $ 29,053,920 $ (6,961,647) $ 14,111,867
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31, December 31, December 30,
------------- ------------- -------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ 1,958,446 $ 2,100,330 $ (1,829,363)
------------- ------------- -------------
Adjustments to reconcile net income/(loss)
to net cash provided by operating
activities
Depreciation, amortization and deferred rent 3,679,095 3,910,946 10,920,968
Deferred Income Taxes (271,789) (34,243) (1,570,892)
Changes in operating assets and liabilities
Refundable and pre-paid income taxes 133,091 -- (1,265,572)
Inventories (53,740) 115,026 (267,887)
Prepaid expenses, receivables and other (219,213) 229,495 (335,987)
Accrued expenses 931,398 753,267 9,642,444
Accounts payable (412,554) 1,376,364 3,041,742
Other operating assets and liabilities (115,125) 65,595 (1,113,121)
------------- ------------- -------------
Total adjustments 3,671,163 6,416,450 19,051,695
------------- ------------- -------------
Net cash provided by operating activities 5,629,609 8,516,780 17,222,332
Cash Flows from Investing Activities
Business acquired, net of cash -- -- (89,358,175)
Additions to property and equipment (7,946,034) (4,478,755) (19,354,475)
Development and franchise fees paid (160,000) (320,000) (240,000)
Acquisition of liquor licenses (61,937) (20,464) (64,301)
Additions to preopening costs (730,021) (392,371) (1,954,082)
------------- ------------- -------------
Net cash used in investing activities (8,897,992) (5,211,590) (110,971,033)
------------- ------------- -------------
Cash Flows from financing activities
Borrowings of mortgage loans -- 24,250,000 5,677,000
Repayments of Mortgage loans -- (154,149) (802,249)
Financing costs -- (1,439,402) (7,876,598)
Cash Dividend Paid -- (12,221,927) --
Return of capital -- (4,447,933) --
Issuance of common shares -- 22,500 29,048,084
Repurchase of treasury shares -- (8,260,827) --
Sale of treasury shares -- 243,757 --
Principal payments under capital lease obligations (23,223) (85,463) (89,101)
Net (payments) borrowings under lines of credit 3,305,000 (1,375,000) (27,000,000)
Borrowings of bonds payable -- 100,000,000
------------- ------------- -------------
Net cash provided by (used in) financing activities 3,281,777 (3,468,444) 98,957,136
------------- ------------- -------------
Net Increase (Decrease) in Cash 13,394 (163,254) 5,208,435
Cash, beginning of year 397,535 410,929 247,675
------------- ------------- -------------
Cash, end of year $ 410,929 $ 247,675 $ 5,456,110
============= ============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of amounts capitalized $ 1,067,325 $ 1,946,811 $ 3,756,100
============= ============= =============
Cash paid for income taxes $ 1,151,186 $ 1,217,812 $ 457,000
============= ============= =============
</TABLE>
During 1996, a capital lease obligation of approximately $400,000 was incurred
when the Company entered into a lease for new equipment.
F-4
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Operations
NE Restaurant Company, Inc. (a Delaware corporation) (the "Company") was
incorporated on January 1, 1994. On January 1, 1994, the partners of NE
Restaurant Holdings Group (the "Group") transferred 100% of their respective
partnership interests in exchange for an aggregate of 2,000,000 shares of the
common stock of the Company. All significant leases, franchise agreements and
other contracts were assigned from the Group to the Company.
The Company was formed to acquire and operate restaurants situated in
Massachusetts, New Hampshire, Maine, Vermont, Rhode Island, Connecticut and
portions of New York. As of December 30, 1998, the Company operated 33 Chili's
and four On The Border restaurants in five New England states. The restaurants
are operated under franchise agreements with Brinker International (a Texas
corporation) ("Brinker"). The restaurants offer a full bar and dining service
featuring a limited menu of broadly appealing food items prepared daily
according to special Chili's and On The Border recipes.
On August 6, 1997, the Company formed a wholly-owned limited partnership,
NERC Limited Partnership ("NERCLP"), to obtain the mortgage loans from FFCA
discussed below. On April 3, 1998, the Company formed a wholly owned limited
partnership, NERC Limited Partnership II ("NERCLPII") to obtain the additional
FFCA loans discussed below.
In July 1998, the Company completed its acquisition of Bertucci's, a
publicly owned restaurant company. As of December 30, 1998, the Company owned
and operated 89 full-service casual dining, Italian-style restaurants under the
name Bertucci's Brick oven Pizzeria located primarily in the northeastern and
Mid-Atlantic United States and one Sal and Vinnie's Steakhouse located in
Massachusetts.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Change in Year End. In 1998, the Company changed its fiscal year to the 52
or 53 week period ended on the Wednesday closest to December 31st. Fiscal years
prior to 1998 ended on December 31st. Each of the years presented consists of 52
weeks.
(2) Acquisition
On July 21, 1998, the Company through a wholly owned subsidiary, NE
Restaurant Acquisition Corp., completed its acquisition of Bertucci's Inc.
("Bertucci's") pursuant to the terms of an Agreement and Plan of Merger dated as
of May 13, 1998 (the "Acquisition"). The Company purchased all of the issued and
outstanding shares of Bertucci's common stock at a price of $10.50 per share.
The total purchase price was $89.4 million. NE Restaurant Acquisition Corp. had
no operations prior to the acquisition and was subsequently merged into the
Company. In connection with the acquisition, the Company sold $100,000,000
principal amount of 10 3/4% Senior Notes due July 15, 2008. The net proceeds
along with equity financing of approximately $29 million were used to consummate
the Acquisition, repay certain outstanding indebtedness of the Company and
Bertucci's and pay fees and expenses incurred in connection with the financing
and the Acquisition.
The purchase price, including expenses related to the acquisition has been
allocated to assets and liabilities based on estimated fair market values on
July 21, 1998. The difference between the purchase price and the net assets
acquired of $34 million has been recorded as Goodwill and is being amortized
over 15 years. The amortization for the period from the date of Acquisition to
December 30, 1998 was approximately $1.0 million.
F-5
<PAGE>
The purchase price has been allocated to assets acquired and liabilities
assumed, as follows (dollars in thousands):
Cash 3,669
Accounts receivable $ 204
Inventories 1,204
Other current assets 2,982
Property and equipment 67,976
Assets held for sale 6,601
Other assets 7,353
Accounts payable (3,620)
Accrued liabilities (12,851)
Line of Credit and Notes Payable (13,525)
Other liabilities (929)
--------
Net Assets Acquired 59,037
Goodwill 33,963
Total purchase price 93,027
Cash Acquired (3,669)
--------
Net Purchase Price $ 89,358
========
Assets Held for Sale
The acquisition of Bertucci's included 90 Bertucci's restaurants and one
Sal & Vinnie's restaurant. The Company has decided to close 18 underperforming
Bertucci's restaurants. In addition, the Company has decided to sell the former
Bertucci's headquarters located in Massachusetts. The assets related to these
locations, which are primarily property and equipment, have been assigned a
value of approximately $6.6 million based on estimated sale proceeds. From the
date of the Acquisition to December 30, 1998, these locations had combined net
sales of approximately $18.7 million and a combined approximate $889,000 loss
from operations. Any operating profit or loss related to these locations held
for sale are and will be included in the consolidated statement of income
through the date of sale, as the operating locations to be sold had not been
identified at the date of the Acquisition. It is anticipated that the closing
and sale of the above assets will be completed by the fall of 1999.
As of the date of acquisition, the Company accrued approximately $3
million related to closing these locations, consisting of estimated lease
commitments beyond the closings and certain exit costs. As of December 30,
1998, these accrued costs are included in accrued expenses. Any additional
restaurant closing costs and any gain/(loss) on the sales or the ultimate
disposition of these locations has been or will be treated as an adjustment
to the original purchase price allocation.
F-6
<PAGE>
The following presents the approximate unaudited proforma consolidated
statements of income of the Company for the years ended December 30, 1998 and
December 31, 1997. The statements give proforma effect to the acquisition of
Bertucci's as if the acquisition had occurred on January 1, 1997 the sale of
$100,000,000 principal amount of 10.75% Notes and the closing of the
restaurant locations discussed above.
(In thousands, except where noted)
Year Ended Year Ended
December 31, December 30,
1997 1998
--------- ---------
Net Sales $ 218,084 $ 243,414
Costs and Expenses
Cost of Sales 57,486 64,980
Operating expenses 112,037 129,163
General & Administrative expenses 12,353 11,604
Deferred Rent, Depreciation &
Amortization 16,124 18,167
Taxes other than income 10,819 11,799
--------- ---------
Total costs and expenses 208,819 235,713
Operating Income 9,265 7,701
Interest Expense, net 12,998 14,474
--------- ---------
Loss before income taxes (3,733) (6,773)
Income taxes benefit (979) (1,838)
--------- ---------
Net loss ($ 2,754) ($ 4,935)
========= =========
In computing the proforma earnings, earnings have been reduced by the net
interest expense on indebtedness incurred in connection with the acquisition and
related amortization of deferred finance costs. In addition, earnings have been
increased by the losses incurred by the locations to be closed discussed above
and decreased by the amortization of goodwill related to the acquisition. The
proforma information presented does not purport to be indicative of the results
which would have been reported if these transactions had occurred on January 1,
1997, or which may be reported in the future.
(3) Summary of Significant Accounting Policies
Reclassification
Certain reclassifications have been made to prior year financial
statements to make them consistent with the current year's presentation.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
Inventories
Inventories are carried at the lower of first-in, first-out cost or market
value, and consist of the following:
1997 1998
---------- ----------
Food .......................................... $ 287,226 $1,190,961
Liquor ........................................ 304,917 664,560
Supplies ...................................... -- 0 -- 208,443
---------- ----------
Total inventory .......................... $ 592,143 $2,063,964
========== ==========
Property and Equipment
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method to charge the cost
of properties to expense over the estimated useful lives of the assets. The
lives used are as follows:
Asset Classification Estimated Useful Life
- -------------------- ---------------------
Buildings 20-40 years
Leasehold improvements Shorter of Term of the lease
(ranging between 10-20 years)
Furniture, machinery and equipment or life of asset 3-10 years
Included in furniture and equipment in the accompanying consolidated
balance sheets is smallwares. The Company capitalizes a normal complement of
smallwares for each location prior to the store's opening date and expenses all
smallwares purchased after each store's opening date.
Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
The Company's long-lived assets consist primarily of goodwill, real estate
and leasehold improvements related to its restaurant operations. SFAS No. 121
requires management to consider whether long-lived assets have been impaired
by comparing gross future cash flows expected to be generated from utilizing
these assets to their carrying amounts. If cash flows are not sufficient to
recover the carrying amount of the assets, an impairment has occurred and the
assets should be written down to their fair market value. Significant
estimates and assumptions regarding future sales, cost trends, productivity
and market maturity are required to be made by management in order to test
for impairment under this standard. Based on current facts, estimates and
assumptions, management believes that no assets are impaired under this
standard. There is no assurance that management's estimates and assumptions
will prove correct.
Land Right
In 1994, the Company executed an agreement to prepay the rent associated
with a 99-year lease for land in Southington, Connecticut. Prepaid rental
payments totaled $735,000 and are reflected as a land right in the accompanying
consolidated balance sheets. The lease is renewable for an additional 99 years
for a payment of $1.
Capitalized Interest
The Company capitalizes interest costs during the construction period on
capital expenditures funded by debt. Total interest costs incurred and amounts
capitalized are as follows:
1996 1997 1998
---------- ---------- ----------
Total interest expense ........ $1,151,490 $1,961,428 $8,200,344
Less--Amount capitalized ...... 98,058 43,823 196,084
---------- ---------- ----------
Interest expense, net of amounts
capitalized ...................... $1,053,432 $1,917,605 $8,004,260
========== ========== ==========
F-8
<PAGE>
Other Assets
Other assets are comprised partially of development and franchise fees
(see Note 10) and trademarks. Development fees are amortized over seven years,
and franchise fees are amortized over the life of the franchise agreements (20
years). Trademarks are amortized over 25 years. Accumulated amortization of
these assets amounts to approximately $509,000 and $303,000 at December 30, 1998
and December 31, 1997, respectively.
Other assets also include investments restricted for the payment of
certain officers' deferred compensation. These investments are stated at market
value at December 30, 1998 and December 31, 1997. Since these securities are
from time to time bought and sold at the discretion of the officers they are
classified as trading securities.
Pre-opening Costs
Capitalized pre-opening costs include the direct and incremental costs
typically associated with the opening of a new restaurant. These costs primarily
consist of costs incurred to develop new restaurant management teams; travel and
lodging for both the training and opening unit management teams; and the food,
beverage and supplies costs incurred to perform role-play testing of all
equipment, concept systems and recipes. Subsequent to the restaurant opening,
costs are amortized over a 12-month period. Accumulated amortization of these
costs at December 30, 1998 and December 31, 1997 amounted to approximately
$1,364,000 and $188,000, respectively.
New Accounting Pronouncements
In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP
98-5"), Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998, although early application is
encouraged. Initial application of SOP 98-5 should be as of the beginning of the
fiscal year in which it is first adopted and should be reported as a cumulative
effect of a change in accounting principle.
The Company has adopted SOP 98-5 as of January 1, 1999. Upon adoption, the
Company incurred a cumulative effect of a change in accounting principle of
approximately $1.1 million in 1999. This write off was primarily for unamortized
preopening costs which were previously amortized over the 12-month period
subsequent to a restaurant opening.
Accrued Liabilities
Accrued liabilities consist of the following as of December 30, 1998 and
December 31, 1997
1997 1998
----------- -----------
Accrued occupancy costs $ 687,622 $ 1,418,327
Accrued payroll and related benefits 2,305,483 9,490,222
Accrued interest 71,199 4,800,362
Accrued advertising 421,855 1,741,820
Accrued royalties 362,947 1,581,382
Unredeemed gift certificates 772,164 1,857,568
Accrued sales tax 378,568 623,958
Accrued income taxes -- 195,932
Store closing reserves -- 3,040,000
Other accrued liabilities 298,162 3,041,043
----------- -----------
$ 5,298,000 $27,790,614
=========== ===========
F-9
<PAGE>
Deferred Finance Costs
Underwriting, legal and other direct costs incurred in connection with the
issuance of the senior notes and mortgages discussed below have been capitalized
and are being amortized over the life of the related borrowings.
Liquor Licenses
Liquor licenses purchased are accounted for at the lower of cost or
market. Annual renewal fees are expensed as incurred.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable, line
of credit loans and long-term debt. The carrying amounts of the Company's cash
and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short-term nature of these instruments. The Senior Bank
Facility loans bear interest at a variable market rate and therefore, the
carrying amount approximates fair value. The fair value of the Company's
senior notes and mortgage loans based on quoted market prices for similar
issues approximate the current carrying value.
(4) Income Taxes
The Company accounts for income taxes under the liability method in
accordance with SFAS 109. The components of the provision for income taxes
for the years ended December 30, 1998, December 31, 1997, and December 31,
1996 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current--
Federal ................................. $ 1,016,485 $ 704,254 $ 460,329
State ................................... 301,711 304,834 208,755
----------- ----------- -----------
1,318,196 1,009,088 669,084
----------- ----------- -----------
Deferred--
Federal .................................. (278,597) 56,835 (1,080,772)
State .................................... 6,808 17,547 (490,120)
----------- ----------- -----------
(271,789) 74,382 (1,570,892)
----------- ----------- -----------
Total (benefit)/provision for income taxes $ 1,046,407 $ 1,083,470 $ (901,808)
=========== =========== ===========
</TABLE>
A reconciliation of the amount computed by applying the statutory federal
income tax rate of 34% to income (loss) before taxes for the years ended
December 30, 1998, December 31, 1997, and December 31, 1996 are as follows:
1996 1997 1998
----------- ----------- -----------
Income tax expense (benefit) computed
at federal statutory rate $ 1,020,821 $ 1,082,492 $ (928,598)
State taxes, net of federal benefit 204,326 212,771 (216,253)
FICA tax credit (180,756) (216,253) (210,000)
Targeted jobs tax credit -- (1,897) (3,197)
Goodwill amortization -- -- 484,953
Other 2,016 6,357 (28,713)
----------- ----------- -----------
Income tax provision (benefit) $ 1,046,407 $ 1,083,470 $ (901,808)
=========== =========== ===========
F-10
<PAGE>
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 30, 1998 and December 31, 1997 are as follows:
1997 1998
------------ ------------
Deferred tax assets:
Deferred rent $ 933,407 $ 1,009,744
Store closing write downs and liabilities -- 7,467,000
Deferred and accrued compensation 425,952 549,223
Accrued expenses and other 13,882 1,658,012
------------ ------------
1,373,241 10,683,979
------------ ------------
Deferred tax liabilities--
Accelerated tax depreciation (984,220) (971,239)
Pre-opening costs (64,322) (344,094)
Liquor licenses (150,807) (118,577)
------------ ------------
(1,199,349) (1,433,910)
------------ ------------
Total net deferred tax assets $ 173,892 $ 9,250,069
============ ============
Current portion $ 111,504 $ 9,265,011
============ ============
Noncurrent portion $ 62,388 $ (14,942)
============ ============
No valuation allowance has been provided as the Company estimates that all of
the tax assets will be realized.
(5) Senior Bank Facility
During 1998, the Company entered into the Senior Bank Facility with
BankBoston, N.A. and Chase Bank of Texas, N.A (the "Banks"). The Senior Bank
Facility replaced the existing Line-of-Credit Loans between the Company and
BankBoston. The Senior Bank Facility is secured by substantially all the
tangible and intangible assets of the Company and its subsidiaries, other than
NERCLP. The Senior Bank Facility is in effect until August 2001, under which the
Company may borrow up to $20,000,000 and will include a $1,000,000 sub-limit for
the issuance of letters of credit. The Company pays a commitment fee of 0.3750%
on the aggregate undrawn portion of the Senior Bank Facility. Borrowings bear
interest at the Company's option of either, the LIBOR rate, as defined in the
agreement, plus an applicable margin based on the Company's ratio of debt to
EBITDA, or the Base Rate, as defined in the agreement, plus an applicable margin
based on the Company's ratio of debt to EBITDA. The weighted average interest
rate on the line of credit loans and the Senior Bank Facility during months with
outstanding borrowings in 1998 was 7.75%. No borrowings were outstanding as of
December 30, 1998.
The loan agreement contains various restrictive covenants that, among
other thing, require the Company to comply with specified financial ratios and
tests, including minimum interest coverage, minimum fixed charge coverage, and
maximum leverage ratios, minimum net worth levels and maximum capital
expenditure amounts. The Company was in compliance with or had received
waivers relative to these covenants at December 30, 1998.
(6) Capital Lease Obligation
During 1996, the Company entered into a capital lease with the Bank for
restaurant equipment. At the expiration of the lease in 2001, the Company may
purchase the equipment at the then fair market value.
The minimum lease payments due under the lease as of December 30, 1998 are
as follows:
Lease
Payments to
be Made
-------
Year
1999 ....................................................... 92,398
2000 ....................................................... 92,398
2001 ....................................................... 69,301
---------
254,097
Less--Interest ............................................. 30,711
---------
$ 223,386
=========
Current portion of obligation............................... $ 72,647
=========
Long-term portion of obligation............................. $ 150,739
=========
F-11
<PAGE>
(7) Mortgage Loans and Bond Payable
On August 6, 1997, NERCLP entered into a loan agreement (the "Loan
Agreement") with FFCA Acquisition Corporation ("FFCA") in the aggregate amount
of $22,400,000 (the "Initial FFCA Loans"), evidenced by promissory notes
maturing on various dates from September 2002 through September 2017, with
interest at 9.67% per annum. Proceeds from the FFCA Loans were used to pay the
Company for real estate assets sold and transferred to NERCLP. The Company then
used the sale proceeds to make certain payments to its shareholders (see Note 13
for further discussion). NERCLP mortgaged 17 restaurant properties to FFCA as
collateral for the Initial FFCA Loans. On or about August 28, 1997, NERCLP
obtained additional financing from FFCA in the aggregate amount of $1,850,000
(the "1997 Additional FFCA Loans"), evidenced by promissory notes maturing on
various dates from September 2007 through September 2017, with interest at
9.701% per annum. The 1997 Additional FFCA Loans were collateralized by
mortgages on three restaurant properties. Between July 2, 1998 and December 10,
1998, NERCLPII obtained additional financing from FFCA in the aggregate amount
of $5,677,000 (the "1998 Additional FFCA Loans", which together with the Initial
FFCA Loans and the 1997 Additional FFCA Loans are hereinafter referred to as the
"FFCA Loans"), evidenced by promissory notes maturing on various dates from
January 2006 to January 2019, with interest rates ranging from 8.440% to 9.822%
per annum. The 1998 Additional FFCA Loans were collateralized by mortgages on 4
restaurant properties. The net book value of all properties covered by mortgages
granted to FFCA on the dates of borrowing was $32,091,000. For the years ended
December 30, 1998 and December 31, 1997, interest related to the FFCA Loans was
$2,362,000 and $708,000, respectively.
The Loan Agreements with FFCA contain restrictive covenants that requires
the maintenance of Fixed Charge Coverage Ratios of 1.25:1, as determined on each
December 31, with respect to each of the FFCA mortgaged restaurant properties
individually. "Fixed Charge Coverage Ratio" is defined in the Loan Agreement to
mean the ratio of (a) the sum of net income, depreciation and amortization,
interest expense and operating lease expense, less a corporate overhead
allocation equal to 5% of gross sales, for an FFCA mortgaged restaurant property
to (b) the sum of FFCA debt service payments, equipment lease and equipment loan
payments and ground lease rental payments for such restaurant property. If the
Fixed Charge Coverage Ratio is not achieved by any individual restaurant, the
Company is required to pay FFCA an amount sufficient to comply with the Fixed
Charge Coverage Ratio. The Company was in compliance with these covenants as of
December 30, 1998.
Existing loan documents between FFCA, NERCLP and NERCLPII are
cross-defaulted and cross-collateralized with all other loan agreements,
existing or forthcoming, between FFCA, NERCLP and NERCLPII or the Company,
subject to certain limited exceptions.
On July 13, 1998, the Company issued $100 million of 10 3/4% Senior Notes
due 2008 (the "Notes"). Interest on the Notes is payable semi-annually on
January 15 and July 15, with payments commencing on January 15, 1999. The net
proceeds were $92.0 million, after expenses in connection with the offering. The
proceeds were used to fund the purchase price of the acquisition of Bertucci's,
Inc. and its subsidiaries and, along with equity contributions, to repay
outstanding bank debt. After July 15, 2003, the Company may, at its option,
redeem any or all of the Notes at face value, plus a premium of up to
approximately 5% through July 15, 2006. Thereafter, the Notes may be redeemed at
face value. In addition, anytime through July 15, 2001, the Company may redeem
up to 35% of the Notes, subject to restrictions, with the net proceeds of one or
more Equity Offerings, as defined, at a redemption price of 110.75% of the
principal amount of such Notes. Additionally, under certain circumstances,
including a change of control or following certain asset sales, the holders of
the Notes may require the Company to repurchase the Notes, at a redemption price
of 101%. The Notes are fully and unconditionally guaranteed, on a joint and
several basis, on an unsecured senior basis, by all of the Company's
subsidiaries, other than those that are, or will become, parties to the FFCA
loans or other similar secured financings. These Senior Notes were exchanged for
Senior Notes with the same terms pursuant to a registered exchange offer that
was completed in November 1998.
F-12
<PAGE>
The loan payments due under the FFCA loans and the Notes as of December 30, 1998
are as follows:
Loan
Principal
Payments to
be Made
------------
Year Ending 1999 $ 843,708
2000 921,575
2001 1,014,149
2002 1,084,156
2003 1,092,678
Thereafter 124,039,336
------------
$128,995,602
============
(8) Commitments and Contingencies
Operating Leases
The Company has entered into numerous lease arrangements, primarily for
restaurant land, equipment and buildings, which are noncancelable and expire on
various dates through 2028.
Some operating leases contain rent escalation clauses whereby the rent
payments increase over the term of the lease. Rent expense includes base rent
amounts, percentage rent payable periodically, as defined in each lease, and
rent expense accrued to recognize lease escalation provisions on a straight-line
basis over the lease term. Rent expense recognized in operating expenses in the
accompanying consolidated statements of income was approximately $10,292,000,
$3,955,000 and $3,324,000 for the years ended December 30, 1998, December 31,
1997 and December 31, 1996, respectively. The excess of accrued rent over
amounts paid is classified as deferred rent in the accompanying consolidated
balance sheets.
The approximate minimum rental payments due under all noncancelable operating
leases as of December 30, 1998 are as follows:
Rental
Payments to
be Made
------------
Year
1999 .................. $ 16,058,507
2000 .................. 16,060,254
2001 .................. 16,178,966
2002 .................. 15,516,092
2003 .................. 13,841,309
Thereafter .................. 89,986,780
------------
$167,641,908
============
Certain leases require the payment of an additional amount, calculated as
a percentage of annual sales, as defined in the lease agreement, which exceeds
annual minimum rentals. The percentage rent factors generally range from 3% to
6% of sales.
Contingencies
The Company is subject to various legal proceedings that arise in the
ordinary course of business. Based on discussion with the Company's legal
counsel, management believes that the amount of ultimate liability with respect
to these actions will not be material to the financial position or results of
operations of the Company.
F-13
<PAGE>
(9) Related Parties
Under the terms of the corporation agreements, the stockholders have
consented to the payment of an ongoing financial consulting fee to Jacobson
Partners, Limited Partnership ("Jacobson"), a stockholder of the corporation.
The amounts paid to Jacobson for financial consulting fees were $330,000 for the
year ended December 30, 1998 and $160,000 for each of the two years ended
December 31, 1997, and 1996 and are included in general and administrative
expenses in the accompanying consolidated statements of income. In addition,
Jacobson was paid $400,000 for consulting fees associated with obtaining the
above mentioned mortgages and $1,000,000 for consulting fees related to the
Acquisition and related financing.
The Company has a nonqualified deferred compensation plan (the "Plan") for
certain officers and management personnel, which allows them to defer receiving
a portion of their compensation. This compensation is not taxable to the
employee or deductible to the Company for tax purposes until the compensation is
paid. An officer of the Company, who is also a participant in the Plan, is the
trustee of the Plan.
(10) Franchise and Development Agreements
All of the Company's Chili's and On the Border restaurants operate under
franchise agreements with Brinker. The agreements provide, among other things,
that the Company pay an initial franchise fee of $40,000 per restaurant and a
royalty fee ranging from 2% to 4% of sales. The initial franchise fee is payable
in two installments of $20,000. The first installment is due on or before the
construction commencement date. The second installment is due at least 10 days
prior to the date on which the restaurant opens for business. The initial
franchise fees are capitalized and amortized over the term of the franchise
agreement. Royalty fees averaged 3.9% of sales in 1998, 3.8% of sales in 1997
and 3.9% in 1996. In addition, the Company is required to pay an advertising fee
to Brinker of .5% of sales and spend an additional 2% of sales on local
advertising. In return, Brinker is obligated to provide certain support for
restaurant operations, siting and promotion. Royalty and advertising fees are
expensed as incurred.
In 1991, the Company entered into a development agreement with Brinker
whereby the Company was granted the exclusive right to develop additional
Chili's franchises within a certain geographic territory. In 1995, the Company
paid $150,000 to renew the agreement, which now expires in 2000. The Company is
required to develop a certain number of Chili's restaurants during the term of
the agreement in order to maintain its exclusive development rights. The
agreement is renewable at the Company's option for payment of additional sums at
the expiration date.
Also during 1995, the Company paid $50,000 to Brinker in exchange for both
the right to open its first On The Border franchise and the option to enter into
an On The Border development agreement in the future. In 1997, the Company
elected the option to enter into the On The Border development agreement, and
the above $50,000 fee was applied against the cost of the development agreement.
(11) 401(k) Profit Sharing Plan
The Company maintains a defined contribution plan (the "401(k) Plan")
whereby substantially all employees of the Company may defer a portion of their
current salary, on a pretax basis, to the 401(k) Plan. The Company may also make
a discretionary profit sharing contribution to the 401(k) Plan that is
allocated, based on a formula as defined by the 401(k) Plan, to the 401(k) Plan
participants. Bertucci's currently has a similar 401(k) plan for management and
office employees. Discretionary contributions made by the Company for the years
ended December 30, 1998, December 31, 1997 and December 31, 1996 were
approximately $160,000, $67,000 and $43,000, respectively. Two officers of the
Company are also the 401(k) Plan's trustees.
(12) Stock Option Plan
On September 15, 1997, the Board of Directors of the Company established
the 1997 Equity Incentive Plan, which included a nonqualified stock option plan
(the "Option Plan"), for certain key employees and directors. The Option Plan
will be administered by the Board of Directors of the Company and may be
modified or amended by the Board of Directors in any respect.
F-14
<PAGE>
Between September 15, 1997 and December 4, 1997, 331,123 options were
granted. Between July 21, 1998 and October 19, 1998, 58,429 options were
granted. The options are exercisable as follows:
Two years beyond options grant date......................................... 25%
Three years beyond option grant date........................................ 50%
Four years beyond option grant date......................................... 75%
Five years beyond option grant date.........................................100%
The Company accounts for the Option Plan under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized since the
options are granted at fair market value.
Had compensation cost for the Option Plan been determined consistent with
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation, the Company's net income (loss) and earnings per share would
have been reduced to the following pro forma amounts:
1998 1997
-------------- -------------
Net income (loss)
As reported ................. $ (1,829,363) $ 2,100,330
Pro Forma ................... $ (2,051,121) 2,041,288
EPS--
As reported ................. $ (0.89) $ 1.22
Pro Forma ................... $ (1.00) 1.18
A summary of the Option Plan activity for the years ended December 30, 1998
and December 31, 1997 is presented in the table and narrative
below.
1997 1998
------------------- ------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
--------- ------ --------- ------
Outstanding at beginning of year $ 331,123 $11.63
Granted 331,123 11.63 58,429 17.51
Exercised (11,020) (11.63)
Forfeited
Expired
--------- ------ --------- ------
Outstanding at end of year 331,123 $11.63 378,532 $12.67
========= ====== ========= ======
Exercisable at end of year
Weighted average fair value of each
option granted $ 3.06 $ 3.24
The 378,532 options outstanding at December 30, 1998 have a remaining
weighted average contractual life of approximately five years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1998: weighted average risk-free interest rates of 5.96 percent;
weighted average expected lives of five years; and expected volatility of 0%.
(13) Stockholders' Equity
In August 1997, the Company made a dividend and return of capital payout
to shareholders of $8.31 per share from additional paid-in capital, with the
excess payout being charged to retained earnings. In addition, the Company
repurchased 716,429 shares of common stock at $11.63 per share. The Company's
repurchase of shares of common stock was recorded as treasury stock, at cost,
and resulted in a reduction of Stockholders' Equity (Deficit).
(14) Subsidiary Guarantors
F-15
<PAGE>
The Notes (see Note 7 for further discussion) are fully and
unconditionally guaranteed on an unsecured senior basis by all of the Company's
existing and future subsidiaries, other than those that are, or will become,
parties to the FFCA loans or other similar secured financings (such guarantors,
collectively, the "Guarantor Subsidiaries"). Those subsidiaries that are, or
will become, parties to the FFCA loans and other similar secured financings are
collectively known as the "Non-Guarantor Subsidiaries".
The following are the 1998 consolidating financial statements of the
combined guarantor subsidiaries and combined non-guarantor subsidiaries:
F-16
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
ASSETS Subsidiaries Subsidiaries Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
Current Assets:
Cash $ 5,456,110 $ -- $ 5,456,110
Credit card receivables 1,115,925 -- 1,115,925
Inventories 2,063,964 -- 2,063,964
Prepaid expenses and other current assets 866,643 -- 866,643
Prepaid and current deferred income taxes 10,530,585 -- 10,530,585
Pre-opening costs, net of accumulated amortization 1,135,055 -- 1,135,055
------------- ------------- -------------
Total current assets 21,168,282 -- 21,168,282
------------- ------------- -------------
Property and Equipment, at cost:
Land and land right 3,397,953 4,792,524 8,190,477
Buildings 6,904,847 4,771,782 11,676,629
Leasehold improvements 48,819,732 16,705,862 65,525,594
Furniture and equipment 26,777,075 11,659,218 38,436,293
------------- ------------- -------------
78,040,515 37,929,386 115,969,901
Less - Accumulated depreciation (7,818,909) (8,522,014) (16,340,923)
------------- ------------- -------------
78,080,698 29,407,372 107,488,070
Construction work in process 3,309,822 -- 3,309,822
------------- ------------- -------------
Net property and equipment 81,390,520 29,407,372 110,797,892
Deferred Taxes, noncurrent -- -- --
Goodwill, net 32,958,037 -- 32,958,037
Deferred Finance Costs, net 7,525,449 1,591,270 9,116,719
Assets Held for Sale 6,601,000 -- 6,601,000
Liquor licenses 3,138,464 -- 3,138,464
Restricted investments 1,170,043 -- 1,170,043
Other assets, net 1,781,168 -- 1,781,168
------------- ------------- -------------
$ 155,732,963 $ 30,998,642 $ 186,731,605
============= ============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Current portion of mortgage loan and bonds payable $ 25,000 $ 818,708 $ 843,708
Accounts Payable 10,649,346 -- 10,649,346
Accrued Expenses 27,790,614 -- 27,790,614
Capital lease obligation- current portion 72,647 -- 72,647
Intercompany payable (2,625,762) 2,625,762 --
------------- ------------- -------------
Total current liabiliites 36,098,015 3,258,300 39,356,315
Line of Credit Loans -- -- --
Capital lease obligation, net of current portion 150,739 -- 150,739
Mortgage Loan Payable, net of current portion -- 28,151,894 28,151,894
Bonds Payable, net of current portion 100,000,000 -- 100,000,000
Deferred Rent and Other Long-Term Liabilites 4,960,790 -- 4,960,790
------------- ------------- -------------
Total liabilities 141,023,374 31,596,364 172,619,738
Commitments and Contingencies
Stockholders' Equity:
Common stock, $01 par value
Authorized 4,000,000 shares
Issued - 2,006,000 shares at December 31, 1998
and 3,666,370 shares at December 31, 1998 36,664 -- 36,664
Less Treasury stock-689,344 shares at cost (8,017,070) -- (8,017,070)
Additional paid in capital 29,053,920 -- 29,053,920
Retained earnings (Accumulated deficit) (6,363,925) (597,722) (6,961,647)
------------- ------------- -------------
Total stockholders' equity (deficit) 14,709,589 (597,722) 14,111,867
------------- ------------- -------------
$ 155,732,963 $ 30,998,642 $ 186,731,605
============= ============= =============
</TABLE>
F-17
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATING STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales $ 160,805,177 $ -- $ 160,805,177
------------- ------------- -------------
Cost of Sales and Expenses
Cost of sales 44,376,765 -- 44,376,765
Operating expenses 89,052,034 (4,511,825) 84,540,209
General and administrative expenses 8,203,830 -- 8,203,830
Deferred rent, depreciation and
amortization 8,771,288 2,149,680 10,920,968
Taxes other than income 7,490,316 -- 7,490,316
------------- ------------- -------------
Total cost of sales and expenses 157,894,233 (2,362,145) 155,532,088
------------- ------------- -------------
Income from operations 2,910,944 2,362,145 5,273,089
Interest expense, net 5,642,115 2,362,145 8,004,260
------------- ------------- -------------
Loss before income tax benefit (2,731,171) -- (2,731,171)
Income Tax Benefit (901,808) -- (901,808)
------------- ------------- -------------
Net Loss $ (1,829,363) $ -- $ (1,829,363)
============= ============= =============
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NE Restaurant Company, Inc.:
We have audited the accompanying consolidated balance sheets of NE Restaurant
Company, Inc. (the "Company") and its subsidiaries as of December 30, 1998 and
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 30, 1998. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NE Restaurant Company, Inc. and
its subsidiaries as of December 30, 1998 and December 31, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 30, 1998 in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1999
F-19
<PAGE>
NE Restaurant Company, Inc.
Schedule II: VALUATION AND QUALIFYING ACCOUNTS.
For the year ended December 30, 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Description 1 Balance at Charged to Charged to other Deductions -- Balance at end of
beginning of costs and accounts -- describe period
period expenses describe
<S> <C> <C> <C> <C> <C>
Store closing reserves $ 0 $ 0 $ 3,040,000 $0 $ 3,040,000
</TABLE>
As described in Note 2 to the consolidated financial statements, store
closing reserves have been established as part of the acquisition of
Bertucci's . These reserves are related to estimated future lease commitments
and exit costs to close 18 Bertucci's locations.
S-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998
FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-30-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-30-1998 DEC-31-1997
<CASH> 5,546 248
<SECURITIES> 0 0
<RECEIVABLES> 1,116 297
<ALLOWANCES> 0 0
<INVENTORY> 2,064 592
<CURRENT-ASSETS> 21,168 1,593
<PP&E> 127,139 40,945
<DEPRECIATION> 16,341 9,993
<TOTAL-ASSETS> 186,732 37,337
<CURRENT-LIABILITIES> 39,356 9,998
<BONDS> 100,000 0
0 0
0 0
<COMMON> 37 20
<OTHER-SE> 14,075 (13,127)
<TOTAL-LIABILITY-AND-EQUITY> 186,732 37,337
<SALES> 160,805 81,364
<TOTAL-REVENUES> 160,805 81,364
<CGS> 44,377 23,384
<TOTAL-COSTS> 155,532 76,262
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,004 1,918
<INCOME-PRETAX> (2,731) 0
<INCOME-TAX> (902) 0
<INCOME-CONTINUING> (1,829) 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,829) 0
<EPS-PRIMARY> (0.89) 0
<EPS-DILUTED> (0.89) 0
</TABLE>
