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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 29, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number:
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.)
5 Clock Tower Place, Suite 200, Maynard, MA 01754
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 897-1400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
____________________________ _________________________________________
____________________________ _________________________________________
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
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
the northeastern United States. The Company's wholly owned subsidiary,
Bertucci's Restaurant Corp. ("Bertucci's") owns and operates a restaurant
concept under the name Bertucci's Brick Oven Pizzeria(R). The Company also
develops and operates two distinct restaurant franchises, Chili's Grill & Bar(R)
("Chili's") and On The Border Mexican Cafe(R) ("On The Border"), under franchise
agreements with Brinker International, Inc., a publicly-owned company ("Brinker"
or the "Franchisor").
In July 1998, the Company completed its acquisition of Bertucci's' parent
entity, Bertucci's, Inc., a publicly-owned restaurant company for a purchase
price, net of cash received, of approximately $89.4 million (the "Acquisition").
As of December 29, 1999, Bertucci's owned and operated 79 full-service, casual
dining, Italian-style restaurants under the name Bertucci's Brick Oven
Pizzeria(R) located primarily in New England 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. During 1999, the Company closed the Bertucci's test kitchen
restaurant in Wakefield, Massachusetts and also closed ten underperforming
Bertucci's restaurants. Subsequent to December 29, 1999 and prior to January 31,
2000, the Company closed seven additional Bertucci's restaurants, thereby
completing the planned closings identified shortly after the Acquisition.
The Company is the world's largest Chili's franchisee and as of December
29, 1999, the Company operated 38 Chili's and five 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. From 1991 until December 29, 1999, the Company has grown through the
addition of 23 new Chili's and 5 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, two in 1998, and five in 1999, and opened one On The
Border restaurant in 1996, three in 1998, and one in 1999. 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 $2.8 million in fiscal 1999.
As a result of the Acquisition, the Company offers its targeted customer
base three distinct yet complementary casual dining menus: Italian at
Bertucci's, "American/southwestern" at Chili's and "Tex-Mex" at On The Border.
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Concepts
The Company's restaurants are full-service restaurants, featuring 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.
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 restaurants 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.
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 29,
1999, the Chili's restaurant system consisted of 656 restaurants in 47 states,
of which 454 were Franchisor-owned and 202 were franchised. The Company holds
the exclusive rights to operate up to an aggregate of 55 Chili's restaurants
(including the 38 it operated as of December 29, 1999) 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 29, 1999, the On The Border
restaurant system in the United States consisted of 103 restaurants in 29
states, of which 77 were Franchisor-owned and 26 were franchised. The Company
holds the exclusive rights to operate up to an aggregate of 21 On The Border
restaurants (including the five it operated as of December 29, 1999) in all six
New England states and in Westchester County and upstate New York.
Restaurant Overview and Menu
The Company's restaurants are full-service, casual dining restaurants,
featuring 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 open at December 29,
1999 (excluding Sal & Vinnie's) 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.
Bertucci's. Bertucci's restaurants offer a distinctive menu and a
contemporary European-style design that offers 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. In addition to pizzas, 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 and sauces. Wine and beer are available at all Bertucci's locations
and full bar service is available at some Bertucci's restaurants. Price points
generally range from $5.79 to $6.99 for lunch entrees and from $6.59 to $11.99
for dinner entrees. Most items on the menu may be purchased for take-out service
or delivery, which together, during Bertucci's fiscal 1999, accounted for
approximately 26% of net sales.
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
$5.49 to $13.99.
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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 $5.99 to $7.49 for lunch entrees and from $7.49 to
$14.99 for dinner entrees.
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.
Restaurant Design
Bertucci's. Bertucci's restaurants are free-standing or in-line buildings
averaging approximately 6,200 square feet in size with a seating capacity of
approximately 170 people. 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 and its take-out and
delivery business. 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.
Chili's. The Company's Chili's restaurants are prototypically
free-standing buildings that average approximately 5,800 square feet in size and
have a seating capacity of approximately 190 people. 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 23 new Chili's restaurants that the Company has opened since 1991,
18 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. 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 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.
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
21 On The Border restaurants (inclusive of the 38 Chili's and five On The Border
restaurants that the Company operated as of December 29, 1999) 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 three Chili's and three to five On The Border restaurants each
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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 2004 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 that 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. Furthermore, according to the franchise agreements, the Franchisor
may require the Company to pay an additional amount of advertising. The
Franchisor requested that the Company pay an additional 0.375% of net sales for
supplemental advertising for the period from September 1999 through August 2000.
Restaurant Development
Expansion. The Company expects to continue its steady growth strategy
through the opening of new restaurants over the next several years. 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. Management has designed a
new Bertucci's restaurant prototypical kitchen and take-out area in preparation
for restaurant expansion of the Bertucci's concept beginning in fiscal year
2000.
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 expanding into new territory and by increasing the level of
market penetration in territories that are not yet "efficient."
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.
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Quality Control
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.
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.
Management Incentive Programs
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 believes this incentive program has
contributed significantly to the entrepreneurial spirit of its restaurants and,
ultimately, to overall guest satisfaction and Company profitability.
Training
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. 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 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
which are designated as "training restaurants" and also incorporates training
manuals and other written guides. At the end of the 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. 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
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.
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Advertising and Marketing
The Company's overall marketing objective is to grow the brand equity of
each of its restaurant concepts by building revenues and increasing
profitability across all three major brands. Management utilizes strategies that
create customer trial of new products/events so as to increase the share of
visits and average guest check for each of the brands, yet maintain the unique
dining experience and brand personality associated with each individual concept.
the Company recognizes the need to build brand awareness in order to increase
market share. Its advertising plan is designed to increase brand awareness,
trial and share of visits from its target market by providing media coverage in
markets where each brand has sufficient penetration to support media at
competitive levels. In those markets where the Company has its highest
penetration, television and radio advertising is provided. In its secondary
markets, the Company utilizes more cost-effective localized marketing vehicles
including newspaper inserts, radio and direct mail.
Pursuant to its franchise agreements with the Franchisor, the Company
contributes 0.5% of net sales from each Chili's and On The Border 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 a
minimum of 2.0% of net sales from each restaurant on local advertising. The
Company's advertising expenditures generally have exceeded the levels required
under its agreements. In addition, according to the franchise agreements, the
Franchisor may require the Company to pay an additional amount of advertising.
The Franchisor requested that the Company pay an additional 0.375% of net sales
for supplemental advertising for the period from September 1999 through August
2000.
Purchasing
The Company 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 uses one full-service distributor for
the substantial portion of restaurant supplies and product requirements, with
such distributor charging the Company fixed mark-ups over prevailing wholesale
prices. The Company has a five-year contract with its full-service distributor
which is terminable by either party upon 60 days' prior notice. 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. 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.
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. 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.
Trademarks, Servicemarks and Other 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
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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 "Dine Out. Of the Ordinary." and "Menucci" as service marks
and trademarks. 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 29, 1999, the Company had approximately 2,521 full-time
employees (of whom approximately 103 are based at the Company's executive
office) and approximately 6,029 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.
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. 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 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.
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Environmental Compliance
In connection with the sale of Bertucci's headquarters located in
Wakefield, Massachusetts, initial environmental testing disclosed isolated
deposits of several volatile organic compounds. Further testing confirmed the
limitation and location of the deposit. Bertucci's expended approximately
$30,000 in environmental investigation and remediation costs. Bertucci's
environmental engineer expects that the Wakefield project will be cleared from
Massachusetts Department of Environmental Protection reporting requirements by
the end of fiscal year 2000. The sale of the Bertucci's headquarters was
consummated in November 1999.
ITEM 2. PROPERTIES
The Company's executive office is located in Maynard, Massachusetts. The
office is occupied under the terms of a lease covering approximately 39,000
square feet that is scheduled to expire in 2007 and has two five-year options to
renew. One of the Company's previous offices in Westborough, Massachusetts is
currently being marketed for sub-lease. The Company sold the 60,000 square foot
Wakefield, Massachusetts office building (previously the Bertucci's
headquarters) in November 1999.
Restaurant Locations
The table below identifies the location of the restaurants operated by the
Company during fiscal 1999.
<TABLE>
<CAPTION>
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On The
Chili's Border
Bertucci's Openings On The Openings
Bertucci's Closings in Bertucci's Chili's in fiscal Chili's Border in fiscal
State 12/30/98 fiscal 1999 12/29/99 12/30/98 1999 12/29/99 12/30/98 1999
------------- ------------ ----------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Connecticut 9 - 9 9 2 11 2 -
Georgia 6 (6) - - - - - -
Illinois 7 - 7 - - - - -
Maine - - - 1 - 1 - -
Maryland 5 - 5 - - - - -
Massachusetts 35 (1) 34 14 1 15 2 1
New Hampshire 3 - 3 5 2 7 - -
New York 3 (1) 2 - - - - -
New Jersey 5 - 5 - - - - -
Pennsylvania 6 - 6 - - - - -
Rhode Island 2 - 2 4 - 4 - -
Virginia 7 (3) 4 - - - - -
Washington D.C. 2 - 2 - - - - -
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Total 90 (11) 79 33 5 38 4 1
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On The Grand
Border Sal & Total
State 12/29/99 Vinnie's 12/29/99
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<S> <C> <C> <C>
Connecticut 2 - 22
Georgia - - -
Illinois - - 7(a)
Maine - - 1
Maryland - - 5
Massachusetts 3 1 53(b)
New Hampshire - - 10
New York - - 2
New Jersey - - 5
Pennsylvania - - 6
Rhode Island - - 6
Virginia - - 4
Washington D.C. - - 2
---------- ---------- ----------
Total 5 1 123
---------- ---------- ----------
</TABLE>
(a) The seven restaurants in Illinois were closed as of January 31, 2000.
(b) The test kitchen located at the Bertucci's corporate office in
Wakefield, Massachusetts was closed in June 1999 prior to the sale of the
building.
Of the 123 restaurants operated by the Company at December 29, 1999, the
Company owned the land for 12 restaurants and leased the land for all other
restaurants. The leases for most of the existing restaurants are for terms of 15
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. 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.
Page 9 of 59
<PAGE>
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, 2000, there was no established public trading market for
any class of common equity security of the Company.
Record Holders
As of March 15, 2000, there were approximately 78 holders of Common Stock
of the Company, $.01 par value per share. As of March 15, 2000, 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
None.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data for fiscal years ended 1995 through 1999 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.
Page 10 of 59
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
December 29, December 30, December 31, December 31, December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data (in thousands)
NET SALES $ 267,665 $ 160,805 $ 81,364 $ 70,094 $ 60,300
COST AND EXPENSES:
Cost of sales 73,860 44,377 23,384 21,203 18,095
Operating expenses 141,889 84,540 40,932 34,268 30,101
General and administrative expenses 14,609 8,204 4,207 3,679 3,449
Deferred rent, depreciation and
amortization 17,863 10,921 3,911 3,679 3,201
Taxes other than income 13,653 7,490 3,829 3,207 2,871
------------ ------------ ------------ ------------ ------------
Total costs of sales and expenses 261,873 155,532 76,263 66,037 57,717
------------ ------------ ------------ ------------ ------------
Operating income (loss) 5,792 5,273 5,101 4,057 2,583
------------ ------------ ------------ ------------ ------------
Interest expense, net 14,007 8,004 1,918 1,053 463
------------ ------------ ------------ ------------ ------------
(Loss) income before income tax
(benefit) expense and change in
accounting principle (8,215) (2,731) 3,183 3,005 2,120
(Benefit) provision for income taxes (2,357) (902) 1,083 1,047 699
Income before change in accounting
principle (5,858) (1,829) 2,100 1,958 1,421
Change in accounting principle, net of tax (678)
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (6,536) $ (1,829) $ 2,100 $ 1,958 $ 1,421
============ ============ ============ ============ ============
Basic and diluted (loss) earnings per
share before change in accounting
principle $ (1.97) $ (0.89) $ 1.22 $ 0.98 $ 0.71
Change in accounting principle per share $ (0.22) $ - $ - $ - $ -
Basic and diluted (loss) earnings per
share $ (2.19) $ (0.89) $ 1.22 $ 0.98 $ 0.71
Other Financial Data:
EBITDA (in thousands) (a) $ 23,655 $ 16,194 $ 9,012 $ 7,737 $ 5,784
EBITDA margin (b) 8.8% 10.1% 11.1% 11.0% 9.6%
Comparable restaurant sales - (c) 2.1% 1.6% 2.7% -0.4% -1.6%
</TABLE>
(a) "EBITDA" is defined as income from operations before deferred rent,
depreciation, amortization and preopening costs. 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.
(b) EBITDA margin represents EBITDA divided by net sales.
(c) The Company defines comparable restaurant sales as net sales from
restaurants that have been open for at least one full fiscal year. The
comparable sales in 1999 and 1998 relate to the combined company
(Bertucci's, Chili's, On The Border and, for 1999 only, Sal & Vinnie's)
while the 1997, 1996 and 1995 comparable sales relate to Chili's only (On
The Border did not have a comparable restaurant as defined until Fiscal
Year 1998).
Page 11 of 59
<PAGE>
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
The Company is an operator of full-service, casual dining restaurants in
the northeastern United States. The Company's wholly owned subsidiary,
Bertucci's Restaurant Corp. owns and operates a restaurant concept under the
name Bertucci's Brick Oven Pizzeria(R). The Company also develops and operates
two distinct restaurant franchises, Chili's Grill & Bar(R) and On The Border
Mexican Cafe(R), under franchise agreements with Brinker International, Inc., a
publicly-owned company.
In July 1998, the Company completed its acquisition of Bertucci's' parent
entity, Bertucci's, Inc., a publicly-owned restaurant company for a purchase
price, net of cash received, of approximately $89.4 million (the "Acquisition").
As of December 29, 1999, Bertucci's owned and operated 79 full-service, casual
dining, Italian-style restaurants under the name Bertucci's Brick Oven
Pizzeria(R) located primarily in New England 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. During 1999, the Company closed the Bertucci's test kitchen
restaurant in Wakefield, Massachusetts and also closed ten underperforming
Bertucci's restaurants. Subsequent to December 29, 1999 and prior to January 31,
2000, the Company closed seven additional Bertucci's restaurants, thereby
completing the planned closings identified shortly after the Acquisition.
The Company has entered into franchise and development agreements with
Brinker to operate the 43 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 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 and fiscal 1999 include the operations of
Bertucci's from and after July 21, 1998, approximately 17 months. See Notes 2
and 7 to the Consolidated Financial Statements.
The Acquisition included 90 Bertucci's restaurants and one Sal & Vinnie's
restaurant. The Company closed its Bertucci's test kitchen in Wakefield,
Massachusetts in 1999, sold the former Bertucci's headquarters located in
Wakefield, Massachusetts in 1999 and closed seventeen other underperforming
Bertucci's restaurants as of January 31, 2000. The assets related to these
locations, which are primarily property and equipment, had been assigned a value
of approximately $6.6 million based on estimated sale proceeds. The gross sale
proceeds, net of fees, from the Bertucci's headquarters and several
underperforming restaurants was $4.8 million. During fiscal year 1999, the
seventeen underperforming restaurant locations and the test kitchen location had
combined net sales of approximately $14.7 million and a combined approximate
$1.5 million loss from operations (not including approximately $0.1 million of
direct general and administrative expenses). The results of operations for the
test kitchen and the other seventeen restaurants during the period from date of
the Acquisition to December 29, 1999 have been included in the consolidated
income statement.
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 as
well as supplies used in carry-out and delivery sales. 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 company advertising expenses, 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.
Page 12 of 59
<PAGE>
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>
Income Statement Data: For Fiscal Year Ended
December 29, December 30, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of sales 27.6 27.6 28.7
Operating expenses 53.0 52.6 50.3
General and administrative expenses 5.5 5.1 5.2
Depreciation and amortization 6.7 6.8 4.8
Taxes other than income 5.1 4.7 4.7
------------ ------------ ------------
Total costs of sales and expenses 97.9 96.8 93.7
------------ ------------ ------------
Operating income 2.1 3.2 6.3
------------ ------------ ------------
Interest expense, net 5.2 5.0 2.4
(Loss) income before income tax (benefit) provision
and change in accounting principle (3.1) (1.8) 3.9
------------ ------------ ------------
(Benefit) provision for income taxes (0.9) (0.6) 1.3
Change in accounting principle, net of tax (0.3) -- --
------------ ------------ ------------
Net (loss) income (2.5) (2.4) 5.2
============ ============ ============
</TABLE>
Year Ended December 29, 1999 Compared to Year Ended December 30, 1998
Net Sales. Net sales increased $106.9 million, or 66.5%, to $267.7
million in fiscal 1999, from $160.8 million in fiscal 1998. Most of the increase
was attributable to the inclusion of Bertucci's for twelve months of 1999 but
approximately five months during 1998 as the result of the Acquisition. An
additional component of the increase was from the Company's opening of six new
Bertucci's, eight new Chili's and four new On The Border restaurants during 1998
and 1999. The remainder of the increase was a result of increased comparable
restaurant sales in 1999 versus the same period 1998. Comparable restaurant
sales for locations opened prior to 1998 increased 2.1% from fiscal 1998 to
fiscal 1999. Average sales per restaurant increased 5.9% to almost $2.1 million
in fiscal 1999, from just under $2.0 million the previous year.
Cost of Sales. Cost of sales increased by $29.5 million, or 66.4%, to
$73.9 million in fiscal 1999 from $44.4 million in fiscal 1998. Expressed as a
percentage of net sales, cost of sales remained flat at 27.6% in both fiscal
1999 and fiscal 1998. This statistic is comprised of two significant changes in
the Company's business. The inclusion of Bertucci's results in 1998 helped to
decrease the Company's overall cost of sales. However, the increase in cheese
costs during the Summer of 1999 impacted the cost of sales at Bertucci's by
approximately 2% of net sales.
Operating Expenses. Operating expenses increased by $57.3 million, or
67.8%, to $141.9 million in fiscal 1999 from $84.5 million in fiscal 1998.
Expressed as a percentage of net sales, operating expenses increased to 53.0% in
fiscal 1999 from 52.6% in fiscal 1998. The dollar increase was primarily
attributable to the inclusion of Bertucci's for twelve months in 1999 but for
approximately five months in 1998 as a result of 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 $6.4 million, or 78.1%, to $14.6 million in fiscal 1999 from $8.2
million in fiscal 1998. Expressed as a percentage of net sales, general and
administrative expenses increased to 5.5% in 1999 from 5.1% in fiscal 1998. The
dollar increase was primarily due to the Acquisition as well as new rental
payments for the Company's headquarters. The percentage increase was primarily
Page 13 of 59
<PAGE>
attributable to increased general and administrative staffing, particularly
increases in payroll, training and recruitment costs related to hiring
additional restaurant managers to better staff the Company's restaurants.
Deferred Rent, Depreciation, Amortization and Preopening Expenses.
Deferred rent, depreciation, amortization and preopening expenses increased by
$7.0 million, or 63.6%, to $17.9 million in fiscal 1999 from $10.9 million in
fiscal 1998. Expressed as a percentage of net sales, deferred rent,
depreciation, amortization and preopening expenses decreased to 6.7% in fiscal
1999 from 6.8% in fiscal 1998. The dollar increase was due to the combination of
the incremental seven months of Bertucci's results in 1999 versus 1998 as a
result of the Acquisition, opening six additional Brinker concept restaurants,
opening six Bertucci's restaurants, the write-down of approximately $0.4 million
associated with the Westborough executive offices, approximately $1.4 million of
preopening expenses and amortization of approximately $2.3 million of the $34
million goodwill associated with the Acquisition.
Taxes Other Than Income Taxes. Taxes, other than income taxes, increased
$6.2 million, or 82.3%, to $13.7 million in fiscal 1999 from $7.5 million in
fiscal 1998. Taxes, other than income taxes increased as a percentage of net
sales from 4.7% in fiscal 1998 to 5.1% in fiscal 1999. The primary reason for
the increase was due to increased payroll taxes.
Interest Expense. Interest expense increased $6.0 million, or 75.0%, to
$14.0 million in fiscal 1999 from $8.0 million in fiscal 1998. This increase was
attributable to the sale of the Senior Notes in July 1998 and to the FFCA Loans
entered into since August 1998. Interest was approximately $10.8 million on the
Senior Notes, $3.0 million on the FFCA Loans and $0.2 million on borrowings from
the Company's line of credit during fiscal 1999.
Income Tax Expense. In fiscal 1999, the Company realized an income tax
benefit of 30.3% of loss before income tax expense, compared to an income tax
benefit of 33.0% of loss before income tax expense in fiscal 1998. The primary
unfavorable variance was due to the non-deductibility of goodwill associated
with the Acquisition.
Change in Accounting Principle. The Company has adopted the American
Institute of Certified Public Accountants' Statement of Position 98-5 (SOP 98-5)
as of the first day of fiscal 1999. Upon adoption, the Company incurred a
pre-tax cumulative effect of a change in accounting principle of approximately
$1.1 million. Net of income taxes, the expense was approximately $0.7 million.
This charge was primarily for the write-off of unamortized preopening costs
which were previously amortized over the 12-month period subsequent to a
restaurant opening. Effective with the first day of fiscal 1999, the Company
expenses all preopening costs as incurred. The costs are included in Deferred
Rent, Deprecation, Amortization and Preopening expenses in the accompanying
Statement of Operations.
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.
Page 14 of 59
<PAGE>
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 million
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.
Liquidity and Capital Resources
The Company has 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.
Fiscal Year Ended December 29, 1999. Net cash flows from operating
activities were $6.5 million for fiscal 1999 as compared to $17.2 million for
fiscal 1998. Approximately $5.0 million of the $10.7 million difference was a
result of additional interest incurred on the Senior Notes in 1999 versus 1998.
Net loss from operations for this period was $6.5 million and the non-cash
reconciling item of deferred rent, depreciation, amortization and pre-tax change
in accounting principle increased cash flows by $17.6 million. Accrued expenses
decreased by $4.5 million mostly as a result of a reduction of accrued payroll,
restaurant closing reserves, occupancy expenses and other liabilities which were
partially offset by an increase in unredeemed gift certificates. The Company
also used cash from operations to increase working capital needs for newly
developed restaurant locations and for the Bertucci's restaurants acquired
during fiscal 1998. Increases in deferred taxes and accounts payable were
partially offset by a net decrease in other working capital accounts, a decrease
in inventories and an increase in prepaid expenses. Net cash used in investing
activities for fiscal 1999 was $14.4 million. Approximately $19.2 million was
used for developing, building and opening new restaurants, paying franchise fees
and for capital additions at existing restaurants. The sale of assets (primarily
the former Bertucci's headquarters
Page 15 of 59
<PAGE>
located in Wakefield, Massachusetts) accounted for approximately $4.8 million of
additional cash to the Company in 1999. Net cash provided by financing
activities was $10.1 million for fiscal 1999. During this period, $11.3 million
was borrowed from FFCA Acquisition Corporation ("FFCA") for new restaurant
mortgages (Note 7 of the consolidated financial statements), $1.0 million was
used for repaying principle on FFCA mortgages and approximately $0.2 was used
for capital lease payments and return of capital.
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 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.
Fiscal 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.
The Company's capital expenditures were $19.0 million, $19.4 million and
$4.5 million, for fiscal1999, 1998 and 1997, respectively. In fiscal 1999,
capital expenditures for maintenance and repair of the Company's restaurants and
the move to the new headquarters were approximately $7.0 million. The Company
expects to open three Bertucci's restaurants and ten Brinker Concept Restaurants
in Fiscal Year 2000.
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 29, 1999, the Company had approximately $139.4 million of
consolidated indebtedness, including $100.0 million of indebtedness pursuant to
the Senior Notes, $39.3 million of borrowings under the FFCA Loans and $0.1
million of capital lease obligations. In addition, the Company has a Senior Bank
Facility in the amount of $20.0 million. As a December 29, 1999, 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.
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 that commenced 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, 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.
Page 16 of 59
<PAGE>
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. The 1999 FFCA Loans were collateralized by
mortgages on 8 restaurant properties. For the years ended December 30, 1999 and
December 30, 1998, interest related to the FFCA Loans was $2,995,000 and
$2,362,000, respectively. 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). The Senior Bank Facility
contains certain financial covenants with which the Company was in compliance at
the end of fiscal 1999. 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 for the next twelve
months. 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.
Page 17 of 59
<PAGE>
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 application was
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 as of the first day of fiscal 1999. Upon
adoption, the Company incurred a pre-tax cumulative effect of a change in
accounting principle of approximately $1.1 million. This charge was primarily
for the write-off of unamortized preopening costs which were previously
amortized over the 12-month period subsequent to a restaurant opening.
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities.
This statement established accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts and for hedging activities) be recorded in the balance sheet
as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedging accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June15, 2000. A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied
retroactively. The Company has not determined the timing of adoption, but does
not anticipate the adoption of this new standard to have a material impact on
the Company's fiscal position or results of operations.
Year 2000 Disclosure
Many currently installed computer systems and software products were
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields were required to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. Prior to
January 1, 2000, the Company assessed the potential impact of Year 2000 issues
on the processing of date-sensitive information by the Company's automated
information and point-of-sale systems. While there can be no assurance that Year
2000 matters have been entirely eradicated, the Company has not experienced any
material adverse affects from Year 2000 issues.
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
1999, the Company's aggregate outstanding indebtedness was $139.4 million, the
Company's shareholders' equity was $7.5 million and the Company's working
capital deficit, deficiency of earnings to fixed charges and losses were $16.2
million, $8.2 million and $6.5 million, respectively. The Company's ratio of
earnings to fixed charges for fiscal 1999 was 0.6 times.
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
Page 18 of 59
<PAGE>
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.
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 three new Chili's restaurants each
year in accordance with a specified schedule over approximately the next three
years and three to five new On The Border restaurants each year in accordance
with a specified schedule over approximately the next four 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.
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<PAGE>
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 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 were outside of New England. As of this filing, and
partially as a result of closing seventeen restaurants outside New England,
approximately 20% of the Company's restaurants are currently 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 three new Chili's restaurants each year in accordance with a specified
schedule over approximately the next three years and three to five new On The
Border restaurants each year in accordance with a specified schedule over
approximately the next four 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, however, there can be no
assurance that the Company will continue to do so. 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.
Page 20 of 59
<PAGE>
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. 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 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 five-year contract with this vendor which expires in May 2004 and is otherwise
terminable by either party upon 60 days' prior notice. The Company believes that
it would be able to replace any vendor if it were required to do so; however,
any disruption in supply from vendors or the Company's inability to replace
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 2000 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. 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
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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 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. Any 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.
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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 at the time of this filing:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Benjamin R. Jacobson............. 55 Chairman of the Board of Directors, Interim President and Chief Executive
Officer and Treasurer
Paul V. Hoagland................. 47 Executive Vice President and Director
David J. Nace.................... 53 Executive Vice President, Chief Financial Officer and Director
Raymond P. Barbrick.............. 46 Vice President
Richmond A. Brittingham.......... 51 Vice President
Robert L. Hogan ................. 54 Vice President - Marketing
Paul J. Seidman ................. 43 Vice President - Food & Beverage and Procurement
Kathleen P. Federico............. 40 Vice President - Human Resources
Rosario Del Nero................. 46 Vice President
Stephen F. Mandel, Jr............ 44 Director
James J. Morgan.................. 57 Director
David A. Roosevelt............... 29 Director
Thomas R. Devlin................. 52 Director
James R. Parish.................. 53 Director
</TABLE>
Benjamin R. Jacobson. Mr. Jacobson has served as Chairman of the Board of
Directors of the Company since 1991 and as Interim President and Chief Executive
Officer since October 1999. 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.
Paul V. Hoagland. Mr. Hoagland has been employed in the restaurant
industry for 19 years and is currently Executive Vice President, Chief
Administrative Officer and Director. He has served as the Company's Executive
Vice President since 1992, its Chief Financial Officer from 1992 through 1999
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.
David J. Nace. Mr. Nace has over 25 years experience in multi-unit
retailing concepts. In March 2000, he became the Company's Executive Vice
President, Chief Financial Officer and Director. From December 1999 until March
2000, he served as the Company's Interim Chief Financial Officer. Prior to this
and from September 1998 until July 1999, he was Executive Vice President, Chief
Financial Officer and Treasurer of Little Switzerland, Inc., a retailer of
luxury gifts and jewelry in the eastern Caribbean. From October 1993 until
January of 1998, Mr. Nace served as Executive Vice President, Chief Financial
Officer and Treasurer of Gart Sports Company, a retailer of sporting goods and
apparel. From June 1981 until October 1993, he was Vice President and Controller
for Child World, Inc.
Raymond P. Barbrick. Mr. Barbrick has been employed in the restaurant
industry for 30 years and currently serves as Vice President of the Company and
President of Bertucci's. He served as the Company's Vice President of Operations
for the Brinker Concept Restaurants from January 1998 until October 1999. 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.
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<PAGE>
Richmond A. Brittingham. Mr. Brittingham has been employed in the
restaurant industry for 31 years and currently serves as Vice President of the
Company and President of the Brinker Concept Restaurants. He served as the
Company's Regional Director for the South Region from 1992 until 1999. In such
capacity, he was 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.
Robert L. Hogan. Mr. Hogan has been employed in the restaurant industry
for 26 years and has served as the Company's Vice President - Marketing since
April 1999. He is responsible for the marketing efforts of all three major
brands, as well as strategic planning and new concept development for the
Bertucci's brand. Prior to joining the Company, Mr. Hogan served as Vice
President of Marketing for Ralston-Purina's Jack in the Box chain, The
Black-eyed Pea casual dining chain, Saga Corporation's Straw Hat Pizza
Restaurants and Senior Vice President for Farrell's Ice Cream Parlor
Restaurants. He also was President of his own three-restaurant company, Pizza &
Pipes, a pizza/entertainment concept located in California.
Paul J. Seidman. Mr. Seidman has been employed in the restaurant industry
for 25 years and has served as the company's Vice President of Food & Beverage
and Procurement since January of 1998. Mr. Seidman's responsibilities include
all food and beverage specifications, purchasing, and cost control as well as
leading the menu and product development team. Mr. Seidman has held numerous
positions in the industry, most recently as Vice President of Food & Beverage
and Corporate Executive Chef for the Bayport Restaurant Group.
Kathleen P. Federico. Ms. Federico has been in the restaurant industry
for 16 years and has served as the Vice President of Human Resources since
joining the Company in October of 1998. Her responsibilities include Training
and Development, Compensation, Benefits, Recruiting and Employee Relations.
Prior to joining the Company, Ms. Federico was Vice President of Human Resources
for Sodexho Marriott Services. She also served as a Director of Human Resources
at Au Bon Pain and Friendly Ice Cream Corporation.
Rosario Del Nero. Mr. Del Nero has been employed in the restaurant
industry for 17 years. He has served as Corporate Executive Chef for Bertucci's
since 1992 and was promoted to Vice President of the Company in January 2000.
His responsibilities include product and ingredient development, recipe design
and documentation, training and quality enhancement. His vast and detailed
knowledge of language, food and cuisine, especially those of the Mediterranean,
provide for a foundation of authenticity. Mr. Del Nero's previous industry
experience, both in the United States and abroad, includes positions as
independent restaurateur, culinary arts instructor and food consultant to
restaurants and manufacturers.
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 Black Rock 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 24 of 59
<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.).
On October 28, 1999, Dennis Pedra tendered his resignation as President,
Chief Executive Officer and Director of the Company. Mr. Pedra continues to be a
significant shareholder of the Company. On February 4, 2000, Gary Schwab
tendered his resignation as Vice President of the Company.
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 1999 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>
------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ------------------------------------------- ------------------------------------------------------------------------------
Name and Principal Position Salary($) Bonus($) Other Annual Securities Underlying
Compensation Options (#)
- ------------------------------------------- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dennis D. Pedra 1999 278,077 - 9,086 122,948 (e)
President and Chief Executive Officer (a) 1998 288,982 (b) 225,000 110,348 (d) 122,948 (e)
1997 212,508 179,646 (c) 80,142 (d) 99,198 (e)
Raymond P. Barbrick 1999 133,962 108,002 8,100 29,776
Vice President 1998 109,154 92,344 7,200 24,568
1997 85,895 69,175 6,000 21,268
Paul V. Hoagland 1999 184,000 - 10,378 41,635
Executive Vice President 1998 171,575 (f) 159,000 88,205 (d) 41,635
1997 152,417 142,010 (g) 60,545 (d) 33,068
Richmond A. Brittingham 1999 91,071 88,519 7,400 17,034
Vice President 1998 81,749 62,009 7,200 17,034
1997 79,154 50,600 7,200 14,178
Kathleen P. Federico 1999 131,500 23,449 6,192 5,761
Vice President - Human Resources 1998 - - - -
1997 - - - -
</TABLE>
Page 25 of 59
<PAGE>
(a) Mr. Pedra resigned his position as President and Chief Executive Officer
on October 28, 1999.
(b) Includes $33,404 payable for fiscal 1998 but deferred pursuant to the
Non-qualified Deferred Compensation Plan.
(c) Includes $100,000 payable for fiscal 1997 but deferred pursuant to the
Non-qualified Deferred Compensation Plan.
(d) Includes auto lease payments paid by the Company and 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.
(e) Mr. Pedra's options expired on January 26, 2000.
(f) Includes $3,252 payable for fiscal 1998 but deferred pursuant to the
Non-qualified Deferred Compensation Plan.
(g) Includes $103,496 payable for fiscal 1997 but deferred pursuant to the
Non-qualified Deferred Compensation Plan.
Options Granted in Last Fiscal Year
The following table sets forth information concerning options granted
during fiscal 1999 to each of the Named Executive Officers.
<TABLE>
<CAPTION>
Potential
Realizable Value
Number of at Assumed Annual
Securities Stock Price
Underlying % of Total Appreciation for
Options Granted in Exercise Expiration Option Term(c)
Name Granted (a) Fiscal 1999 Price (b) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Dennis D. Pedra 0 0.0%
Raymond P. Barbrick 5,208 14.4% $15.00 8/10/04 $ 21,583 $ 47,693
Paul V. Hoagland 0 0.0%
Richmond A. Brittingham 0 0.0%
Kathleen P. Federico 4,333 12.0% $15.00 8/10/04 $ 17,957 $ 39,680
</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.
Page 26 of 59
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information concerning option exercises
during fiscal 1999, and the fiscal year-end value of unexercised options for
each of the Named Executive Officers.
<TABLE>
<CAPTION>
Value Of
Unexercised
Number Of In-The-Money
Securities Options At
Shares Underlying At Fiscal Year-End
Acquired on Value Fiscal Year-End Exerciseable/
Name Exercise Realized(a) Exerciseable/Unexercisable Unexerciseable(b)
<S> <C> <C> <C> <C>
Dennis D. Pedra 0 $0 24,800 / 98,148 (c) $0/$0
Raymond P. Barbrick 0 0 5,317 / 24,459 0/0
Paul V. Hoagland 0 0 8,267 / 33,368 0/0
Richmond A. Brittingham 0 0 3,545 / 13,489 0/0
Kathleen P. Federico 0 0 0 / 5,761 0/0
</TABLE>
(a) 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).
(b) Based upon a price of $9.22
(c) Mr. Pedra's stock options expired on January 26, 2000
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 an employment agreement with an executive officer as
described below:
Paul V. Hoagland. Mr. Hoagland's employment agreement (as amended, the
"Hoagland Agreement") provides that he will serve as Executive Vice President 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 1999 base salary of $184,000 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) an 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 as of
December 29, 1999). 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 29,
Page 27 of 59
<PAGE>
1999. At December 31, 1997, there were 1,316,656 shares of common stock of the
Company outstanding. An additional 1,671,394 such shares were issued pursuant to
the Equity Investment resulting in 2,988,050 shares of common stock outstanding
at December 30, 1998. At December 29, 1999, 2,988,050 shares of common stock
were outstanding. An additional 36,110 options were granted during fiscal 1999
at a price of $15.00 per share.
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 provides incentives and rewards for performance 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.
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 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 29, 1999, trust account balances for Paul
Hoagland and Dennis Pedra were $475,333 and $671,549, respectively.
During 1999, the Company has also established the NE Restaurant Company,
Inc. Executive Savings and Investment Plan (the "Executive Savings and
Investment Plan") to which highly compensated executives of the company may
elect to defer a portion of their salary and or earned bonus. The Company
maintains an irrevocable grantor trust which has been established by the
Company, as grantor, pursuant to the Scudder Kemper Investments Non-Qualified
Deferred Compensation Plan Trust Agreement, dated September 20, 1999. The
agreement is between the Company and Scudder Kemper Investments, as trustee, for
the purpose of paying benefits under 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 February 2000, there were 29 participants in the
plan with a total market value of approximately $153,068.
401(k). The Company maintains two defined contribution plans (the
"Bertucci's 401(k) Plan" and the "NE Restaurant 401(k) Plan"). Under the
Bertucci's 401(k) Plan, 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 makes a matching 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. The Company is currently in the process of terminating the NE
Restaurant 401(k) Plan and as of May 1, 1999 all eligible participants were
transferred to the Bertucci's 401(k) Plan in order to consolidate the Plans
after the Acquisition. Matching contributions made by the Company for the years
ended December 29, 1999, December 30, 1998 and December 31, 1997 were
approximately $89,000, $160,000 and $67,000, respectively. Two officers of the
Company are also the 401(k) Plan's trustees.
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.
Page 28 of 59
<PAGE>
Compensation Committee Interlocks and Insider Participation
Effective as of January 1, 1998, the Board of Directors appointed a
Compensation Committee and an Audit Committee. Currently, the Compensation
Committee is comprised of Messrs. Jacobson, Mandel, Morgan and Devlin and the
Audit Committee is comprised of Messrs. Parish, Mandel, Hoagland and Nace.
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 were made by Mr. Jacobson and other non-management directors. 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 29 of 59
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information at March 15, 2000, 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, 2000 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.
Shares
Beneficially Percent
Name and Address of Beneficial Owner Owned of Class
- ------------------------------------ ----- --------
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 *
James R. Parish 11,422 *
Dennis D. Pedra(6) 190,670 6.41%
Paul V. Hoagland(7) 114,132 3.84%
Raymond P. Barbrick 7,467 *
Richmond A. Brittingham 8,412 *
Paul J. Seidman 5,063 *
All directors and executive officers as a
group (10 persons) 1,375,162 37.50%
* Less than 1%.
Page 30 of 59
<PAGE>
(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 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.
Page 31 of 59
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
$61,000 for the year ended December 29, 1999, $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, Mr. Jacobson was paid $400,000 for consulting fees
associated with obtaining the FFCA 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,
the Company has entered into an agreement with Jacobson Partners whereby the
Company would pay Jacobson Partners $500,000 per year together with
reimbursement of certain travel and other incidental expenses. During 1999,
Jacobson Partners agreed to reduce its annual fee to $250,000 until further
notice. The amounts paid to Jacobson Partners for financial consulting fees were
$313,000 for the fiscal year ended December 29, 1999 and $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
that 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 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 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 29, 1999, trust account balances for Paul
Hoagland and Dennis Pedra were $475,333 and $671,549, respectively. In January
2000, the Non-qualified Deferred Compensation Plan was terminated and the
balances were paid to the participants.
During 1999, the Company has also established the NE Restaurant Company,
Inc. Executive Savings and Investment Plan (the "Executive Savings and
Investment Plan") to which highly compensated executives of the company may
elect to defer a portion of their salary and or earned bonus. The Company
maintains an irrevocable grantor trust which has been established by the
Company, as grantor, pursuant to the Scudder Kemper Investments non-qualified
deferred compensation plan trust agreement, dated September 20, 1999. The
agreement is between the Company and Scudder Kemper Investments, as trustee, for
the purpose of paying benefits under 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 February 2000, there were 29 participants in the
plan with a total market value of approximately $153,068.
Page 32 of 59
<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:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 29, 1999 and December
30, 1998
Consolidated Statements of Operations for each of the years ended
December 29, 1999, December 30, 1998 and December 31, 1997.
Consolidated Statements of Stockholders' Equity for each of the years
ended December 29, 1999, December 30, 1998 and December 31, 1997.
Consolidated Statements of Cash Flows for each of the years ended
December 29, 1999, December 30, 1998 and December 31, 1997.
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II: Valuation and Qualifying Accounts
(3) Exhibit Index
(b) The Company did not file a Current Report on Form 8-K during the 4th
Quarter of fiscal 1999.
Page 33 of 59
<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/ Benjamin R. Jacobson
-------------------------------
Benjamin R. Jacobson, Chairman of the Board
Date: March 28, 2000
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 R. Jacobson Chairman of the Board of March 28, 2000
- ------------------------ Directors, Acting President
Benjamin R. Jacobson and Chief Executive Officer,
Treasurer (Principal
Executive Officer)
/s/ Paul V. Hoagland Executive Vice President, March 28, 2000
- ------------------------ Assistant Treasurer,
Paul V. Hoagland Assistant Secretary, Director
/s/ David J. Nace Executive Vice President, March 28, 2000
- ------------------------ Chief Financial Officer,
David J. Nace Director (Principal
Financial Officer and
Principal Accounting Officer)
/s/ David A. Roosevelt Director March 28, 2000
- ------------------------
David A. Roosevelt
/s/ James J. Morgan Director March 28, 2000
- ------------------------
James J. Morgan
Page 34 of 59
<PAGE>
EXHIBIT LISTING AND INDEX
------------------------------------------------------------------------
Exhibit Description
No.
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
Page 35 of 59
<PAGE>
------------------------------------------------------------------------
Exhibit Description
No.
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
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) as amended
------------------------------------------------------------------------
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.
------------------------------------------------------------------------
10.13* 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.
------------------------------------------------------------------------
10.18* 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.
------------------------------------------------------------------------
12.1* Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
------------------------------------------------------------------------
21.1* Subsidiaries of Registrant.
------------------------------------------------------------------------
27.1(1) Financial Data Schedule
------------------------------------------------------------------------
Page 36 of 59
<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.
(1) Filed herewith.
Page 37 of 59
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
NE Restaurant Company, Inc.:
We have audited the accompanying consolidated balance sheets of NE Restaurant
Company, Inc., a Delaware Corporation (the Company), and its subsidiaries as of
December 29, 1999 and December 30, 1998, 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 29, 1999. 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 auditing standards generally accepted
in the United States. 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 29, 1999 and December 30, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 29, 1999 in conformity with accounting principles
generally accepted in the United States.
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 25, 2000
Page 38 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of Fiscal Year Ended:
December 29, December 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 7,578,632 $ 5,456,110
Credit card receivables 1,630,844 1,115,925
Inventories 1,804,346 2,063,964
Prepaid expenses and other current assets 668,698 866,643
Short-term assets held for sale 1,847,584 --
Prepaid and current deferred income taxes 8,647,600 10,530,585
Preopening costs, net of accumulated amortization -- 1,135,055
------------- -------------
Total current assets 22,177,704 21,168,282
------------- -------------
Property and Equipment, at cost:
Land and land right 8,422,025 8,190,477
Buildings and building improvements 12,199,895 11,676,629
Leasehold improvements 76,017,712 65,525,594
Furniture and equipment 44,732,345 38,436,293
------------- -------------
141,371,977 123,828,993
Less - Accumulated depreciation (27,662,046) (16,340,923)
------------- -------------
113,709,931 107,488,070
Construction work in process 4,300,112 3,309,822
------------- -------------
Net property and equipment 118,010,043 110,797,892
Goodwill, net 30,682,037 32,958,037
Deferred finance costs, net 8,761,004 9,116,719
Assets held for sale -- 6,601,000
Liquor licenses 3,057,235 3,138,464
Restricted investments 1,177,685 1,170,043
Deferred taxes, noncurrent 4,294,982 --
Other assets, net 1,417,140 1,781,278
------------- -------------
TOTAL ASSETS $ 189,577,830 $ 186,731,715
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of mortgage loans and bonds payable 1,255,406 843,708
Accounts payable 13,720,971 10,649,346
Accrued expenses 23,337,877 27,790,614
Capital lease obligation- current portion 72,647 72,647
------------- -------------
Total current liabiliites 38,386,901 39,356,315
Capital lease obligation, net of current portion 57,861 150,739
Mortgage loans payable, net of current portion 38,017,489 28,151,894
Bonds payable, net of current portion 100,000,000 100,000,000
Deferred rent and other long-term liabilities 5,590,010 4,960,790
------------- -------------
TOTAL LIABILITIES 182,052,261 172,619,738
Commitments and contingencies (Note 8)
Stockholders' Equity:
Common stock, $.01 par value
Authorized 4,000,000 shares
Issued - 3,677,394 at December 29, 1999 and December 30, 1998 36,774 36,774
Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070)
Additional paid in capital 29,003,920 29,053,920
Accumulated deficit (13,498,055) (6,961,647)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 7,525,569 14,111,977
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 189,577,830 $ 186,731,715
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 39 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended:
December 29 December 30, December 31,
------------- ------------- -------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 267,664,677 $ 160,805,177 $ 81,363,751
------------- ------------- -------------
Cost of Sales and Expenses
Cost of sales 73,859,788 44,376,765 23,383,851
Operating expenses 141,888,760 84,540,209 40,931,889
General and administrative expenses 14,608,799 8,203,830 4,206,862
Deferred rent, depreciation,
amortization and preopening expenses 17,862,892 10,920,968 3,910,946
Taxes other than income 13,652,827 7,490,316 3,828,798
------------- ------------- -------------
Total cost of sales and expenses 261,873,066 155,532,088 76,262,346
------------- ------------- -------------
Income from operations 5,791,611 5,273,089 5,101,405
Interest expense, net 14,007,051 8,004,260 1,917,605
------------- ------------- -------------
(Loss) income before (benefit) provision for income
taxes and change in accounting principle (8,215,440) (2,731,171) 3,183,800
(Benefit) provision for income taxes (2,357,000) (901,808) 1,083,470
------------- ------------- -------------
(Loss) income before change in accounting principle (5,858,440) (1,829,363) 2,100,330
Change in accounting principle, net of tax (Note 3) (677,968)
------------- ------------- -------------
Net (loss) income $ (6,536,408) $ (1,829,363) $ 2,100,330
============= ============= =============
Basic and diluted (loss) earnings per share before change in
accounting principle $ (1.97) $ (0.89) $ 1.22
Change in accounting principle per share (0.22)
------------- ------------- -------------
Basic and diluted (loss) earnings per share $ (2.19) $ (0.89) $ 1.22
============= ============= =============
Weighted Average Shares Outstanding 2,988,050 2,053,692 1,722,918
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 40 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the fiscal years ended December 29, 1999,
December 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Common Stock Treasury Stock Retained Total
-------------------------------------------- Earnings Stockholders'
Number of $.01 per Number of Additional Paid (Accumulated Equity
Shares Share Shares Amount In Capital Deficit) (Deficit)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 2,000,000 20,000 -- -- 4,447,933 4,989,313 9,457,246
Net income -- -- -- -- -- 2,100,330 2,100,330
Issuance of common stock 6,000 60 -- -- 22,440 -- 22,500
Cash dividend and return of capital -- -- -- -- (4,447,933) (12,221,927) (16,669,860)
Purchase of treasury stock -- -- (716,429) (8,332,069) -- -- (8,332,069)
Sale of treasury stock -- -- 27,085 314,999 -- -- 314,999
--------- ------- -------- ----------- ------------ ------------ ------------
Balance December 31, 1997 2,006,000 20,060 (689,344) (8,017,070) 22,440 (5,132,284) (13,106,854)
Net (loss) -- -- -- -- -- (1,829,363) (1,829,363)
Issuance of common stock 1,671,394 16,714 -- -- 29,031,480 -- 29,048,194
--------- ------- -------- ----------- ------------ ------------ ------------
Balance December 30, 1998 3,677,394 36,774 (689,344) (8,017,070) 29,053,920 (6,961,647) 14,111,977
Net (loss) -- -- -- -- -- (6,536,408) (6,536,408)
Return of capital -- -- -- -- (50,000) -- (50,000)
--------- ------- -------- ----------- ------------ ------------ ------------
Balance December 29, 1999 3,677,394 $36,774 (689,344) $(8,017,070) $ 29,003,920 $(13,498,055) $ 7,525,569
========= ======= ======== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 41 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31, 1997 and December 30, 1998
and December 29, 1999
<TABLE>
<CAPTION>
December 29, 1999 December 30, 1998 December 31, 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income $ (6,536,408) $ (1,829,363) $ 2,100,330
------------------ ------------------ ------------------
Adjustments to reconcile net (loss) income
to net cash provided by operating activities-
Change in accounting principle 1,135,055 -- --
Depreciation, amortization and deferred rent 16,418,060 10,920,968 3,910,946
Write off of liquor licenses 81,229 -- --
Deferred income taxes (2,411,997) (1,570,892) (34,243)
Changes in operating assets and liabilities-
Refundable and prepaid income taxes -- (1,265,572) --
Inventories 259,618 (267,887) 115,026
Prepaid expenses, receivables and other (316,974) (335,987) 229,495
Accrued expenses (4,452,737) 9,642,444 753,267
Accounts payable 3,071,625 3,041,742 1,376,364
Other operating assets and liabilities (789,689) (1,113,121) 65,595
------------------ ------------------ ------------------
Total adjustments 12,994,190 19,051,695 6,416,450
------------------ ------------------ ------------------
Net cash provided by operating activities 6,457,782 17,222,332 8,516,780
------------------ ------------------ ------------------
Cash Flows from Investing Activities:
Business acquired -- (89,358,175) --
Additions to property and equipment (18,983,091) (19,354,475) (4,478,755)
Proceeds from sale of properties 4,753,416 -- --
Development and franchise fees paid (240,000) (240,000) (320,000)
Acquisition of liquor licenses -- (64,301) (20,464)
Additions to preopening costs -- (1,954,082) (392,371)
------------------ ------------------ ------------------
Net cash used in investing activities (14,469,675) (110,971,033) (5,211,590)
------------------ ------------------ ------------------
Cash Flows from Financing Activities
Borrowings of mortgage loans 11,272,464 5,677,000 24,250,000
Repayments of mortgage loans (995,171) (802,249) (154,149)
Financing costs -- (7,876,598) (1,439,402)
Cash dividend paid -- -- (12,221,927)
Return of capital (50,000) -- (4,447,933)
Issuance of common stock -- 29,048,084 22,500
Repurchase of treasury stock -- -- (8,260,827)
Sale of treasury stock -- -- 243,757
Principal payments under capital lease obligations (92,878) (89,101) (85,463)
Net payments under lines of credit -- (27,000,000) (1,375,000)
Issuance of bonds payable -- 100,000,000 --
------------------ ------------------ ------------------
Net cash provided by (used in) financing activities 10,134,415 98,957,136 (3,468,444)
------------------ ------------------ ------------------
Net Increase (Decrease) in Cash 2,122,522 5,208,435 (163,254)
Cash, beginning of year 5,456,110 247,675 410,929
------------------ ------------------ ------------------
Cash, end of year $ 7,578,632 $ 5,456,110 $ 247,675
================== ================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of amounts capitalized $ 13,808,068 $ 3,756,100 $ 1,946,811
================== ================== ==================
Cash paid for income taxes $ -- $ 457,000 $ 1,217,812
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 42 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1999
(1) ORGANIZATION AND OPERATIONS
NE Restaurant Company, Inc. (a Delaware corporation) (the Company) was
incorporated on January 1, 1994. 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 29, 1999, the Company operated 38 Chili's and 5 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.
In July 1998, the Company completed its acquisition of Bertucci's, a
publicly owned restaurant company. As of December 29, 1999, the Company
owned and operated 79 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.
On August 6, 1997, the Company formed a wholly-owned limited partnership,
NERC Limited Partnership (NERCLP), to obtain mortgage loans from FFCA
Acquisition Corporation (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.
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. Amortization expense for the period
from the date of Acquisition to December 30, 1998 was approximately $1.0
million, and $2.3 million for the year ending December 29, 1999.
Page 43 of 59
<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 59,064
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 sold the former Bertucci's
headquarters located in Wakefield, Massachusetts and closed the
Bertucci's test kitchen restaurant located in the former Bertucci's
headquarters. The Company also closed 17 other underperforming Bertucci's
restaurants. 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. For the year ended December 29,
1999 and from the date of the Acquisition to December 30, 1998, these
locations had combined net sales of approximately $14.7 million and $7.0
million and an approximate combined loss from operations of $1.5 million
and $0.7 million, respectively. 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 closing, as the
operating locations to be sold had not been identified at the date of the
Acquisition. As of December 29, 1999, 11 of these locations have been
closed, including the former Bertucci's headquarters. The Company has
received net proceeds from the sale of these assets of approximately $4.8
million. Subsequent to year-end, the remaining 7 locations were closed.
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. During fiscal
1999 the Company utilized approximately $0.8 million of the store closing
reserves. As of December 29, 1999 and December 30, 1998, these accrued
costs are included in accrued expenses.
The following presents the approximate unaudited proforma consolidated
statements of income of the Company for the years ended December 29, 1999
and December 30, 1998 and December 31, 1997. The below statements give
proforma effect to the acquisition of Bertucci's as if the Acquisition,
the sale of $100,000,000 principal amount of 10.75% Notes and the closing
of the restaurant locations discussed above had occurred on January 1,
1997.
Page 44 of 59
<PAGE>
<TABLE>
<CAPTION>
December 29, December 30, December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Net Sales $ 252,920 $ 243,414 $ 218,084
Costs and Expenses-
Cost of sales 69,483 64,980 57,486
Operating expenses 131,129 129,163 112,037
General and administrative expenses 14,472 11,604 12,353
Deferred rent, depreciation, amortization and preopening 17,863 18,167 16,124
Taxes other than income 12,568 11,799 10,819
--------- --------- ---------
Total costs and expenses 245,516 235,713 208,819
Operating income 7,405 7,701 9,265
Interest expense, net 14,007 14,474 12,998
--------- --------- ---------
Loss before income taxes (6,603) (6,773) (3,733)
Income tax benefit (1,826) (1,838) (979)
Change in accounting principle, net of tax (678) -- --
--------- --------- ---------
Net loss (5,455) (4,935) (2,754)
========= ========= =========
</TABLE>
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. Significant estimates include the reserve
for closing restaurant locations as discussed previously in Note 2.
Actual results could differ from those estimates.
Page 45 of 59
<PAGE>
Inventories
Inventories are carried at the lower of first-in, first-out cost or
market value, and consist of the following:
1998 1999
Food $ 1,190,961 $ 1,059,449
Liquor 664,560 663,089
Supplies 208,443 81,808
--------------- ---------------
Total inventory $ 2,063,964 $ 1,804,346
=============== ===============
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 and building improvements 20-40 years
Leasehold improvements Shorter of term of the lease (ranging
between 10-20 years) or life of asset
Furniture and equipment 3-10 years
Included in furniture and equipment in the accompanying consolidated
balance sheets is the opening amount of small kitchen and dining room
equipment and utensils including but not limited to pots, pans, dishes,
flatware and blenders ("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 Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. The Company'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 undiscounted 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, 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.
Page 46 of 59
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Total interest expense $14,073,213 $ 8,200,344 $ 1,961,428
Less--Amount capitalized 66,162 196,084 43,823
----------- ----------- -----------
Interest expense, net of amounts
capitalized $14,007,051 $ 8,004,260 $ 1,917,605
=========== =========== ===========
</TABLE>
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
$682,543 and $509,000 at December 29, 1999 and December 30, 1998,
respectively.
Other assets also include investments restricted for the payment of
certain officers' deferred compensation. These investments are stated at
market value at December 29, 1999 and December 30, 1998. Since these
securities are from time to time bought and sold at the discretion of the
officers they are classified as trading securities.
Preopening Costs
In April 1998, the American Institute of Certified Public Accountants
(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 was effective for financial statements for fiscal
years beginning after December 15, 1998. The Company 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
(approximately $0.7 million net of tax) in 1999. This charge was
primarily to write off unamortized preopening costs which were previously
amortized over the 12-month period subsequent to a restaurant opening.
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.
Accrued Expenses
Accrued expenses consisted of the following as of December 29, 1999 and
December 30, 1998:
1999 1998
Accrued occupancy costs $ 896,765 $ 1,418,327
Accrued payroll and related benefits 7,219,555 9,490,222
Accrued interest 4,999,345 4,800,362
Accrued advertising 1,692,244 1,741,820
Accrued royalties 553,034 420,022
Unredeemed gift certificates 2,100,453 1,857,568
Accrued sales tax 787,111 623,958
Accrued income taxes 645,320 195,932
Store closing reserves 2,281,524 3,040,000
Other accrued liabilities 2,162,526 4,202,403
----------- -----------
$23,337,877 $27,790,614
=========== ===========
Page 47 of 59
<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.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130, which is effective for fiscal 1999, establishes
standards for the reporting and display of comprehensive income and its
components. 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. Comprehensive income for fiscal
1999, 1998 and 1997 is equal to net income as reported.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No.
14, Financial Reporting for Segments of a Business Enterprise and
requires that a company report annual and interim financial and
descriptive information about its reportable operating segments.
Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 allows
aggregation of similar operating segments into a single operating segment
if the businesses are considered similar under the criteria. The Company
believes it meets the aggregation criteria for its operating segments.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement established accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts and
for hedging activities) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedging accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June15, 2000. A company may
also implement the Statement as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. The Company does
not anticipate that the adoption of this new standard will have a
material impact on the Company's fiscal position or results of
operations.
Page 48 of 59
<PAGE>
(4) INCOME TAXES
The Company accounts for income taxes under the liability method in
accordance with SFAS 109. The components of the (benefit) provision for
income taxes for the years ended December 29, 1999, December 30, 1998,
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current-
Federal $ (276,651) $ 460,329 $ 704,254
State (125,459) 208,755 304,834
----------- ----------- -----------
(402,110) 669,084 1,009,088
----------- ----------- -----------
Deferred--
Federal (1,659,438) (1,080,772) 56,835
State (752,539) (490,120) 17,547
----------- ----------- -----------
(2,411,977) (1,570,892) 74,382
----------- ----------- -----------
Total (benefit) provision for income taxes (2,814,087) (901,808) 1,083,470
(Benefit) on change in accounting principle (457,087)
----------- ----------- -----------
(Benefit) provision on continuing (loss) income $(2,357,000) $ (901,808) $ 1,083,470
</TABLE>
A reconciliation of the amount computed by applying the statutory federal
income tax rate of 34% to (loss) income before taxes and change in
accounting principle for the years ended December 29, 1999, December 30,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income tax (benefit) provision computed at federal statutory rate $(2,793,250) $ (928,598) $ 1,082,492
State taxes, net of federal benefit (485,355) (216,253) 212,771
FICA tax credit (340,000) (210,000) (216,253)
Targeted jobs tax credit (1,650) (3,197) (1,897)
Goodwill amortization 773,840 484,953 --
Other 32,328 (28,713) 6,357
----------- ----------- -----------
Income tax (benefit) provision $(2,814,087) $ (901,808) $ 1,083,470
=========== =========== ===========
</TABLE>
Page 49 of 59
<PAGE>
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 29, 1999 and December 30, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets-
Deferred rent $ 1,683,890 $ 1,009,744
Store closing write downs and liabilities 6,155,245 7,467,000
Deferred and accrued compensation 990,593 549,223
Net operating loss carryforwards 4,169,304 --
Accrued expenses and other 1,996,537 1,658,012
------------ ------------
14,995,569 10,683,979
Deferred tax liabilities-
Accelerated tax depreciation (1,656,235) (971,239)
Pre-opening costs -- (344,094)
Liquor licenses (396,752) (118,577)
------------ ------------
(2,052,987) (1,433,910)
------------ ------------
Total net deferred tax assets $ 12,942,582 $ 9,250,069
============ ============
Current portion $ 8,647,600 $ 9,265,011
============ ============
Noncurrent portion $ 4,294,982 $ (14,942)
============ ============
</TABLE>
As of December 29, 1999, the Company had net operating loss carryforwards
for federal purposes of approximately $10.4 million which are subject to
review by the Internal Revenue Service. The net operating loss
carryforwards begin to expire in 2014 and are subject to limitations on
their use in any one year if there should be a change in control of the
Company.
No valuation allowance has been provided as the Company believes it is
more likely than not that all of the net deferred 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 0.5% 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 1999 and 1998
was 7.75%. No borrowings were outstanding as of December 29, 1999 and
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 these covenants at December 29, 1999.
Page 50 of 59
<PAGE>
(6) CAPITAL LEASE OBLIGATION
During 1996, the Company entered into a capital lease 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 29, 1999
are as follows:
Year-
2000 $ 92,892
2001 61,928
--------
154,820
Less--Interest 24,312
--------
$130,508
========
Current portion of obligation $ 72,647
========
Long-term portion of obligation $ 57,861
========
(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 $48,221,000. For the years
ended December 30, 1999 and December 30, 1998, interest related to the
FFCA Loans was $2,995,000 and $2,362,000, 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 29, 1999.
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.
Page 51 of 59
<PAGE>
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.
The loan payments due under the FFCA loans and the Notes as of December
29, 1999 are as follows:
Year Ending-
2000 $ 1,255,406
2001 1,416,586
2002 1,527,076
2003 1,580,098
2004 1,694,181
Thereafter 131,799,548
-------------
$ 139,272,895
=============
(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 $15,938,0000, $10,292,000 and $3,955,000 for the years
ended December 29, 1999, December 30, 1998 and December 31, 1997,
respectively. The excess of accrued rent over amounts paid is classified
as deferred rent in the accompanying consolidated balance sheets.
Page 52 of 59
<PAGE>
The approximate minimum rental payments due under all noncancelable
operating leases as of December 29, 1999 are as follows:
Year-
2000 $ 15,102,006
2001 15,229,451
2002 14,504,542
2003 12,671,135
2004 11,788,620
Thereafter 68,622,901
-------------
$ 137,918,655
=============
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.
(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 Partners"), a
stockholder of the corporation. The amounts paid to Jacobson Partners for
financial consulting fees were $313,000, $330,000 and $160,000 for the
years ended December 29, 1999, December 30, 1998 and December 31, 1997,
respectively, and are included in general and administrative expenses in
the accompanying consolidated statements of income. In addition, during
fiscal 1998, Jacobson Partners 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 of approximately 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 1999 and 1998 and 3.8% in 1997. 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 addition, according to the franchise agreements,
the Franchisor may require the Company to pay an additional amount of
advertising. The Franchisor requested that the Company pay an additional
0.375% of net sales for supplemental advertising for the period from
September 1999 through August 2000.
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.
Page 53 of 59
<PAGE>
The agreement is renewable at the Company's option and the Company
exercised its option to renew verbally with Brinker during 1999. The
Company will be required to pay additional sums at the expiration date in
connection with the renewal.
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. The On The Border development
agreement expires in 2004.
(11) 401(K) PROFIT SHARING PLAN AND DEFERRED COMPENSATION PLAN(S)
The Company maintains two defined contribution plans (the "Bertucci's
401(k) Plan" and the "NE Restaurant 401(k) Plan"). Under the Bertucci's
401(k) Plan, 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 makes a matching contribution to the Bertucci's 401(k) Plan
that is allocated, based on a formula as defined by the Bertucci's 401(k)
Plan, to the Bertucci's 401(k) Plan participants. The Company is
currently in the process of terminating the NE Restaurant 401(k) Plan and
as of May 1, 1999 all eligible participants were transferred to the
Bertucci's 401(k) Plan in order to consolidate the Plans after the
Acquisition. In connection with the termination of the NE Restaurant
401(k) Plan, all amounts became fully vested. Matching contributions made
by the Company for the years ended December 29, 1999, December 30, 1998
and December 31, 1997 were approximately $89,000, $160,000 and $67,000,
respectively. Prior to the termination of the NE Restaurant 401(k) Plan,
two officers of the Company were also the NE Restaurant 401(k) Plan's
trustees.
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 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 29, 1999, trust account
balances for Paul Hoagland and Dennis Pedra were $475,333 and $671,549,
respectively. In January 2000, the Non-qualified Deferred Compensation
Plan was terminated and the balances were paid to the participants.
During 1999, the Company has also established the NE Restaurant Company,
Inc. Executive Savings and Investment Plan (the "Executive Savings and
Investment Plan") to which highly compensated executives of the company
may elect to defer a portion of their salary and or earned bonus. The
Company maintains an irrevocable grantor trust which has been established
by the Company, as grantor, pursuant to the Scudder Kemper Investments
non-qualified deferred compensation plan trust agreement, dated September
20, 1999. The agreement is between the Company and Scudder Kemper
Investments, as trustee, for the purpose of paying benefits under
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 February 2000, there were 29
participants in the plan with a total market value of approximately
$153,068.
(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 is administered by the Board of Directors of the Company
and may be modified or amended by the Board of Directors in any respect.
Page 54 of 59
<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. During 1999, 36,110 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:
1999 1998 1997
Net (loss) income-
As reported $ (6,536,408) $ (1,829,363) $ 2,100,330
Pro Forma $ (6,800,665) $ (2,051,121) $ 2,100,330
EPS-
As reported $ (2.19) $ (0.89) $ 1.22
Pro Forma $ (2.28) $ (1.00) $ 1.22
A summary of the Option Plan activity for the years ended December 29,
1999 and December 30, 1998 and December 31, 1997 is presented in the
table and narrative below.
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 378,532 $ 12.54 331,123 $ 11.63 -- $ --
Granted 36,110 $ 15.00 58,429 $ 17.51 331,123 $ 11.63
Exercised -- $ -- (11,020) $ (11.63) -- $ --
Forfeited -- $ -- -- $ -- -- $ --
Expired -- $ -- -- $ -- -- $ --
----------------------------------------------------------------
Outstanding at end of year 414,642 $ 12.75 378,532 $ 12.54 331,123 $ 11.63
================================================================
Exercisable at end of year 80,026 $ 11.63 -- $ -- -- $ --
Weighted average fair value of
each option granted $ 3.28 $ 3.24 $ 3.06
</TABLE>
The 414,642 options outstanding at December 29, 1999 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 1999: weighted average risk-free interest
rates of 5.66 percent; weighted average expected lives of five years; and
expected volatility of 0%. The weighted average risk-free interest rate
used for 1998 was 5.29% and, for 1997, 5.88%.
Page 55 of 59
<PAGE>
(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). During 1999, the Company returned capital of $50,000
that was previously paid into the Company from two employees.
(14) SUBSIDIARY GUARANTORS
The Notes (see Note 7) 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 1999 consolidating financial statements of the
combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries:
Page 56 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 29, 1999
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 7,578,632 $ 7,578,632
Credit card receivables 1,630,844 1,630,844
Inventories 1,804,346 1,804,346
Prepaid expenses and other current assets 668,698 668,698
Short-term assets held for sale 1,847,584 1,847,584
Prepaid and current deferred income taxes 8,647,600 8,647,600
Preopening costs, net of accumulated amortization -- --
------------- ------------- -------------
Total current assets 22,177,704 -- 22,177,704
------------- ------------- -------------
Property and Equipment, at cost:
Land and land right 2,460,412 5,961,613 8,422,025
Buildings and building improvements 6,511,957 5,687,938 12,199,895
Leasehold improvements 50,218,926 25,798,786 76,017,712
Furniture and equipment 28,943,855 15,788,490 44,732,345
------------- ------------- -------------
88,135,150 53,236,827 141,371,977
Less - Accumulated depreciation (15,799,189) (11,862,857) (27,662,046)
------------- ------------- -------------
72,335,961 41,373,970 113,709,931
Construction work in process 4,300,112 -- 4,300,112
------------- ------------- -------------
Net property and equipment 76,636,073 41,373,970 118,010,043
Goodwill, net 30,682,037 30,682,037
Deferred finance costs, net 7,169,734 1,591,270 8,761,004
Assets held for sale -- --
Liquor licenses 3,057,235 3,057,235
Restricted investments 1,177,685 1,177,685
Deferred taxes, noncurrent 4,294,982 4,294,982
Other assets, net 1,417,140 1,417,140
------------- ------------- -------------
TOTAL ASSETS $ 146,612,590 $ 42,965,240 $ 189,577,830
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of mortgage loans and bonds payable 25,000 1,230,406 1,255,406
Accounts payable 13,720,971 13,720,971
Accrued expenses 23,337,877 23,337,877
Capital lease obligation- current portion 72,647 -- 72,647
Intercompany Payable (4,315,067) 4,315,067 --
------------- ------------- -------------
Total current liabiliites 32,841,428 5,545,473 38,386,901
Capital lease obligation, net of current portion 57,861 -- 57,861
Mortgage loans payable, net of current portion (0) 38,017,489 38,017,489
Bonds payable, net of current portion 100,000,000 100,000,000
Deferred rent and other long-term liabilities 5,590,010 5,590,010
------------- ------------- -------------
TOTAL LIABILITIES 138,489,299 43,562,962 182,052,261
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value
Authorized 4,000,000 shares
Issued - 3,677,394 at December 29, 1999 and December 30, 1998 36,774 36,774
Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070)
Additional paid in capital 29,003,920 29,003,920
Accumulated deficit (12,900,333) (597,722) (13,498,055)
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 8,123,291 (597,722) 7,525,569
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,612,590 $ 42,965,240 $ 189,577,830
============= ============= =============
</TABLE>
Page 57 of 59
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATING STATEMENTS OF INCOME FOR FISCAL YEAR ENDED DECEMBER 29, 1999
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
Subsidiaries Subsidiaries Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 267,664,677 $ -- $ 267,664,677
------------- ------------- -------------
Cost of Sales and Expenses
Cost of sales 73,859,788 -- 73,859,788
Operating expenses 146,949,105 (5,060,345) 141,888,760
General and administrative expenses 14,608,799 -- 14,608,799
Deferred rent, depreciation,
amortization and preopening expenses 15,797,693 2,065,199 17,862,892
Taxes other than income 13,652,827 -- 13,652,827
------------- ------------- -------------
Total cost of sales and expenses 264,868,212 (2,995,146) 261,873,066
------------- ------------- -------------
Income from operations 2,796,465 2,995,146 5,791,611
Interest expense, net 11,011,905 2,995,146 14,007,051
------------- ------------- -------------
Loss before income tax benefit and change in accounting principle (8,215,440) -- (8,215,440)
Income tax benefit (2,357,000) -- (2,357,000)
------------- ------------- -------------
Loss before change in accounting principle (5,858,440) -- (5,858,440)
Change in accounting principle, net of tax (677,968) (677,968)
------------- ------------- -------------
Net Loss (6,536,408) -- (6,536,408)
============= ============= =============
</TABLE>
Page 58 of 59
<PAGE>
NE Restaurant Company, Inc.
Schedule II: VALUATION AND QUALIFYING ACCOUNTS.
For the year ended December 29, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
(1) (1)
Balance at Charged to Charged to other Deductions -- Balance at end of
beginning of costs and accounts -- describe period
Description 1 period expenses describe
<S> <C> <C> <C> <C> <C>
Store closing reserves 1998 $ 0 $ 0 $ 3,040,000 $0 $ 3,040,000
Store closing reserves 1999 $ 3,040,000 $ 0 $ 0 ($758,476) $ 2,281,524
</TABLE>
(1) 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. Usage to date includes costs related to
facility closings, restaurant employee severance and legal fees associated with
the store closings.
Page 59 of 59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULED CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K FOR FISCAL YEAR EDNDED DECEMBER 29, 1999 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-29-2000 DEC-30-1998
<PERIOD-START> DEC-31-1998 JAN-01-1998
<PERIOD-END> DEC-29-1999 DEC-30-1998
<CASH> 7,579 5,456
<SECURITIES> 0 0
<RECEIVABLES> 1,631 1,116
<ALLOWANCES> 0 0
<INVENTORY> 1,804 2,064
<CURRENT-ASSETS> 22,178 21,168
<PP&E> 145,672 127,139
<DEPRECIATION> 27,662 16,341
<TOTAL-ASSETS> 189,578 186,732
<CURRENT-LIABILITIES> 38,387 39,356
<BONDS> 100,000 100,000
0 0
0 0
<COMMON> 37 37
<OTHER-SE> 7,488 14,075
<TOTAL-LIABILITY-AND-EQUITY> 189,578 186,732
<SALES> 267,665 160,805
<TOTAL-REVENUES> 267,665 160,805
<CGS> 73,860 44,377
<TOTAL-COSTS> 261,873 155,532
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,007 8,004
<INCOME-PRETAX> (8,215) (2,731)
<INCOME-TAX> (2,357) (902)
<INCOME-CONTINUING> (5,858) (1,829)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (678) 0
<NET-INCOME> (6,536) (1,829)
<EPS-BASIC> (2.19) (0.89)
<EPS-DILUTED> (2.19) (0.89)
</TABLE>
