<PAGE>
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 29, 1998.
__ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO
_______.
Commission file number 0-16348.
PREMIUM RESTAURANT COMPANY
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1564262
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
(612) 941-0108
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [X]
The Company had 1,462,819 shares of Common Stock, $.01 par value per share,
outstanding as of April 30, 1998.
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 29, 1998 and
June 29, 1997. 3
Consolidated Statements of Operations for the thirteen
and thirty-nine weeks ended March 29, 1998 and March 30, 1997. 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended March 29, 1998 and March 30, 1997. 5
Consolidated Notes to Financial Statements 6-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10-15
PART II. OTHER INFORMATION 16-17
2
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PART I - FINANCIAL INFORMATION
PREMIUM RESTAURANT COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND JUNE 29, 1997
<TABLE>
<CAPTION>
MAR. 29, JUNE 29,
1998 1997
----------- ----------
(unaudited) (note A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 342,415 $ 454,157
Restricted cash 358,750 -
Receivables 57,697 72,930
Current portion of notes receivable 57,695 -
Inventories 100,569 146,598
Prepaid expenses and other current assets 128,819 83,574
Assets held for sale - 663,108
----------- -----------
Total current assets 1,045,945 1,420,367
PROPERTY AND EQUIPMENT
Equipment 3,287,446 3,870,418
Leasehold improvements 2,322,642 2,638,024
Automobiles 15,058 15,058
----------- -----------
5,625,146 6,523,500
Less accumulated depreciation and (2,958,564) (3,281,305)
----------- -----------
Net property and equipment 2,666,582 3,242,195
OTHER ASSETS
Notes receivable 265,015 -
----------- -----------
$ 3,977,542 $ 4,662,562
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term notes payable and current
long-term obligations
Related party $ 400,000 $ 100,000
Other 926,403 779,807
Accounts payable 991,023 1,369,290
Accrued salaries and wages 173,464 322,071
Amounts received from outside investors 358,750 -
Other accrued liabilities 613,506 720,818
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Total current liabilities 3,463,146 3,291,986
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 1,068,310 764,467
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value; authorized
shares; no shares issued or outstanding - -
Common stock, $.01 par value; authorized
shares; issued and outstanding 742,819 7,428 7,428
Additional paid-in capital 4,335,214 4,335,214
Accumulated deficit (4,896,556) (3,736,533)
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(553,914) (606,109)
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$ 3,977,542 $ 4,662,562
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PREMIUM RESTAURANT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 39 WEEKS ENDED
---------------------------- -----------------------------
MAR. 29, MAR. 30, MAR. 29, MAR. 30,
1998 1997 1998 1997
----------- ----------- ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sale
Full-service restaurants $1,985,801 $4,003,692 $7,882,183 $11,789,394
Bagel bakeries 697,858 470,763 2,084,074 1,350,523
----------- ----------- ------------ -----------
Total sales 2,683,659 4,474,455 9,966,257 13,139,917
Cost of food and beverage 868,973 1,356,025 3,133,529 3,997,944
----------- ----------- ------------ -----------
Gross profit 1,814,686 3,118,430 6,832,728 9,141,973
Restaurant operating expenses
Labor and benefits 976,233 1,550,257 3,620,558 4,690,525
Direct and occupancy 1,019,607 1,628,702 4,031,025 4,745,835
General and administrative expenses 284,640 248,849 955,911 932,092
Gain on sale of full-service restaurants - - (926,341) -
Loss from closure of bagel bakery - - 63,039 -
Impairment of assets write-down - - 90,732 640,286
----------- ----------- ------------ -----------
2,280,480 3,427,808 7,834,924 11,008,738
Loss from operations (465,794) (309,378) (1,002,196) (1,866,765)
Other income (expense), net
Interest expense (59,606) (25,555) (172,749) (79,790)
Investment income 8,774 2,358 15,300 17,983
Other, net 1,099 4,036 4,622 14,800
----------- ----------- ------------ -----------
(49,733) (19,161) (152,827) (47,007)
----------- ----------- ------------ -----------
Loss before income taxes (515,527) (328,539) (1,155,023) (1,913,772)
Income tax expense (benefit) 5,000 1,225 5,000 (8,883)
----------- ----------- ------------ -----------
Net loss ($520,527) ($329,764) ($1,160,023) ($1,904,889)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net loss per share -basic and diluted ($0.70) ($0.44) ($1.56) ($2.56)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Weighted average number of shares
outstanding during the year-basic and diluted 742,819 742,819 742,819 742,819
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PREMIUM RESTAURANT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THIRTY-NINE WEEKS ENDED
----------------------------------------
MAR. 29, MAR. 30,
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $(1,160,023) $(1,904,889)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 620,643 726,977
Impairment of assets write-down 90,732 640,286
Recovery of note receivable - (85,000)
Gain on sale of full-service restaurants (926,341) -
Loss from closure of bagel bakery 63,039 -
Changes in operating assets and liabilities
net of the effects of the sale of full-service
restaurants
Receivables 15,233 (26,803)
Income taxes receivable - 165,576
Inventories (23,069) 33,767
Prepaid expenses and other current assets (64,069) (39,151)
Accounts payable (378,267) (395,646)
Accrued salaries and wages (148,607) (72,718)
Other accrued liabilities (107,312) 111,456
----------- -----------
Net cash used in operating activities (2,018,041) (846,145)
Investing activities:
Purchases of leasehold improvements and equipment (80,003) (415,794)
Receipts from collections of notes receivable 21,788 -
Proceeds from sale of full-service restaurants 1,483,423 -
----------- -----------
Net cash provided by (used in) investing activities 1,425,208 (415,794)
Financing activities:
Proceeds from debt obligations 829,350 50,000
Payments of debt obligations (348,259) (163,700)
----------- -----------
Net cash provided by (used in) financing activities 481,091 (113,700)
----------- -----------
Net increase (decrease) in cash and cash equivalents (111,742) (1,375,639)
Cash and cash equivalents at beginning of period 454,157 1,602,936
----------- -----------
Cash and cash equivalents at end of period $ 342,415 $ 227,297
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 63,876 $ 80,816
Income taxes 5,000 5,700
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 29, 1998 and the
unaudited consolidated statements of operations and cash flows for the
thirty-nine weeks ended March 29, 1998 and March 30, 1997 have been prepared
by the Company. In the opinion of management, all adjustments (all of which
are normal and recurring in nature) necessary to present fairly the financial
position at March 29, 1998 and the results of operations and cash flow
activity for the periods ended March 29, 1998 and March 30, 1997 have been
made. The consolidated balance sheet as of June 29, 1997 has been taken from
the audited financial statements as of that date. Results of operations for
interim periods are not necessarily indicative of results that may be
expected for a full fiscal year or other interim periods.
NOTE B - NET LOSS PER SHARE-BASIC AND DILUTED
On December 28, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) 128 - "Earnings per Share." The statement
requires restatement of all current and prior year loss per share data. This
restatement had no impact on per share data presented.
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common
shares. The Company's diluted net loss per share amounts are computed by
dividing net loss by the weighted average number of outstanding common shares
and common share equivalents relating to stock options, when dilutive.
Options to purchase 34,403 and 65,726 shares of common stock with a weighted
average exercise price of $2.74 and $2.50 were outstanding during the
thirteen weeks ended March 29, 1998 and March 30, 1997 and options to
purchase 43,545 and 65,665 shares of common stock with a weighted average
exercise price of $2.66 and $2.52 were outstanding during the thirty-nine
weeks ended March 29, 1998 and March 30, 1997, but were excluded from the
computation of common share equivalents because they were anti-dilutive.
NOTE C - RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS 130,
"Reporting Comprehensive Income," which requires the Company to display an
amount representing total comprehensive income, as defined by the statement, as
part of the Company's basic financial statements. Additionally, SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," requires
the Company to disclose financial and other information about its business
segments, their products and services, geographic areas, sales, profits, assets
and other information. These statements will be effective in fiscal year 1999.
The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.
6
<PAGE>
NOTE D - SALE-LEASEBACK OF BAGEL BAKERY EQUIPMENT
During the third quarter of fiscal 1998 the Company re-financed through
sale-leaseback transactions selected equipment at four of its existing bagel
bakeries. The funded amount was in excess of the book value of the equipment
thereby creating a deferred gain which is to be recognized over the remaining
useful life of the equipment. The lease terms are for sixty months expiring
in March, 2003, and have a monthly obligation of approximately $9,500. There
are bargain purchase options at the end of the lease terms allowing for the
purchase of the equipment at ten percent of the fair market value. The
effect of this transaction on the financial statements is as follows:
<TABLE>
<S> <C>
Increase in cash and cash equivalents $ 377,960
Increase in long-term obligations (377,960)
Increase in equipment 104,906
------------
Deferred gain on sale-leaseback $ 104,906
------------
------------
</TABLE>
NOTE E - GAIN ON SALE OF FULL-SERVICE RESTAURANTS
During the first thirty-nine weeks of fiscal 1998, the Company sold five of
its full-service restaurants. The effect of these sales on the financial
statements was as follows:
<TABLE>
<S> <C>
Increase in cash and cash equivalents $ 1,483,423
Increase in notes receivable 344,498
Reduction of accumulated depreciation 433,272
Reduction of equipment and leaseholds (640,193)
Reduction of assets held for sale (606,737)
Reduction of inventories (69,098)
Reduction of prepaid expenses and other current assets (18,824)
--------------
Gain on sale $ 926,341
--------------
--------------
</TABLE>
NOTE F - IMPAIRMENT OF ASSETS WRITE-DOWN
During the second quarter of fiscal 1998, the Company recognized an
impairment loss of $90,732 for the long-lived assets at its Maplewood,
Minnesota restaurant. The Company has determined that the geographic area
this restaurant is located in can no longer support two Italian restaurants
(Ciatti's Italian Restaurant and a competitor restaurant) in such close
proximity to each other. In addition, the Company attempted several
advertising and promotional campaigns during the first twenty-six weeks of
fiscal 1998 that did not produce the results management expected. Based on
these items, management revised its forecasts for this restaurant and
projected operating losses and cash flow deficits for the remainder of the
restaurant's lease, which expires in 2000. Accordingly, the Company has fully
written off the long-lived assets at this restaurant as follows:
<TABLE>
<S> <C>
Equipment $ 427,921
Leasehold improvements 104,106
Accumulated depreciation (441,295)
-----------
Write-down of impaired assets $ 90,732
-----------
-----------
</TABLE>
7
<PAGE>
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the second quarter of fiscal 1998, the Company closed one of its
bagel bakeries. The effect of this closure on the financial statements was as
follows:
<TABLE>
<S> <C>
Reduction of accumulated depreciation $ 15,218
Reduction of equipment and leaseholds (78,257)
------------
Loss on disposal $ (63,039)
------------
------------
</TABLE>
During the first quarter of fiscal 1998, leasehold improvements of
$167,215 were acquired by issuance of debt obligations.
During the second quarter of fiscal 1997, the Company recorded a
write-down of impaired assets in connection with one of its full-service
restaurants. The effect of this write-down was to reduce the Company's
assets as follows:
<TABLE>
<S> <C>
Building $ 610,829
Equipment 620,710
Leasehold improvements 231,229
Accumulated depreciation (822,482)
------------
Write-down of impaired assets $ 640,286
------------
------------
</TABLE>
NOTE H - SHAREHOLDERS' EQUITY
On October 8, 1997, the Company's Common Stock was delisted from the
Nasdaq SmallCap Market because of the Company's inability to comply with the
Nasdaq SmallCap Market shareholders' equity requirement. The Company's
Common Stock is now quoted on the Nasdaq OTC Bulletin Board. There can be no
assurance that a deep and liquid market will ever develop in the Company's
Common Stock.
NOTE I - CONSULTING AGREEMENT
In January 1998, the Company entered into a Consulting Agreement
("Consulting Agreement") with Select Investor Relations Corporation
("Select") under which Select agreed to provide a variety of consulting
services to the Company, including assisting the Company in developing a
business plan, providing public relations activities for the Company,
increasing the Company's visibility in the marketplace and assisting the
Company in locating sources of debt and equity financing. Select is not,
however, acting as a broker-dealer and will not effect any transactions for
the Company. Under the terms of the Consulting Agreement, the Company agreed
to pay Select an initial fee of $29,500, plus monthly fees of $26,042 for a
period of one year. The Company has also agreed, however, that upon its
achieving of the minimum and maximum proceeds from this Offering, it will
prepay certain of the amounts due under the Consulting Agreement. The
Company has also agreed to issue a warrant to Select to purchase 24,759
shares of the Company's Common Stock. Of the shares subject to the warrant,
8,253 shares are exercisable at a price of $.001 per share, 8,253 shares are
exercisable at a price of $1.25 a share for a period of 12 months from the
date of the Consulting Agreement and 8,253 shares are exercisable at a price
of $1.625 a share for a period of 15 months from the date of the Consulting
Agreement.
8
<PAGE>
NOTE J - SUBSEQUENT EVENT
The Company filed a registration statement with the Securities and
Exchange Commission for a unit offering of common stock and warrants with a
minimum requirement of $600,000 (480,000 units) and a maximum of $2,500,000
(2,000,000 units) effective February 23, 1998. Each unit ("Unit") consists
of one share of the Company's common stock ("Common Stock") and one
Redeemable Common Stock Purchase Warrant ("Warrant"). One Warrant entitles
the holder to purchase, at any time up to March 31, 2000, one share of Common
Stock at a price of $1.875. Beginning January 1, 1999, the Warrants are
redeemable, in whole, by the Company at a redemption price of $.05 per
Warrant on not less than 30 days written notice, provided that the market
price of the Common Stock exceeds $3.50 per share (subject to adjustment) for
any 20 consecutive trading days within 15 days prior to such notice.
As of March 29, 1998 the Company had raised $358,750 (287,000 units),
which is recorded as restricted cash and amounts received from outside
investors on the Company's balance sheet as of March 29, 1998. As of April
30, 1998 the Company has raised approximately $900,000 (720,000 units). This
amount exceeds the minimum requirement and the proceeds are available to be
used by the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $2,683,659 for the third quarter of fiscal 1998
decreased $1,790,796, or 40.0%, from consolidated sales of $4,474,455 for the
third quarter of fiscal 1997. Consolidated sales of $9,966,257 for the first
thirty-nine weeks of fiscal 1998 decreased $3,173,660, or 24.2%, from
consolidated sales of $13,139,917 reported during the first thirty-nine weeks
of fiscal 1997. The decrease in consolidated sales during fiscal 1998 was
due to a decline in sales at the Company's full-service restaurants offset by
an increase in sales at the Company's bagel bakeries, as described below.
Sales at the Company's full-service Italian and steakhouse restaurants
of $1,985,801 for the third quarter of fiscal 1998 decreased 50.4% from sales
of $4,003,692 for the same quarter of fiscal 1997. Full-service restaurant
sales of $7,882,183 for the first thirty-nine weeks of fiscal 1998 decreased
33.1% from sales of $11,789,394 for the same period of fiscal 1997. This
decrease in full-service restaurant sales was due, in part, to the Company
selling three of its full-service restaurants in the first quarter of fiscal
1998, and two of its full-service restaurants in the second quarter of fiscal
1998. In addition, this decrease in sales was due to the increased
competition of national chain restaurants in each of the markets in which the
Company's Italian and Steakhouse restaurants operate. The Company expects
competition to intensify and, therefore, most of the Company's restaurants
will continue to face significant pressure to maintain sales levels. To
offset this the Company developed a new menu that was introduced to the
Italian restaurants in September 1997. The focus of the new menu is to
increase portion sizes and increase the offerings of chicken and seafood in
order to create a higher quality and value to the customer. In addition, the
purpose of the new menu is to increase the check average per person without
decreasing the value. As of March 29, 1998 the Company has seen an increase
in the check average per person.
Sales at the Company's bagel bakeries of $697,858 for the third quarter
of fiscal 1998 increased $227,095, or 48.2%, from bagel bakery sales of
$470,763 for the same quarter of fiscal 1997. Sales of $2,084,074 for the
first thirty-nine weeks of fiscal 1998 increased $733,551, or 54.3%, over
bagel bakery sales of $1,350,523 for the same period of fiscal 1997. This
increase in sales was primarily a function of the Company having seven bagel
bakeries open as of March 29, 1998, while only having five bagel bakeries
open as of March 30, 1997. The Company closed one of its bagel bakeries in
November 1997. The Company is required by its development agreement, as
amended through May 11, 1998, to have eight stores open by August 1, 1998,
nine stores open by September 1, 1998 and thirty stores open by July 1, 2002.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 32.4%
for the third quarter of fiscal 1998 from 30.3% for the same period in fiscal
1997, and increased to 31.4% for the first thirty-nine weeks of fiscal 1998
from 30.4% for the same period of fiscal 1997. These costs were up due to the
mix of the Company's business including a larger percentage of bagel bakery
sales, which have a slightly higher cost of food and beverage associated with
them.
The Company does not expect the cost of food and beverage to increase
significantly in the future. The Company expects to construct a commissary
in calendar 1998 to lower the food and beverage costs associated with its
bagel bakeries and expects no change to the food and beverage costs at its
full-service restaurants.
10
<PAGE>
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales increased to 36.4% for
the third quarter of fiscal 1998 from 34.6% for the same quarter of fiscal
1997, and increased to 36.3% for the first thirty-nine weeks of fiscal 1998
compared to 35.7% during the same period of last year. This slight increase
was primarily due to the minimum wage increase that took effect on September
1, 1997. In response to this minimum wage increase, the Company implemented
menu price increases at its full-service restaurants which took effect
October 1, 1997. These increases have partially offset the cost of the wage
increases. This minimum wage increase is not expected to have a material
effect on the Company's bagel bakeries as all employee pay rates are already
at or above the new minimum wage.
DIRECT AND OCCUPANCY
Direct and occupancy costs increased to 38.0% of sales for the third
quarter of fiscal 1998, from 36.4% during the same period of fiscal 1997, and
increased to 40.4% of sales for the first thirty-nine weeks of fiscal 1998
compared to 36.1% of sales during the same period of last year. This
increase was primarily due to the fact that the Company is currently paying
rent on four bagel bakery leases that are not yet under construction. Bagel
bakeries will not be constructed at these locations until financing can be
acquired. Secondly, the Company increased its advertising and promotional
costs at its full-service restaurants from 2.6% of sales for the first
thirty-nine weeks of fiscal 1997 to 5.3% of sales for the same period of
fiscal 1998. The Company expects advertising and promotional expenses to
decrease to 4.0% of sales for the remainder of fiscal 1998. The Company is
obligated by its development agreement with Bruegger's to spend a minimum of
2% of sales on advertising and, following its current practice, expects to
spend between 4% and 5% of bakery sales in the near future. Lastly, direct
and occupancy costs at the Company's bagel bakeries were affected by fixed
costs such as rent and depreciation being spread across a lower sales base
than at its full-service restaurants. As sales at the Company's bagel
bakeries increase in the future, these fixed costs will decrease as a percent
of sales.
GENERAL AND ADMINISTRATIVE
General and administrative costs as a percentage of sales increased to
10.6% for the third quarter of fiscal 1998 from 5.6% of sales reported during
the same quarter of last year, and increased to 9.6% for the first
thirty-nine weeks of fiscal 1998 compared to 7.1% of sales for the same
period of last year. This increase in general and administrative costs was
primarily due to the Company incurring approximately $385,000 of general and
administrative costs in the first thirty-nine weeks of fiscal 1998 relating
to the development of a corporate infrastructure at its bagel bakery
operation, as compared to only $216,000 of costs for the same period last
year. The Company also had increased professional fees pertaining to its
attempts to acquire financing for its bagel bakery concept. General and
administrative costs were lower during the third quarter of fiscal 1997 as a
result of the Company recording an $85,000 recovery of a bad debt expense.
GAIN ON SALE OF FULL-SERVICE RESTAURANTS
The Company sold five of its full-service restaurants during the first
thirty-nine weeks of fiscal 1998. The restaurants are located in Burnsville,
Falcon Heights, Woodbury and St. Cloud, Minnesota and LaCrosse, Wisconsin.
The sale of these restaurants generated proceeds of approximately $1,827,000.
The gain recognized on the sale of these restaurants sold was $926,341.
LOSS FROM CLOSURE OF BAGEL BAKERY
The Company closed one of its bagel bakeries during the first
thirty-nine weeks of fiscal 1998. The bakery is located in Irving, Texas.
This bakery was an experimental site, as it was connected to a gas station
and was only one-third the size of a standard bakery. The Company determined
it was unlikely that this bakery would generate the sales necessary to
achieve profitability. The equipment at this bakery was removed and can be
used at other bakeries. The Company recognized a loss of $63,039 on the net
book value of the leasehold improvements at the bakery.
11
<PAGE>
IMPAIRMENT OF ASSETS WRITE-DOWN
During the first thirty-nine weeks of fiscal 1998, the Company
recognized an impairment loss of $90,732 for the long-lived assets at its
Maplewood, Minnesota restaurant. The Company has determined that the
geographic area this restaurant is located in can no longer support two
Italian restaurants (Ciatti's Italian Restaurant and a competitor restaurant)
in such close proximity to each other. In addition, the Company attempted
several advertising and promotional campaigns during fiscal 1998 that did not
produce the results management expected. Based on these items, management
revised its forecasts for this restaurant and projected operating losses and
cash flow deficits for the remainder of the restaurant's lease, which expires
in 2000. Accordingly, the Company has fully written off the long-lived
assets at this restaurant.
OTHER INCOME (EXPENSE) NET
Other income (expense) increased to a net expense of $49,733 for the
third quarter of fiscal 1998, up from a net expense of $19,161 reported in
the same quarter of last year, and increased to a net expense of $152,827 for
the first thirty-nine weeks of fiscal 1998 up from a net expense of $47,007
during the same period of last year. This increase in expense was primarily
due to the Company carrying higher debt as a result of the construction of
the Company's bagel bakeries.
INCOME TAX EXPENSE (BENEFIT)
For the thirteen and thirty-nine weeks ended March 29, 1998, the
Company recorded income tax expense of $5,000 for state and franchise taxes
paid during fiscal 1998. For the thirteen and thirty-nine weeks ended March
30, 1997, the Company recorded income tax expense of $1,225 and an income tax
benefit of $8,883 which was due to the receipt of state and federal income
taxes in excess of the amount recorded as an income tax receivable as of June
30, 1996, offset by state and franchise taxes paid during fiscal 1997. There
was no tax benefit recorded for the losses generated during fiscal 1997
because no taxes would have been recoverable from a carryback of the net
losses. As of March 29, 1998, the Company has approximately $166,000 of
alternative minimum tax credit carryforwards and $3,802,000 in net operating
loss carryforwards. These tax carryforwards may only be utilized against
future earnings and there is no assurance that the Company will realize these
benefits. The utilization of these carryforwards may be limited if there are
significant changes in the ownership of the Company.
SEASONALITY
The Company's highest sales from its Italian and Steakhouse restaurants
have historically occurred during the months of July through December. The
Company's bagel bakeries' highest sales have occurred during the period from
September through May.
EFFECTS OF INFLATION
Inflationary factors such as increases in food and labor costs directly
affect the Company's operations. Because most of the Company's employees are
paid hourly rates related to federal and state minimum wage and tip credit
laws, changes in these laws may result in an increase in the Company's labor
costs. The Company cannot always effect immediate price increases to offset
higher costs, and no assurance can be given that the Company will be able to
do so in the future.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1998 the Company had cash and cash equivalents on hand of
$342,415, which represents a decrease of $111,742 from the $454,157 in cash
and cash equivalents reported as of June 29, 1997. Net cash used in
operating activities was $2,018,041 for the first thirty-nine weeks of fiscal
1998. For the first thirty-nine weeks of fiscal 1998 the Company incurred a
net loss of $1,160,023 which was net of a gain of $926,341 pertaining to the
sale of five of the Company's full-service restaurants and a loss of $90,732
pertaining to the impairment of assets write-down at one of the Company's
full-service restaurants. In addition, the Company reduced its accounts
payable balance by $378,267 during the first thirty-nine weeks of fiscal 1998
as a result of the sale of the five full-service restaurants. These uses of
cash were partially offset by non-cash depreciation and amortization expense
of $620,643.
Net cash provided by investing activities was $1,425,208 during the
first thirty-nine weeks of fiscal 1998 which is the net of $1,483,423
generated from the sale of five of the Company's full-service restaurants,
$21,788 from collections on notes receivable, and $80,003 for the purchase of
leasehold improvements and equipment for bagel bakeries.
Net cash provided by financing activities was $481,091 for the first
thirty-nine weeks of fiscal 1998. The net cash provided by financing
activities consists of borrowings from the Chairman of the Board of Directors
of the Company of $300,000, borrowings of $151,390 from a note offering
commenced in June 1997 and borrowings of $377,960 from sale-leasebacks on the
equipment at the Company's existing bagel bakeries. These borrowings were
partially offset by payments of $237,620 to the Company's equipment vendor
and $110,639 due under other debt financing.
DFW Bagels, Inc. (DFW Bagels), a wholly-owned subsidiary of Premium
Restaurant Company, has entered into an exclusive development agreement with
Bruegger's Franchise Corporation (Bruegger's). This agreement, as last
amended in May 1998, requires DFW Bagels to build thirty bagel bakeries by
July 1, 2002. Through April 30, 1998, DFW Bagels has opened seven bagel
bakeries. The Company is required by its development agreement, as amended
through May 11, 1998, to have eight stores open by August 1, 1998, nine
stores open by September 1, 1998 and thirty stores open by July 1, 2002.
Currently, DFW Bagels has entered into lease agreements for four additional
bagel bakery sites. The Company intends to open bagel bakeries at a faster
rate than that obligated under the development agreement, subject to
available financing. The Company believes each new site will require
approximately $370,000 for capital expenditures, including pre-opening
expenses and the initial franchise fee.
During the period from May 1996 through October 1997, Bruegger's was
owned by Quality Dining, Inc. In October 1997, Bruegger's was sold back to
its original owners. The Company is working with the current owners of
Bruegger's to provide the Company with additional working capital and to
increase sales at the Company's bagel bakeries. The current owners of
Bruegger's have agreed to waive the initial franchise fee for all Bruegger's
Bagel Bakery restaurants opened in calendar 1998 and reduce franchise
royalties through calendar 1998.
The Company believes that the profitability of any individual bagel
bakery often depends to a high degree on the penetration of a particular
market by the bagel bakery operator. The Company believes that individual
bagel bakeries will generally become profitable only after the Company has
opened a number of bagel bakeries sufficient to make the franchise name
well-known in that market. The Company estimates that in the Dallas-Fort
Worth area the minimal number of bagel bakeries needed for such penetration
is between twelve and twenty. If the Company is unable to achieve this level
of penetration, its ability to achieve profitability may be affected. In
addition, if the Company is unable to obtain adequate financing to open the
bagel bakeries, it could have a material adverse effect on the Company's
consolidated financial position or results of operations.
13
<PAGE>
In June 1997, the Company commenced a note offering of $2,000,000 in one
and three year notes. The Company is not currently offering any notes
pursuant to this offering, and has raised approximately $224,000 from the
offering.
The Company filed a registration statement with the Securities and
Exchange Commission for a unit offering of common stock and warrants with a
minimum requirement of $600,000 effective February 23, 1998. As of March
29, 1998 the Company had raised $358,750. As of April 30, 1998 the Company
has raised approximately $900,000. This amount exceeds the minimum
requirement and the proceeds are available to be used by the Company.
During the third quarter of fiscal 1998 the Company re-financed through
sale-leaseback transactions selected equipment at four of its existing bagel
bakeries. The four bakeries were originally financed through the Company's
cash reserves. The funded amount was in excess of the book value of the
equipment thereby creating a deferred gain which is to be recognized over the
remaining useful life of the equipment. The lease terms are for sixty months
expiring in March, 2003, and have a monthly obligation of approximately
$9,500. There are bargain purchase options at the end of the lease terms
allowing for the purchase of the equipment at ten percent of the fair market
value. The Company used the proceeds from this transaction to satisfy a debt
with its equipment vendor and for working capital. The Company has and is
continuing to explore several alternatives for lease financing and equipment
financing for its bagel bakeries including additional sale and lease-back
financing arrangements with respect to its existing bagel bakeries and
full-service restaurants.
As of the quarter ended March 29, 1998, the Company has borrowed
$400,000 from the Chairman of the Board of Directors of the Company pursuant
to an unsecured promissory note due December 31, 1998. Although the Company
may borrow additional amounts from Mr. Danford, there are no agreements
between Mr. Danford and the Company with respect to future financing or any
guarantee that such funds will be available.
The Company sold five of its full-service restaurants during the first
thirty-nine weeks of fiscal 1998. The restaurants are located in Burnsville,
Falcon Heights, Woodbury and St. Cloud, Minnesota and LaCrosse, Wisconsin.
The sale of these restaurants generated proceeds of approximately $1,827,000.
The gain recognized on the sale of these restaurants sold was $926,341. The
restaurants sold are initially being operated as Ciatti's Italian
Restaurants-Registered Trademark-, however, the new operators have the right
to change the name. The Company decided to sell these restaurants to focus on
achieving and maintaining profitability at its remaining full-service
restaurants and to generate cash to continue to expand its bagel bakery
concept in the Dallas-Fort Worth market. During fiscal 1997, the restaurants
sold generated approximately $8,270,000 of sales, net earnings of $445,000
and cash flows from operations of $799,000. Although the Company has no
agreements to sell any of its remaining full-service restaurants, it is
exploring alternatives to maximize its cash flow, including the possible sale
of any of its remaining full-service restaurants.
The Company plans to finance its working capital and capital
resource needs with its current cash and proceeds from its current and future
debt and equity financing. The Company has and is continuing to explore
several alternatives for lease financing and equipment financing for its
bagel bakeries.
The Company believes that these sources will be sufficient to enable it
to satisfy its working capital needs for the next twelve months. Because the
Company has decided to pursue a strategy of building bagel bakeries at a rate
faster than that required by the development agreement, it may need funds in
addition to those generated from the current unit offering. In such event,
the Company will attempt to raise additional funds through debt or equity
offerings. If the Company is unable to successfully raise funds from the unit
offering in a timely manner, it may be necessary for it to raise additional
capital through other means of financing. Although the Company believes that
it will be able to secure the necessary capital, there can be no assurance
that the Company will be successful.
14
<PAGE>
FORWARD LOOKING STATEMENT
Statements included in this 10-QSB that are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and are subject to certain
risks and uncertainties that could cause actual results to differ materially.
The Company's ability to succeed in the future is dependent upon the Company's
ability to achieve and maintain profitability in its existing restaurants and,
together with its subsidiary, DFW Bagels, Inc., to open additional Bruegger's
Bagel Bakery restaurants and to operate those restaurants in a profitable
manner. The Company's ability to achieve these goals will be affected by
factors such as (i) the ability of the Company to generate funds from
operations, obtain adequate restaurant financing on favorable terms and raise a
significant amount of additional working capital, (ii) the strength of the
Bruegger's name, including in the areas in which the Company is the franchisee,
(iii) the ability of the Company to locate and negotiate favorable leases for
additional locations, (iv) the ability of the Company to hire, train and retain
skilled restaurant management and personnel, and (v) the competitive environment
within the restaurant industry.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
In January 1998, the Company entered into a Consulting Agreement
("Consulting Agreement") with Select Investor Relations Corporation
("Select") under which Select agreed to provide a variety of consulting
services to the Company, including assisting the Company in developing a
business plan, providing public relations activities for the Company,
increasing the Company's visibility in the marketplace and assisting the
Company in locating sources of debt and equity financing. See
"Management's Discussion and Analysis or Plan of Operation". In connection
with this agreement, the Company has also agreed to issue a warrant to
Select to purchase 24,759 shares of the Company's Common Stock. Of the
shares subject to the warrant, 8,253 shares are exercisable at a price of
$.001 per share, 8,253 shares are exercisable at a price of $1.25 a share
for a period of 12 months from the date of the Consulting Agreement and
8,253 shares are exercisable at a price of $1.625 a share for a period of
15 months from the date of the Consulting Agreement. The Company believes
that the issuance of the warrant was exempt pursuant to Section 4(2) of the
securities Act of 1993.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company filed a registration statement with the Securities and Exchange
Commission for the offer and sale of up to 2,000,000 units, each unit
consisting of one share of common stock and a warrant to purchase an
additional share at a price of $1.875. The offering had a minimum
requirement of $600,000 (480,000 units). The Company commenced the
offering on February 23, 1998. As of March 29, 1998 the Company had raised
$358,750, and as of April 30, 1998 the Company had raised approximately
$900,000, which exceeds the minimum requirement and the proceeds are
available to be used by the Company in its operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
-----------------------------------------
(Registrant)
/s/ Phillip R. Danford
----------------------------
Phillip R. Danford
President
/s/ Scott P. McGuire
----------------------------
Scott P. McGuire
Controller
Dated May 12, 1998
17
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