<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 28, 1999.
__ 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 1,850,189 shares of Common Stock, $.01 par value per share,
outstanding as of May 3, 1999.
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 28, 1999 and
June 28, 1998. 3
Consolidated Statements of Operations for the thirteen
and thirty-nine weeks ended March 28, 1999 and
March 29, 1998. 4
Consolidated Statements of Cash Flows for the thirty-nine
weeks ended March 28, 1999 and March 29, 1998. 5
Consolidated Notes to Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 8-13
PART II. OTHER INFORMATION 14-15
</TABLE>
2
<PAGE>
PREMIUM RESTAURANT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 28, JUNE 28,
1999 1998
---------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 542,243 $ 885,087
Receivables 46,942 58,148
Current portion of notes receivable 31,610 82,120
Inventories 48,440 82,294
Prepaid expenses and other current assets 149,541 22,186
Assets held for sale - 469,251
---------------- ----------------
Total current assets 818,776 1,599,086
PROPERTY AND EQUIPMENT
Equipment 1,833,914 2,149,782
Leasehold improvements 1,703,043 1,858,690
Automobiles 15,060 15,060
---------------- ----------------
3,552,017 4,023,532
Less accumulated depreciation and amortization (1,499,625) (1,978,381)
---------------- ----------------
Net property and equipment 2,052,392 2,045,151
OTHER ASSETS
Notes receivable, less current portion 88,334 249,620
Deferred financing costs 75,017 89,820
---------------- ----------------
$ 3,034,519 $ 3,983,677
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term obligations
Related party $ 400,000 $ 400,000
Other 538,366 761,927
Accounts payable 872,993 718,435
Accrued salaries and wages 99,949 197,779
Other accrued liabilities 586,986 675,679
---------------- ----------------
Total current liabilities 2,498,294 2,753,820
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 761,853 1,047,647
OTHER LONG-TERM LIABILITIES 130,186 161,983
SHAREHOLDERS' EQUITY(DEFICIT)
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued or outstanding - -
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,850,189 18,502 18,330
Additional paid-in capital 5,537,344 5,518,651
Accumulated deficit (5,911,660) (5,516,754)
---------------- ----------------
(355,814) 20,227
---------------- ----------------
$ 3,034,519 $ 3,983,677
---------------- ----------------
---------------- ----------------
</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
---------------------------------- ---------------------------------
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1999 1998 1999 1998
---------------- ---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales
Full-service restaurants $ 434,796 $ 1,985,801 $ 2,391,373 $ 7,882,183
Bagel bakeries 687,349 697,858 2,035,108 2,084,074
---------------- ---------------- --------------- ----------------
Total sales 1,122,145 2,683,659 4,426,481 9,966,257
Cost of food and beverage 369,579 868,973 1,486,341 3,133,529
---------------- ---------------- --------------- ----------------
Gross profit 752,566 1,814,686 2,940,140 6,832,728
Operating expenses (income)
Labor and benefits 404,288 976,233 1,636,902 3,620,558
Direct and occupancy 632,545 1,019,607 2,201,352 4,031,025
General and administrative expenses 83,079 284,640 614,602 955,911
Gain on sale of restaurants (394,932) - (916,495) (926,341)
Loss from closure of bagel bakery - - - 63,039
Impairment of assets write-down - - - 90,732
---------------- ---------------- --------------- ----------------
724,980 2,280,480 3,536,361 7,834,924
Income (Loss) from operations 27,586 (465,794) (596,221) (1,002,196)
Other income (expense)
Interest expense (49,859) (59,606) (152,528) (172,749)
Investment income 2,247 8,774 17,115 15,300
Other, net (37) 1,099 280 4,622
---------------- ---------------- --------------- ----------------
(47,649) (49,733) (135,133) (152,827)
---------------- ---------------- --------------- ----------------
Loss before income taxes and extraordinary items (20,063) (515,527) (731,354) (1,155,023)
Income taxes 1,250 5,000 3,800 5,000
---------------- ---------------- --------------- ----------------
Loss before extraordinary items (21,313) (520,527) (735,154) (1,160,023)
Extraordinary gain from the early extinguishment of debt - - 340,248 -
---------------- ---------------- --------------- ----------------
Net loss $ (21,313) $ (520,527) $ (394,906) $ (1,160,023)
---------------- ---------------- --------------- ----------------
---------------- ---------------- --------------- ----------------
Earnings (loss) per share-basic and diluted
Loss before extraordinary item $ (0.01) $ (0.70) $ (0.39) $ (1.56)
Extraordinary item - - 0.18 -
---------------- ---------------- --------------- ----------------
Net loss $ (0.01) $ (0.70) $ (0.21) $ (1.56)
---------------- ---------------- --------------- ----------------
---------------- ---------------- --------------- ----------------
Weighted average number of shares
outstanding during the period-basic and diluted 1,850,189 742,819 1,848,772 742,819
---------------- ---------------- --------------- ----------------
---------------- ---------------- --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PREMIUM RESTAURANT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THIRTY-NINE WEEKS ENDED
--------------------------------------------
MARCH 28, MARCH 29,
1999 1998
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (394,906) $ (1,160,023)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 477,918 620,643
Impairment of assets write-down - 90,732
Gain on sale of restaurants (916,495) (926,341)
Extraordinary gain from the early extinguishment of debt (340,248) -
Loss from closure of bagel bakery - 63,039
Other (31,797) -
Changes in operating assets and liabilities
net of the effects of the sale of restaurants
Receivables 11,206 15,233
Inventories 33,854 (23,069)
Prepaid expenses and other current assets (126,617) (64,069)
Accounts payable 154,558 (378,267)
Accrued salaries and wages (97,830) (148,607)
Other accrued liabilities (88,693) (107,312)
---------------- ----------------
Net cash used in operating activities (1,319,050) (2,018,041)
Investing activities:
Purchases of leasehold improvements and equipment (294,184) (80,003)
Proceeds from sale of restaurants 1,357,370 1,483,423
Collections on notes receivable 211,796 21,788
---------------- ----------------
Net cash provided by investing activities 1,274,982 1,425,208
Financing activities:
Proceeds from long-term obligations - 829,350
Payments on long-term obligations (317,651) (348,259)
Proceeds from issuance of common stock, net 18,875 -
---------------- ----------------
Net cash provided by (used in) financing activities (298,776) 481,091
---------------- ----------------
Net increase (decrease) in cash (342,844) (111,742)
Cash at beginning of period 885,087 454,157
---------------- ----------------
Cash at end of period $ 542,243 $ 342,415
---------------- ----------------
---------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 117,564 $ 63,876
Income taxes 3,800 5,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 28, 1999 and the
unaudited consolidated statements of operations and cash flows for the
thirty-nine weeks ended March 28, 1999 and March 29, 1998 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 28, 1999 and the results of operations and cash flow activity
for the periods ended March 28, 1999 and March 29, 1998 have been made. The
consolidated balance sheet as of June 28, 1998 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 - GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements during the first thirty-nine weeks of fiscal 1999, the Company
incurred a loss of $394,906 and as of March 28, 1999, the Company has a working
capital deficit of $1,679,518. In addition to funding the working capital
deficit, the Company is obligated to develop bagel bakeries pursuant to its
development agreement with Bruegger's. As of March 28, 1999, the Company was not
in compliance with the development agreement. These factors raise a substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE C - NET EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
The Company's basic net earnings (loss) per share amounts are computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares. The Company's diluted net earnings (loss) per share amounts are
computed by dividing net earnings (loss) by the weighted average number of
outstanding common shares and common share equivalents relating to stock options
and warrants, when dilutive. Options to purchase 22,454 and 34,403 shares of
common stock with a weighted average exercise price of $3.20 and $2.74 were
outstanding during the thirteen weeks ended March 28, 1999 and March 29, 1998
and options to purchase 27,964 and 43,545 shares of common stock with a weighted
average price of $2.93 and $2.66 were outstanding during the thirty-nine weeks
ended March 28, 1999 and March 29, 1998, but were excluded from the computation
of common share equivalents because they were anti-dilutive. Warrants to
purchase 1,107,370 shares of common stock with a weighted average exercise price
of $1.875 were outstanding as of March 28, 1999, but were excluded from the
computation of common share equivalents because they were anti-dilutive.
NOTE D - RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which was adopted in the first quarter of
1999. SFAS No. 130 established standards for the reporting and display of an
amount representing comprehensive income and its components as part of the
Company's basic financial statements. Comprehensive income includes certain
non-owner changes in equity that currently are excluded from net income. Because
the Company historically has not experienced transactions that would be included
in comprehensive income, the adoption of SFAS No. 130 did not have a material
effect on the consolidated financial position, results of operations, or cash
flows of the Company.
6
<PAGE>
Additionally, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective June 29, 1998.
SFAS No. 131 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. The statement does not need to be
applied to interim financial statements in the initial year of application.
Comparative information for the interim periods in the initial year of
application will be reported in the Company's financial statements for the
interim periods in fiscal 2000.
NOTE E - GAIN ON SALE OF RESTAURANTS
During the thirty-nine weeks ended March 28, 1999, the Company sold
three of its full-service restaurants. These restaurants are located in Eden
Prairie, Edina and St. Paul, Minnesota. The sale of these restaurants generated
proceeds of approximately $1,357,000. The gain recognized on the sale of these
restaurants was $916,495. During fiscal 1998, these restaurants generated
approximately $5,540,000 of sales, $118,000 of net earnings and $292,000 of cash
flows from operations. The Company remains contingently liable for future lease
payments for one of the restaurants sold. The lease has a termination date
through January 2003. The aggregate amount of the contingent lease payments was
approximately $457,000 as of March 28, 1999.
NOTE F - EXTRAORDINARY GAIN FROM THE EARLY EXTINGUISHMENT OF DEBT
In July 1998, the Company entered into an agreement whereby it was
released from its obligations under the capital lease at its Madison, Wisconsin,
location and the Company ceased operating this restaurant. The long-lived assets
at this location had been written-off in fiscal 1997. The remaining capital
lease obligation of $340,248 has been recorded as an extraordinary gain from the
early extinguishment of debt.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In March 1999, the Company opened a dough making facility for its bagel
bakery operation. The equipment and leasehold cost of this facility was
$157,156, and was funded by the Company's construction vendor. The construction
vendor has a secured interest in the equipment at this facility. The Company is
attempting to acquire debt funding for this facility, and any funds raised will
be paid to the construction vendor.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $1,122,145 for the third quarter of fiscal 1999
decreased $1,561,514, or 58.2%, from consolidated sales of $2,683,659 for the
third quarter of fiscal 1998. Consolidated sales of $4,426,481 for the first
thirty-nine weeks of fiscal 1999 decreased $5,539,776, or 55.6%, from
consolidated sales of $9,966,257 reported during the first thirty-nine weeks of
fiscal 1998. The decrease in consolidated sales during the first thirty-nine
weeks of fiscal 1999 was due to a decline in sales at both the Company's
full-service restaurants and bagel bakeries, as described below.
Full-service restaurant sales of $434,796 for the third quarter of
fiscal 1999 decreased 78.1% from sales of $1,985,801 for the same quarter of
fiscal 1998. Full-service restaurant sales of $2,391,373 for the first
thirty-nine weeks of fiscal 1999 decreased 69.7% from sales of $7,882,183 for
the same period of fiscal 1998. This decrease in sales was primarily a function
of the Company having no full-service restaurants open as of March 28, 1999,
while having five full-service restaurants open as of March 29, 1998. The
Company sold one of its full-service restaurants in October 1998, one of its
full-service restaurants in November 1998 and its last full-service restaurant
in March 1999.
Sales at the Company's bagel bakeries of $687,349 for the third quarter
of fiscal 1999 decreased 1.5%, from bagel bakery sales of $697,858 for the same
quarter of fiscal 1998. Sales of $2,035,108 for the first thirty-nine weeks of
fiscal 1999 decreased 2.3% from bagel bakery sales of $2,084,074 for the same
period of fiscal 1998. This decrease in sales was primarily a function of the
Company closing its bagel bakeries at three o'clock in the afternoon during the
third quarter of fiscal 1999 compared to a six o'clock closure for the same
quarter of fiscal 1998. This change became effective in November 1998 and was
instituted to reduce bakery overhead, as ninety percent of a bagel bakery's
business is completed before 3:00 p.m. This decrease was slightly offset by the
Company having eight bagel bakeries open as of March 28, 1999, while having
seven bagel bakeries open as of March 29, 1998. The Company closed one of its
bagel bakeries in November 1997, and opened a new bagel bakery in October 1998.
The development agreement between Bruegger's and the Company required the
Company to have nine stores open by October 1, 1998 and requires the Company to
have 30 stores open by July 1, 2002. Bruegger's has notified the Company that it
is in non-compliance with the development agreement pertaining to its
development schedule. The Company does not plan to open any additional bagel
bakeries until it achieves profitability at it's current bakeries.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 32.9%
for the third quarter of fiscal 1999 from 32.4% for the same period in fiscal
1998, and increased to 33.6% for the first thirty-nine weeks of fiscal 1999 from
31.4% for the same period of fiscal 1998. 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 opened a dough making facility in March 1999, which has significantly
lowered the food and beverage costs associated with its bagel bakeries and
expects further reductions in the future as it becomes more familiar with the
new facility.
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales decreased to 36.0% for
the third quarter of fiscal 1999 from 36.4% for the same quarter of fiscal 1998,
and increased to 37.0% for the first thirty-nine weeks of fiscal 1999 compared
to 36.3% during the same period of last year. This decrease for the third
quarter of fiscal 1999, when compared to the same quarter of fiscal 1998, was
primarily due to the reduction of management labor resulting from the closure of
the Company's bagel bakeries three hours earlier. This decrease was slightly
offset by the Company's bagel bakeries not having a high enough sales level to
support minimum labor requirements. As sales at the Company's bagel bakeries
increase in the future, labor and benefits costs as a percent of sales are
expected to decrease.
8
<PAGE>
DIRECT AND OCCUPANCY
Direct and occupancy costs increased to 56.4% of sales for the third
quarter of fiscal 1999, up from 38.0% of sales during the same period of fiscal
1998, and increased to 49.7% of sales for the first thirty-nine weeks of fiscal
1999 compared to 40.4% of sales during the same period of last year. This
increase was primarily due to the fact that the Company is paying rent on three
leases for bagel bakeries that have not yet been constructed. Bagel bakeries
will not be constructed at the remaining three locations until profitability has
been achieved at the current bagel bakeries. The Company is currently attempting
to terminate these three leases. The Company is obligated by its development
agreement with Bruegger's to spend a minimum of 4% 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 bakery restaurants 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 decreased $201,561 to $83,079 in the
third quarter of fiscal 1999 from $284,640 for the same quarter of fiscal 1998,
and decreased $341,309 to $614,602 for the first thirty-nine weeks of fiscal
1999 from $955,911 for the same period of last year. This decrease in general
and administrative costs was primarily a function of the Company instituting
major corporate overhead cuts in December 1998. This includes the resignation of
the President of the Company, Phil Danford, on April 1, 1999. The Company
believes that the current corporate staff will be adequate to cover significant
future growth.
GAIN ON SALE OF RESTAURANTS
During the thirty-nine weeks ended March 28, 1999, the Company sold
three of its full-service restaurants. These restaurants are located in Eden
Prairie, Edina and St. Paul, Minnesota. The sale of these restaurants generated
proceeds of approximately $1,357,000. The gain recognized on the sale of these
restaurants was $916,495. During fiscal 1998, these restaurants generated
approximately $5,540,000 of sales, $118,000 of net earnings and $292,000 of cash
flows from operations. The Company remains contingently liable for future lease
payments for one of the restaurants sold. The lease has a termination date
through January 2003. The aggregate amount of the contingent lease payments was
approximately $457,000 as of March 28, 1999.
OTHER INCOME (EXPENSE)
Other income (expense) decreased to a net expense of $47,649 for the
third quarter of fiscal 1999, down from a net expense of $49,733 reported in the
same quarter of last year, and decreased to a net expense of $135,133 for the
first thirty-nine weeks of fiscal 1999 down from a net expense of $152,827
during the same period of last year.
INCOME TAXES
The Company's income tax expense for the thirteen and thirty-nine weeks
ended March 28, 1999 was $1,250 and $3,800. This was for state taxes paid during
fiscal 1999. The Company's income tax expense for the thirteen and thirty-nine
weeks ended March 29, 1998 was $5,000. This was for state taxes paid during
fiscal 1998. There were no tax benefits recorded for the losses generated during
the first thirteen and thirty-nine weeks of fiscal 1999 and fiscal 1998.
As of March 28, 1999, the Company has approximately $165,000 of
alternative minimum tax credit carryforwards and $5,072,000 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.
9
<PAGE>
EXTRAORDINARY GAIN FROM THE EARLY EXTINGUISHMENT OF DEBT
In the first quarter of fiscal 1999, the Company entered into an
agreement whereby it was released from its obligations under the capital lease
at its Madison, Wisconsin, location and the Company ceased operating this
restaurant. The remaining capital lease obligation of $340,248 has been recorded
as an extraordinary gain from the early extinguishment of debt. The long-lived
assets at this location had been written-off in fiscal 1997. During fiscal 1998,
this restaurant generated approximately $939,000 of sales and $61,000 of net
losses and cash deficits from operations.
SEASONALITY
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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1999 the Company had cash on hand of $542,243, which
represents an decrease of $343,844 from the $885,087 in cash on hand reported as
of June 28, 1998. At March 28, 1999 the Company had a deficit in working capital
of $1,679,518 compared to a deficit in working capital of $1,154,734 at June 28,
1998.
Net cash used in operating activities was $1,319,050 for the first
thirty-nine weeks of fiscal 1999. During the first thirty-nine weeks of fiscal
1999, the Company incurred a net loss of $394,906 which was net of a gain of
$916,495 pertaining to the sale of three of the Company's full-service
restaurants and an extraordinary gain from the early extinguishment of debt of
$340,248 from the closure of one of the Company's full-service restaurants.
These uses of cash were partially offset by non-cash depreciation and
amortization expense of $477,918.
Net cash provided by investing activities was $1,274,982 during the
first thirty-nine weeks of fiscal 1999, which is the net of cash proceeds of
$1,357,370 generated from the sale of three of the Company's full-service
restaurants, $211,796 from collections on notes receivable, and $294,184 for the
purchase of leasehold improvements and equipment.
Net cash used in financing activities was $298,776 during the first
thirty-nine weeks of fiscal 1999. The net cash used in financing activities is
the net of $317,651 due under debt financing and net proceeds of $18,875
generated from the Company's unit offering.
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"). The development agreement
required DFW Bagels to have nine stores open by October 1, 1998 and requires it
to have 30 stores open by July 1, 2002. As of May 3, 1999, DFW Bagels had eight
bagel bakeries and a dough making facility open. Bruegger's has notified DFW
Bagels that it is in non-compliance with the development agreement pertaining to
its development schedule. The Company does not plan to open any additional bagel
bakeries until it achieves profitability at it current bakeries. The Company
opened a dough making facility in March 1999, which has significantly lowered
the food and beverage costs associated with its bagel bakeries, and the Company
expects further reductions in the future.
The owners of Bruegger's waived the initial franchise fee and reduced
franchise royalties for all Bruegger's Bagel Bakery restaurants through calendar
1998. Currently, the Company is still not paying its franchise royalties and
does not plan to until it achieves profitability at its existing bagel bakeries.
Bruegger's has notified DFW Bagels that it is in non-compliance with the
development agreement pertaining to the payment of franchise royalties.
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 originally estimated that in the Dallas-Fort Worth area
the minimal number of bagel bakeries needed for such penetration was between
twelve and twenty. The Company currently has eight bagel bakeries open, and has
no plans to open any additional bagel bakeries until it has achieved
profitability at its existing bagel bakeries. Because of the Company's inability
to acquire financing for the construction of additional bagel bakeries, it was
forced to take alternative measures towards achieving profitability. In November
1998, the Company instituted a major cost cutting campaign that included, but
was not limited to, the reduction of corporate overhead, the closure of its
bakeries earlier in the evening, the reduction in individual bakery managers and
the opening of a dough making facility. As of May 3, 1999 the Company has seen a
significant reduction in its food and beverage costs. The Company believes that
these reductions coupled with the opening of the dough making facility will
bring the Company closer to profitability. If the Company is unable to achieve
any or all of the above mentioned plans, it will have a material adverse effect
on the Company.
11
<PAGE>
The Company sold one of its full-service restaurants in September 1998,
one of its full-service restaurants in November 1998 and one of its full-service
restaurants in March 1999. These restaurants are located in Eden Prairie, Edina
and St. Paul, Minnesota. The sale of these restaurants generated proceeds of
approximately $1,357,000. The gain recognized on the sale of these restaurants
was $916,495. During fiscal 1998, these restaurants generated approximately
$5,540,000 of sales, $118,000 of net earnings and $292,000 of cash flows from
operations. The Company remains contingently liable for future lease payments
for one of the restaurants sold. The lease has a termination date through
January 2003. The aggregate amount of the contingent lease payments was
approximately $457,000 as of March 28, 1999.
In July 1998, the Company entered into an agreement whereby it was
released from its obligations under the capital lease at its Madison, Wisconsin,
location and the Company ceased operating this restaurant. The remaining capital
lease obligation of $340,248 has been recorded as an extraordinary gain from the
early extinguishment of debt. The long-lived assets at this location had been
written-off in fiscal 1997. During fiscal 1998, this restaurant generated
approximately $939,000 of sales and $61,000 of net losses and cash deficits from
operations.
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 and one Redeemable Common Stock Purchase
Warrant ("Warrant"). One Warrant entitles the holder to purchase, at any time
until March 31, 2000, one share of common stock at a price of $1.875. On January
1, 1999, the Warrants became 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 May 3, 1999, no Warrants had been redeemed by the Company.
As of March 28, 1999, the Company has issued 1,107,370 Units, of which
400,000 were purchased by a director of the Company. None of the Warrants have
been exercised as of March 28, 1999. Subsequent to March 28, 1999 and through
May 3, 1999, the Company has not issued any additional Units.
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 has continued to recognize losses from its bagel bakeries
and has funded those losses from cash flows generated from its full-service
restaurants and proceeds generated from the sale of its full-service
restaurants. As of March 28, 1999, the Company has no remaining full-service
restaurants. The Company needs to acquire additional financing to continue to
fund its operations of the bagel bakeries. There can be no assurance that the
Company can raise additional funds. If the Company is unable to raise additional
funds in a timely manner it will have a material adverse effect on the Company.
The Company does not expect Year 2000 computer issues to significantly affect
its operations. The Company is reviewing internally developed programs for
compliance and is contacting external software vendors and other suppliers
regarding compliance. The Company has determined the costs associated with the
conversion to be approximately $30,000.
12
<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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On April 1, 1999, Phillip Danford resigned as President of Premium
Restaurant Company. Jack Lowry was elected as interim President of Premium
Restaurant Company for which he has been working as a consultant for the past
six months. Mr. Danford will remain as a member of the Company's Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports of Form 8-K
The Company filed a report on Form 8-K on March 18, 1999 in
connection with the sale of its remaining full-service restaurant.
14
<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
--------------------------
(Registrant)
/s/ Scott P. McGuire
--------------------
Scott P. McGuire
Vice President of Finance (authorized signatory)
Dated May 11, 1999
15
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