<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the Quarterly Period Ended MARCH 31, 1999
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Commission File Number 333-62775
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NE RESTAURANT COMPANY, INC.
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(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 Number)
80A TURNPIKE ROAD, WESTBOROUGH, MASSACHUSETTS 01581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 870-9200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securities Exchange Act of the 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 the filing
requirements for the past 90 days.
Yes X No
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2,977,026 shares of the registrant's Common Stock were outstanding on May 17,
1999.
<PAGE>
NE RESTAURANT COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
1) Consolidated Balance Sheets
March 31, 1999 and December 30, 1998 4
2) Consolidated Statements of Operations
For the Three Months Ended March 31, 1999
and March 31, 1998 5
3) Consolidated Statements of Shareholders'
Equity For the Three Months Ended March 31, 1999 6
4) Consolidated Statements of Cash
Flows For the Three Months Ended March 31, 1999
and March 31, 1998 7
5) Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II: OTHER INFORMATION 19
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
NE RESTAURANT COMPANY, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 30, MARCH 31,
1998 1999
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<S> <C> <C>
ASSETS
CURRENT
ASSETS:
Cash 5,456,110 715,829
Credit card receivables
1,115,925 1,640,705
Inventories 2,063,964 1,969,633
Prepaid expenses and other current assets
866,643 329,150
Prepaid and current deferred income taxes 10,530,585 10,974,150
Pre-opening costs, net of accumulated amortization 1,135,055 --
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TOTAL CURRENT ASSETS 21,168,282 15,629,467
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PROPERTY AND EQUIPMENT, AT COST:
Land and land right 8,190,477 8,190,477
Buildings 11,676,629 11,674,428
Leasehold improvements 65,525,594 65,635,603
Furniture and equipment 38,436,293 38,813,940
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123,828,993 124,314,449
Less - Accumulated depreciation (16,340,923) (19,191,456)
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107,488,070 105,122,993
Construction work in process 3,309,822 6,931,257
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NET PROPERTY AND EQUIPMENT 110,797,892 112,054,250
GOODWILL, NET 32,958,037 32,500,037
DEFERRED FINANCE COSTS, NET 9,116,719 8,932,333
ASSETS HELD FOR SALE 6,601,000 6,601,000
LIQUOR 3,138,464 3,209,757
LICENSES
RESTRICTED INVESTMENTS 1,170,043 1,177,685
OTHER ASSETS, NET 1,781,168 1,511,695
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TOTAL ASSETS $ 186,731,605 $ 181,616,225
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of mortgage loan and bonds payable 843,708 880,166
Accounts payable 10,649,346 11,682,183
Accrued expenses 27,790,614 23,282,022
Capital lease obligation- current portion
72,647 72,647
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TOTAL CURRENT LIABILIITES 39,356,315 35,917,017
LINE OF CREDIT LOANS
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CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION
150,739 127,882
MORTGAGE LOAN PAYABLE, NET OF CURRENT PORTION 28,151,894 28,828,983
BONDS PAYABLE, NET OF CURRENT PORTION 100,000,000 100,000,000
DEFERRED RENT AND OTHER LONG-TERM LIABILITES 4,960,790 4,959,955
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TOTAL LIABILITIES 172,619,738 169,833,837
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock @ $.01 par value 36,664 36,664
Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070)
Additional paid in capital 29,053,920 29,053,920
Accumulated deficit (6,961,647) (9,291,126)
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TOTAL STOCKHOLDERS EQUITY 14,111,867 11,782,388
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$ 186,731,605 $ 181,616,225
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</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended:
March 31, March 31,
1998 1999
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<S> <C> <C>
Net Sales $ 21,298,113 $ 63,034,185
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Cost of Sales and Expenses
Cost of sales 6,008,114 17,353,337
Operating expenses 10,890,339 33,714,704
General and administrative expenses 1,100,161 3,449,308
Deferred rent, depreciation, amortization and
pre-opening expenses 966,338 4,232,789
Taxes other than income 1,026,152 3,516,825
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Total cost of sales and expenses 19,991,104 62,266,963
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Income from operations 1,307,009 767,222
Interest expense, net 900,092 3,363,344
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Income (loss) before income tax expense (benefit) 406,917 (2,596,122)
Income tax expense (benefit) 120,454 (944,611)
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Income (Loss) before cumulative effect of change
in accounting principle 286,463 (1,651,511)
Cumulative effect of change in accounting
principle (net of tax) -- (677,968)
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Net Income (Loss) 286,463 (2,329,479)
------------ ------------
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Basic and diluted earnings (loss) per share $ 0.22 $ (0.78)
Weighted average shares outstanding 1,316,656 2,977,026
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
NE RESTAURANT COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-----------------------------------------------
NUMBER OF .01 PER NUMBER OF AMOUNT ADDITIONAL ACCUMULATED TOTAL
SHARES SHARE SHARES PAID IN CAPITAL DEFICIT STOCKHOLDERS'
EQUITY
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 30, 1998 3,666,370 $ 36,664 (689,344) $(8,017,070) $ 29,053,920 $ (6,961,647) $ 14,111,867
Net Loss $ (2,329,479) $ (2,329,479)
---------- ---------- --------- ------------ ------------- ------------- -------------
Balance March 31, 1999 3,666,370 $ 36,664 (689,344) $(8,017,070) $ 29,053,920 $ (9,291,126) $ 11,782,388
---------- ---------- --------- ------------ ------------- ------------- -------------
---------- ---------- --------- ------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
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1998 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 286,463 $(2,329,479)
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Adjustments to reconcile net income (loss) to net cash used in operating activities
Cumulative effect of change in accounting principle -- 1,135,055
Depreciation, amortization,deferred rent and pre-opening expenses 1,008,687 4,232,789
Deferred Taxes -- (443,566)
Changes in operating assets and liabilities
Inventories (18,107) 94,331
Prepaid expenses, receivables and other (396,596) 12,713
Accrued expenses 405,830 (4,508,593)
Accounts payable (1,720,156) 1,032,837
Other operating assets and liabilities (25,138) 269,472
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Total adjustments (745,480) 1,825,038
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NET CASH USED IN OPERATING ACTIVITIES (459,017) (504,441)
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (1,462,319) (4,106,891)
Acquisition of marketable securities (3,434,610) --
Acquisition of liquor licenses (5,643) (71,293)
Additions to preopening costs (246,624) (748,346)
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NET CASH USED IN INVESTING ACTIVITIES (5,149,196) (4,926,530)
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of mortgage loans -- 949,381
Repayments of mortgage loans (159,304) (235,834)
Principal payments under capital lease obligations (21,988) (22,857)
Net borrowings under lines of credit 5,686,000 --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 5,504,708 690,691
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Net decrease in cash (103,505) (4,740,281)
Cash, beginning of period 247,675 5,456,110
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Cash, end of period $ 144,170 $ 715,829
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Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest, net of amounts capitalized $ 254,565 $ 5,805,534
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Cash paid during the period for income taxes, net of tax refunds $ 237,000 $ 1,130
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
NE RESTAURANT COMPANY, INC.
Notes To Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements (the "Unaudited
Financial Statements") presented herein have been prepared by NE
Restaurant Co., Inc. and include all of its subsidiaries (collectively,
the "Company") after elimination of intercompany accounts and
transactions, without audit, and, in the opinion of management, reflect
all adjustments of a normal recurring nature necessary for a fair
statement of the interim periods presented. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles ("GAAP")
have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading.
It is suggested that the Unaudited Financial Statements be read in
conjunction with the financial statements and notes included in the
Company's Form 10K.
In 1998, the Company changed its fiscal year to the 52 or 53 week
period ended on the Wednesday closest to December 31st. The Company's
fiscal quarters end March 31, June 30, September 29 and December 29,
1999. In 1998, the Company's fiscal quarters ended March 31, June 30,
September 30 and December 30, 1998.
2. On July 21, 1998 the Company 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 the Bertucci's
common stock at a price of $10.50 per share. The total purchase price
was approximately $89.4 million.
3. In connection with the acquisition of Bertucci's, the Company sold
$100,000,000 principal amount of its 10 3/4% Senior Notes due July 15,
2008. The net proceeds 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.
4. The Acquisition is accounted for as a purchase and, accordingly, has
been included in the Company's consolidated results of operations since
the consummation of the Acquisition on July 21, 1998.
5. In April 1988, 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 adopted SOP 98-5 on December 31, 1998, the first day of
fiscal 1999. Upon adoption, the Company incurred a cumulative effect of
a change in accounting principle of approximately $678,000, net of tax.
This includes unamortized pre-opening costs which were previously
amortized over the 12-month period subsequent to restaurant openings.
6. The following presents the unaudited pro forma consolidated statements
of income of the Company for the three months ended March 31, 1998. In
computing pro forma earnings, Bertucci's earnings have been included
for the period from December 28, 1997 through March 21, 1998 and
earnings have been reduced by the interest expense on indebtedness
incurred in connection with the Acquisition. In addition, earnings have
been reduced by amortization of goodwill and deferred finance costs.
The pro forma information presented does not purport to be indicative
of the results which would have been reported if these transactions had
occurred at the beginning of the respective period, or which may be
reported in the future.
7
<PAGE>
Note 6 (continued)
PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF THE COMPANY
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998
----------------------
<S> <C>
Net sales $ 54,314
Cost of sales and expenses
Cost of sales 14,284
Operating expenses 29,084
General and administrative expenses 3,018
Deferred rent, depreciation and amortization 3,945
Taxes other than income 2,833
----------------------
Total cost of sales and expenses 53,164
----------------------
Income from operations 1,150
Interest expense, net 3,821
----------------------
Loss before income tax benefit (2,671)
Income tax benefit (905)
----------------------
$ (1,766)
----------------------
----------------------
Loss per share $ (.59)
EBITDA(a) $ 5,095
</TABLE>
- -----------
(a) "EBITDA" is defined as income from operations before deferred rent,
depreciation, amortization and pre-opening costs. EBITDA is not a
measure of performance defined by 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
herein.
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 March 31, 1999, the Company operated 34
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 38 Chili's and On The Border 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 Acquisition 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 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 March 31, 1999, these locations had combined net
sales of approximately $11.4 million and a combined approximate $1.1 million
loss from operations. None of these locations' results during the period from
date of the Acquisition to March 31, 1999 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 end of fiscal 1999.
As of the date of the 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 March 31, 1999,
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.
During the third fiscal quarter 1998, the Company entered into a form
of real estate contract of sale dated as of November 6, 1998 by and between
Berestco, Inc. (a wholly owned subsidiary of the Company) and Pinnacle
Properties Management, Inc. for the sale of the Bertucci's corporate office
building in Wakefield, Massachusetts. During the first fiscal quarter 1999,
Pinnacle Properties
9
<PAGE>
Management, Inc. exercised their right to terminate the contract. The Company
still intends to sell its fee interest in the Wakefield property.
For all the Company's restaurants, net sales consist of food, beverage
and alcohol sales. 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, and insurance. 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. Taxes, other than income taxes consist of payroll taxes, real
estate taxes and personal property taxes. Depreciation, amortization, deferred
rent and pre-opening expenses include depreciation and amortization on
appropriate assets (including but not limited to goodwill, deferred financing
costs, property and equipment), deferred rent expenses/credits recorded to
average rental payments over the individual lives of the leased properties and
all pre-opening expenses as incurred.
RESULTS OF OPERATIONS
The results of operations for the fiscal quarter ended March 31, 1999
include the results of operations of the Chili's and On The Border ("Brinker
concept") restaurants and Bertucci's concepts. The results of operations for the
first fiscal quarter ended March 31, 1998 include only the Brinker concept
restaurants.
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:
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended:
MARCH 31, MARCH 31,
1998 1999
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<S> <C> <C>
Net Sales 100.0% 100.0%
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Cost of sales and expenses
Cost of sales 28.2 27.5
Operating expenses 51.1 53.5
General and administrative expenses 5.2 5.5
Deferred rent, depreciation, amortization and pre-opening expenses 4.5 6.7
Taxes other than income 4.8 5.6
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Total cost of sales and expenses 93.9 98.8
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Income from operations 6.1 1.2
Interest expense, net 4.2 5.3
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Income (loss) before income tax expense (benefit) 1.9 (4.1)
Income tax expense (benefit) 0.6 (1.5)
---------- --------
Income (Loss) before cumulative effect of change in accounting
principle 1.3 (2.6)
---------- --------
---------- --------
Cumulative effect of change in accounting principle (net of tax) -- (1.1)
---------- --------
Net Income 1.3 (3.7)
---------- --------
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RESTAURANT OPERATING DATA (DOLLARS IN THOUSANDS):
- -------------------------------------------------------------------------------------------------
EBITDA $ 2,274 $ 5,000
Average annual sales per restaurant-Brinker concepts (a) $ 2,664 $ 2,789
Average annual sales per restaurant-Bertucci's concepts (a) $ 1,644 $ 1,599
Comparable restaurant sales-Brinker concepts 8.6% 4.1%
Comparable restaurant sales-Bertucci's concepts 4.1% -3.6%
Number of restaurants - Brinker restaurants:
Restaurants open at beginning of period 32 37
Restaurants opened 1 1
Restaurants closed -- --
---------- --------
Total restaurants open at end of period 33 38
Number of restaurants - Bertucci's restaurants:
Restaurants open at beginning of period 84 90
Restaurants opened -- --
Restaurants closed -- --
---------- --------
Total restaurants open at end of period 84 90
</TABLE>
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NOTE (a) Average sales per restaurant for the fiscal quarters have been
annualized to reflect a full year of operations, but are not
necessarily indicative of results for a full year. The 1998
Bertucci's average sales per restaurant figure is based on a
12-week period.
11
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales increased $41.7 million, or 196.0%, to $63.0
million during the first fiscal quarter 1999 from $21.3 million during the first
fiscal quarter 1998. The increase in net sales primarily was due to the
inclusion of the results of operations of the Bertucci's restaurants since the
Acquisition. In addition, $7.0 million of the increase in net sales was
attributable to the opening of three Chili's, three On The Borders and six
Bertucci's restaurants during the preceding twelve month period. One of the
three Chili's restaurants opened in the first quarter 1999. The increase was
partially offset by the closing of one Bertucci's restaurant in Owings Mills,
Maryland. Comparable restaurant sales increased by 4.1% for the Brinker concept
restaurants operated by the Company in the first fiscal quarter 1999 as compared
to the first fiscal quarter 1998. The results for nine Chili's restaurants in
Connecticut and four On The Border restaurants reflected a menu price increase.
The menu price increase represented approximately 1.0% increase in comparable
restaurant sales for the Brinker concept restaurants. Comparable restaurant
sales for the Bertucci's restaurants decreased by 3.6% in the first fiscal
quarter 1999 as compared to the comparable period in 1998. The Company believes
that the majority of such decrease was the result of a reduction in planned
advertising for the Bertucci's restaurants which has adversely affected sales in
certain markets.
COST OF SALES. Cost of sales increased by $11.3 million, or 188.8%, to
$17.4 million during the first fiscal quarter 1999 from $6.0 million during the
first fiscal quarter 1998. The dollar increase in cost of sales primarily was
due to the inclusion of the results of operations of Bertucci's restaurants
since the Acquisition. Expressed as a percentage of net sales, overall cost of
sales decreased to 27.5% during the first fiscal quarter 1999 from 28.2% during
the first fiscal quarter 1998. This percentage decrease was primarily due to the
higher margins associated with the Bertucci's restaurants. Cost of sales for the
Bertucci's restaurants which, expressed as a percentage of net sales for the
Bertucci's restaurants, increased to 26.7% during the first fiscal quarter (13
weeks) 1999 from 25.1% during the first twelve weeks of 1998. This increase was
primarily as a result of higher cheese and dairy commodity costs during the
first fiscal quarter 1999. Cost of sales for the Brinker concept restaurants,
expressed as a percentage of Brinker concept restaurant sales, increased from
28.2% in the first fiscal quarter 1998 to 28.5% in the first fiscal quarter
1999. The Company believes that this increase was mainly due to higher commodity
costs of cheese and dairy products during the first fiscal quarter 1999.
OPERATING EXPENSES. Operating expenses increased by $22.8 million, or
209.6%, to $33.7 million during the first fiscal quarter 1999 from $10.9 million
during the first fiscal quarter 1998. Expressed as a percentage of net sales,
operating expenses increased to 53.5% in the first fiscal quarter 1999 from
51.1% during the first fiscal quarter 1998. The dollar increase in operating
expenses primarily was due to the inclusion of the results of operations of the
Bertucci's restaurants since the Acquisition. The percentage increase primarily
was attributable to increased hourly labor costs driven by a tight labor market
as a result of low unemployment 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 by $2.4 million, or 213.6%, to $3.5 million during the first
fiscal quarter 1999 from $1.1 million during the first fiscal quarter 1998. The
dollar increase in general and administrative expenses primarily was due to the
inclusion of the results of operations of Bertucci's overhead since the
Acquisition. Expressed as a percentage of net sales, general and administrative
costs increased to 5.5% during the first fiscal quarter
12
<PAGE>
1999 from 5.2% during the first fiscal quarter 1998. The increase was
attributable to increased Bertucci's restaurant manager training and
additional staffing of corporate support positions to further service the
expanded Company.
DEFERRED RENT, DEPRECIATION, AMORTIZATION AND PRE-OPENING EXPENSES.
Deferred rent, depreciation, amortization and pre-opening expenses increased by
$3.3 million, or 337.7%, to $4.2 million during the first fiscal quarter 1999
from $1.0 million during the first fiscal quarter 1998. The Company adopted the
AICPA's Statement of Position 98-5 ("SOP 98-5", REPORTING ON THE COSTS OF
START-UP ACTIVITIES) effective December 31, 1999, the first day of fiscal 1999.
SOP 98-5 requires that costs incurred during start-up activities, including
organization costs, be expensed as incurred. Those expenses amounted to
approximately $0.5 million in the first fiscal quarter 1999 and were primarily
for the pre-opening expenses related to opening one Chili's restaurant in that
period and three Chili's restaurants in April 1999. In addition, the first
quarter 1999 includes approximately $0.6 million of amortization expenses of
approximately $34.0 million of goodwill associated with the Acquisition. The
remainder of the increase was primarily due to the inclusion of Bertucci's since
the Acquisition.
TAXES OTHER THAN INCOME TAXES. Taxes, other than income taxes,
increased by $2.5 million, or 242.8%, to $3.5 million during the first fiscal
quarter 1999 from $1.0 million during the first fiscal quarter 1998. Expressed
as a percentage of net sales, taxes, other than income taxes, increased from
4.8% during first fiscal quarter 1998 to 5.6% during the first fiscal quarter
1999. The overall dollar increase in taxes, other than income taxes, was due to
the inclusion of the results of operations of the Bertucci's restaurants since
the Acquisition. The percentage increase was due primarily to increased payroll
taxes associated with higher Bertucci's restaurant management and employee
payroll as well as increased manager training payroll and general and
administrative support staff payroll.
INTEREST EXPENSE. Interest expense increased by $2.5 million to $3.4
million during the first fiscal quarter 1999 from $0.9 million during the first
fiscal quarter 1998. This increase was primarily attributable to the sale by the
Company in July 1998 of $100.0 million aggregate principal amount of its 10-3/4%
Senior Notes due 2008 (the "Senior Notes"), and to the approximately $29.7
million aggregate principal amount of mortgage loan financing provided, since
August 1997, to the Company by FFCA Acquisition Corporation (the "FFCA Loans").
Interest was approximately $2.7 million on the Senior Notes, $0.6 million on the
FFCA Loans and $0.1 million on the Company's revolving credit facility, during
the first fiscal quarter 1999.
INCOME TAXES. The effective income tax rate increased to 37.5% during
the first fiscal quarter 1999 from 29.6% during the first fiscal quarter 1998.
The reason for the increased rate was mainly due to the non-deductible portion
of goodwill resulting from the Acquisition.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its capital expenditures and working
capital needs through a combination of operating cash flow, borrowings under the
FFCA Loans and borrowing under the Company's revolving credit facility, which
provides for borrowings of up to $20.0 million, with BankBoston, N.A. acting as
administrative agent and Chase Bank of Texas, N.A. acting as documentation agent
(the "Senior Bank Facility").
Net cash flows used by operating activities were $0.5 million for the
first fiscal quarter 1999 and for the first fiscal quarter 1998. Other changes
in working capital were mainly due to the inclusion of the results of operations
of the Bertucci's restaurants since the Acquisition. The increase in accounts
payable was primarily due to the inclusion of the Bertucci's results while the
decrease in accrued expenses was mainly attributable to the payment of accrued
interest on the Senior Notes. However, that interest payment was partially
offset by increases in other accrued expenses as a result of the Acquisition.
The Company's capital expenditures decreased by $0.2 million to $4.9
million for the first fiscal quarter 1999 compared to $5.1 million of capital
expenditures for the first fiscal quarter 1998. The decrease in capital
expenditures was primarily due to less new construction of restaurants. Under
its area development agreements with the Franchisor, the Company is required to
open at least four Chili's and two On The Border restaurants in 1999 to meet its
minimum development requirements. The Company expects to meet the minimum
requirement for Chili's in fiscal 1999. One Chili's opened in the first fiscal
quarter 1999 and three additional Chili's opened in April 1999. The Company
expects to open three On The Border restaurants which will exceed the
development requirement for that brand in fiscal 1999. The development of four
Chili's and three On The Border restaurants are expected to require capital
expenditures of approximately $13.4 million. As described below, the Company
believes that it will have sufficient working capital and bank borrowing
availability to finance its expansion and other plans for the remainder of
fiscal 1999.
The Company incurred a significant amount of indebtedness in connection
with the Acquisition. As of March 31, 1999, the Company had approximately $129.9
million in consolidated indebtedness, including $100.0 million of indebtedness
pursuant to the Senior Notes, $29.7 million of borrowings under the FFCA Loans
and $0.2 million of capital lease obligations. Significant liquidity demands
will arise from debt service on the Senior Notes, the FFCA Loans and borrowings
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 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 for the remainder of
1999. The Senior Bank Facility provides the Company with available borrowing up
to an aggregate amount of $20.0 million. As of March 31, 1999, $20.0 million of
borrowings were available under the Senior Bank Facility. 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,
14
<PAGE>
business and other factors, many of which are beyond the Company's control.
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 year or any future
quarter.
YEAR 2000 IMPACT
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 two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company is currently 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 by the computerized information systems for its
Bertucci's operations. While there can be no assurance that Year 2000 matters
will be satisfactorily identified and resolved, the Company currently believes,
based on preliminary discussions with its information systems vendors, that Year
2000 issues will not have a materially adverse affect 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
affects 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 effects 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. As of March 31, 1999, the
inventory and assessment phases are substantially completed, and the
remediation, testing, deployment and monitoring phases are in progress. As part
of its testing phase, the Company intends to conduct independent verification
testing of selected network component upgrades received from suppliers. 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. The Company's accounts receivable
system is expected to be compliant by June 1999 and the point-of-sale systems
in one remaining Chili's restaurant is expected to be compliant by September
1999. The Company's ability to meet the target dates is dependent upon the
timely provision
15
<PAGE>
of necessary upgrades and modifications by its suppliers and contractors. In
some instances, first party upgrades or modifications are not expected to be
available until mid-1999; accordingly, the Company's testing and redeployment
of affected items may be delayed until that time. 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 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. To date,
the Company has spent approximately $180,000 in connection with its
anticipated Year 2000 efforts with the remainder expected to be incurred
throughout the rest of fiscal 1999. 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 a contingency and business continuity plan 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 it 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 "non-computerized" mode to address such a
failure, there can be no assurance that the Company would not suffer, as a
result of such or any other unanticipated Year 2000 failure, 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 technologies and other resources, first
party modification actions and other factors. Given the complexity of these
issues and possible unidentified risks, actual results may vary 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 first party
suppliers and similar uncertainties.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Quarterly Report on Form 10-Q, 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. Factors including those set forth herein, as well as those set
forth in the Company's Form 10K filed with the Securities and Exchange
Commission ("SEC") on March 30, 1999 and other filings with the SEC may affect
such expectations. 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.
Item 3. 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.
17
<PAGE>
PART II: OTHER INFORMATION
Item 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
18
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) The Company did not file a Current Report on Form 8-K during
the first fiscal quarter 1999.
19
<PAGE>
Exhibit Index
27.1 Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NE RESTAURANT COMPANY, INC.
------------------------------------------
(Registrant)
Date: May 17, 1999 BY: /s/ Dennis Pedra
------------------------------------------
Dennis Pedra
President and Chief
Executive Officer
Date: May 17, 1999 BY: /s/ Paul Hoagland
------------------------------------------
Paul Hoagland
Chief Financial Officer and
Executive Vice President
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999 FORM
10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 716
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<RECEIVABLES> 1,641
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<INVENTORY> 1,970
<CURRENT-ASSETS> 15,629
<PP&E> 131,246
<DEPRECIATION> 19,191
<TOTAL-ASSETS> 181,616
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<COMMON> 37
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