<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
DECEMBER 27, 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 1,850,189 shares of Common Stock, $.01 par value per share,
outstanding as of February 1, 1999.
<PAGE>
PREMIUM RESTAURANT COMPANY AND SUBSIDIARY
INDEX
FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 27, 1998
and June 28, 1998. 3
Consolidated Statements of Operations for the thirteen and twenty-
six weeks ended December 27, 1998 and December 28, 1997. 4
Consolidated Statements of Cash Flows for the twenty-six weeks
ended December 27, 1998 and December 28, 1997. 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>
PART I - FINANCIAL INFORMATION
PREMIUM RESTAURANT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 27, JUNE 28,
1998 1998
---------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 472,378 $ 885,087
Receivables 22,415 58,148
Current portion of notes receivable 37,936 82,120
Inventories 47,267 82,294
Prepaid expenses and other current assets 182,407 22,186
Assets held for sale - 469,251
---------------- -----------------
Total current assets 762,403 1,599,086
PROPERTY AND EQUIPMENT
Equipment 2,259,643 2,149,782
Leasehold improvements 2,020,546 1,858,690
Automobiles 15,060 15,060
---------------- -----------------
4,295,249 4,023,532
Less accumulated depreciation and amortization (2,255,413) (1,978,381)
---------------- -----------------
Net property and equipment 2,039,836 2,045,151
OTHER ASSETS
Notes receivable, less current portion 92,731 249,620
Deferred financing costs 80,443 89,820
---------------- -----------------
$ 2,975,413 $ 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 865,221 718,435
Accrued salaries and wages 158,891 197,779
Other accrued liabilities 555,045 675,679
---------------- -----------------
Total current liabilities 2,517,523 2,753,820
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 651,606 1,047,647
OTHER LONG-TERM LIABILITIES 140,785 161,983
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 (5,890,347) (5,516,754)
---------------- -----------------
(334,501) 20,227
---------------- -----------------
$ 2,975,413 $ 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 26 WEEKS ENDED
------------------------------------ --------------------------------
DEC. 27, DEC. 28, DEC. 27, DEC. 28,
1998 1997 1998 1997
-------------- ----------------- --------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales
Full-service restaurants $ 728,522 $ 2,312,970 $ 1,956,577 $ 5,896,382
Bagel bakeries 676,179 686,538 1,347,759 1,386,216
-------------- ----------------- --------------- -------------
Total sales 1,404,701 2,999,508 3,304,336 7,282,598
Cost of food and beverage 475,482 963,218 1,116,762 2,264,556
-------------- ----------------- --------------- -------------
Gross profit 929,219 2,036,290 2,187,574 5,018,042
Operating expenses (income)
Labor and benefits 497,422 1,085,401 1,232,614 2,644,325
Direct and occupancy 690,580 1,221,521 1,568,807 3,011,418
General and administrative expenses 262,524 291,385 531,523 671,271
Gain on sale of restaurants (470,359) (440,086) (521,563) (926,341)
Loss from closure of bagel bakery - 63,039 - 63,039
Impairment of assets write-down - 90,732 - 90,732
-------------- ----------------- --------------- -------------
980,167 2,311,992 2,811,381 5,554,444
Loss from operations (50,948) (275,702) (623,807) (536,402)
Other income (expense)
Interest expense (48,384) (56,090) (102,669) (113,143)
Investment income 6,472 5,791 14,868 6,526
Other, net 23 1,270 317 3,523
-------------- ----------------- --------------- -------------
(41,889) (49,029) (87,484) (103,094)
-------------- ----------------- --------------- -------------
Loss before income taxes and extraordinary items (92,837) (324,731) (711,291) (639,496)
Income taxes 1,250 - 2,550 -
-------------- ----------------- --------------- -------------
Loss before extraordinary items (94,087) (324,731) (713,841) (639,496)
Extraordinary gain from the early extinguishment of debt - - 340,248 -
-------------- ----------------- --------------- -------------
Net loss $ (94,087) $ (324,731) $ (373,593) $ (639,496)
============== ================= =============== =============
Earnings (loss) per share-basic and diluted
Loss before extraordinary item ($0.05) ($0.44) ($0.38) ($0.86)
Extraordinary item - - 0.18 -
-------------- ----------------- --------------- -------------
Net loss ($0.05) ($0.44) ($0.20) ($0.86)
============== ================= =============== =============
Weighted average number of shares
outstanding during the period-basic and diluted 1,848,064 742,819 1,848,064 742,819
============== ================= =============== =============
</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 TWENTY-SIX WEEKS ENDED
---------------------------------------------
DEC. 27, DEC. 28,
1998 1997
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (373,593) $ (639,496)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 327,358 455,392
Impairment of assets write-down - 90,732
Gain on sale of restaurants (521,563) (926,341)
Extraordinary gain from the early extinguishment of debt (340,248) -
Loss from closure of bagel bakery - 63,039
Other (21,198) -
Changes in operating assets and liabilities
net of the effects of the sale of restaurants
Receivables 35,733 9,335
Inventories 35,027 (22,517)
Prepaid expenses and other current assets (160,221) (8,722)
Accounts payable 146,784 (578,689)
Accrued salaries and wages (38,888) (56,600)
Other accrued liabilities (120,634) (57,891)
---------------- ----------------
Net cash used in operating activities (1,031,443) (1,671,758)
Investing activities:
Purchases of leasehold improvements and equipment (279,230) (76,131)
Proceeds from sale of restaurants 957,370 1,483,423
Collections on notes receivable 201,073 5,813
---------------- ----------------
Net cash provided by investing activities 879,213 1,413,105
Financing activities:
Proceeds from long-term obligations - 451,390
Payments on long-term obligations (279,354) (70,043)
Proceeds from issuance of common stock, net 18,875 -
---------------- ----------------
Net cash provided by (used in) financing activities (260,479) 381,347
---------------- ----------------
Net increase (decrease) in cash (412,709) 122,694
Cash at beginning of period 885,087 454,157
---------------- ----------------
Cash at end of period $ 472,378 $ 576,851
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 90,105 $ 44,940
Income taxes 2,550 -
</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 December 27, 1998 and the
unaudited consolidated statements of operations and cash flows for the
twenty-six weeks ended December 27, 1998 and December 28, 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 December 27, 1998 and the results of operations and
cash flow activity for the periods ended December 27, 1998 and December 28,
1997 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 twenty-six weeks of fiscal 1999,
the Company incurred a loss of $373,593 and as of December 27, 1998, the
Company has a working capital deficit of $1,755,118. In addition to funding
the working capital deficit, the Company is obligated to develop bagel
bakeries pursuant to its development agreement with Bruegger's. 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 26,964 and 41,548
shares of common stock with a weighted average exercise price of $3.02 and
$2.70 were outstanding during the thirteen weeks ended December 27, 1998 and
December 28, 1997 and options to purchase 30,114 and 48,018 shares of common
stock with a weighted average price of $2.86 and $2.63 were outstanding
during the twenty-six weeks ended December 27, 1998 and December 28, 1997,
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
December 27, 1998, 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 twenty-six weeks ended December 27, 1998, the Company sold two
of its full-service restaurants. The sale of these restaurants generated
proceeds of approximately $957,000. The gain recognized on the sale of these
restaurants was $521,563. During fiscal 1998, these restaurants generated
approximately $3,475,000 of sales, $28,000 of net losses and $146,000 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 $487,000 as of December 27, 1998.
During the twenty-six weeks ended December 28, 1997, the Company sold five
of its full-service restaurants. The sale of these restaurants generated cash
proceeds of approximately $1,483,000 and notes receivable of approximately
$344,000. The gain recognized on the sale of these restaurants was $926,341.
During fiscal 1997, these restaurants generated approximately $8,270,000 of
sales, $445,000 of net earnings and $799,000 of cash flows from operations.
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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SALES
Consolidated sales of $1,404,701 for the second quarter of fiscal 1999
decreased 53.2% from consolidated sales of $2,999,508 for the second quarter of
fiscal 1998. Consolidated sales of $3,304,336 for the first twenty-six weeks of
fiscal 1999 were also down 54.6% from consolidated sales of $7,282,598 reported
during the first twenty-six weeks of fiscal 1998. The decrease in consolidated
sales during the first twenty-six 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 $728,522 for the second quarter of
fiscal 1999 decreased 68.5% from sales of $2,312,970 for the same quarter of
fiscal 1998. Full-service restaurant sales of $1,956,577 for the first
twenty-six weeks of fiscal 1999 decreased 66.8% from sales of $5,896,382 for
the same period of fiscal 1998. This decrease in sales was primarily a
function of the Company having one full-service restaurant open as of
December 27, 1998, while having five full-service restaurants open as of
December 28, 1997. The Company sold one of its full-service restaurants in
October 1998 and one of its full-service restaurants in November 1998. In
addition, this decrease in sales was due to the increased competition of
national chain restaurants in the market in which the Company's remaining
Italian restaurant operates. The Company expects competition to intensify
and, therefore, the Company's remaining restaurant will continue to face
significant pressure to maintain sales levels.
Sales at the Company's bagel bakeries of $676,179 for the second quarter
of fiscal 1999 decreased 1.5% from $686,538 of sales for the same quarter of
fiscal 1998. Sales of $1,347,759 for the first twenty-six weeks of fiscal
1999 decreased 2.8% from bagel bakery sales of $1,386,216 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 second 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 December 27,
1998, while having seven bagel bakeries open as of December 28, 1997. 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 requires the Company to have nine stores open by October 1,
1998 and 30 stores open by July 1, 2002. Bruegger's has notified the Company
that it is in non-compliance of 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.
COST OF FOOD AND BEVERAGE
Cost of food and beverage as a percentage of sales increased to 33.9% for
the second quarter of fiscal 1999 from 32.1% for the same period in fiscal 1998,
and increased to 33.8% for the first twenty-six weeks of fiscal 1999 from 31.1%
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 does not expect the cost of food and beverage to increase significantly
in the future. The Company expects to open a dough making facility during the
third quarter of fiscal 1999 to lower the food and beverage costs associated
with its bagel bakeries and expects no change to the food and beverage costs at
its remaining full-service restaurant.
8
<PAGE>
LABOR AND BENEFITS
Labor and benefit costs as a percentage of sales decreased to 35.4% for the
second quarter of fiscal 1999 from 36.2% for the same quarter of fiscal 1998,
and increased to 37.3% for the first twenty-six weeks of fiscal 1999 compared to
36.3% during the same period of last year. This decrease for the second quarter
of fiscal 1999, when compared to the same quarter of fiscal 1998, was primarily
due to the reduction of management overhead 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 will decrease.
DIRECT AND OCCUPANCY
Direct and occupancy costs primarily include individual restaurant
advertising, promotion, supplies, utilities, occupancy and depreciation
expenses. These costs increased to 49.2% of sales for the second quarter of
fiscal 1999 from 40.7% during the same period of fiscal 1998, and increased to
47.5% of sales for the first twenty-six weeks of fiscal 1999 compared to 41.4%
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. The Company expects advertising and promotional expenses at its
remaining full-service restaurant to approximate 3% for the remainder of fiscal
1999. 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 $28,861 to $262,524 in the
second quarter of fiscal 1999 from $291,385 for the same quarter of fiscal
1998, and decreased $139,748 to $531,523 for the first twenty-six weeks of
fiscal 1999 from $671,271 for the same period of last year. This decrease in
general and administrative costs was primarily a function of the Company
having one full-service restaurants open as of December 27, 1998, while
having five full-service restaurants open as of December 28, 1997. Also, the
Company had more professional fees that were expensed during the second
quarter of fiscal 1998 than the same quarter of fiscal 1999 pertaining to its
attempts to acquire financing for its bagel bakery concept.
GAIN ON SALE OF RESTAURANTS
The Company sold one of its full-service restaurants in November 1998.
This restaurant is located in Edina, Minnesota. The sale of this restaurant
generated proceeds of approximately $650,000. The gain recognized on the
sale of this restaurant was $470,359. During fiscal 1998, this restaurant
generated approximately $1,951,000 of sales, $86,000 of net profits and
$161,000 of cash flows from operations. The Company remains contingently
liable for future lease payments for this restaurant. The lease has a
termination date through January 2003. The aggregate amount of the contingent
lease payments was approximately $487,000 as of December 27, 1998.
The Company sold one of its full-service restaurants in September 1998.
This restaurant is located in Eden Prairie, Minnesota. The sale of this
restaurant generated proceeds of approximately $307,000. The gain recognized
on the sale of the restaurant sold was $51,204. This restaurant was closed by
the new owner and is being converted into a new restaurant concept. During
fiscal 1998 this restaurant generated approximately $1,524,000 of sales,
$114,000 of net losses and $15,000 of cash deficits from operations.
9
<PAGE>
OTHER INCOME (EXPENSE), NET
Other income (expense) decreased to a net expense of $41,889 for the second
quarter of fiscal 1999, down from a net expense of $49,029 reported in the same
quarter of last year, and decreased to a net expense of $87,484 for the first
twenty-six weeks of fiscal 1999 from a net expense of $103,094 during the same
period of last year. This decrease in other income (expense) was primarily due
to increased interest income from the Company carrying a note receivable as a
result of the sale of some of the Company's full-service restaurants.
INCOME TAXES
The Company's income tax expense for the thirteen and twenty-six weeks
ended December 27, 1998 was $1,250 and $2,550. This was for state taxes paid
during fiscal 1999. The Company did not have any taxes for the thirteen and
twenty-six weeks ended December 28, 1997. There were no tax benefits recorded
for the losses generated during the first thirteen and twenty-six weeks of
fiscal 1999 and fiscal 1998.
As of December 27, 1998, the Company has approximately $165,000 of
alternative minimum tax credit carryforwards and $5,050,000 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.
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 highest sales from its Italian 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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1998, the Company had cash on hand of $472,378, which
represents a decrease of $412,709 from the $885,087 in cash as of June 28,
1998. At December 27, 1998, the Company had a deficit in working capital of
$1,755,118 compared to a deficit in working capital of $1,154,734 at June 28,
1998.
Net cash used in operating activities was $1,031,443 for the first
twenty-six weeks of fiscal 1999. During the first twenty-six weeks of fiscal
1999, the Company incurred a net loss of $373,593 which was net of a gain of
$521,563 from the sale of two 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 $327,358.
Net cash provided by investing activities was $879,213 during the first
twenty-six weeks of fiscal 1999, which is the net of cash proceeds of $957,370
generated from the sale of two of the Company's full-service restaurants,
$201,073 from collections on notes receivable, and $279,230 for the purchase of
leasehold improvements and equipment.
Net cash used in financing activities was $260,479 during the first
twenty-six weeks of fiscal 1999. The net cash used in financing activities
is the net of $279,354 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
requires DFW Bagels to have nine stores open by October 1, 1998 and 30 stores
open by July 1, 2002. As of February 1, 1999, DFW Bagels had eight bagel
bakeries open. Bruegger's has notified DFW Bagels that it is in non-compliance
of 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 plans to open a dough making
facility during the third quarter of fiscal 1999. It is believed this facility
will reduce overhead costs and get the Company closer to profitability.
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 in
non-compliance of the development agreement pertaining to the non-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 and a reduction in individual bakery managers. As of
February 1, 1999 the Company has seen a significant reduction in 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 and
one of its full-service restaurants in November 1998. These restaurants are
located in Eden Prairie and Edina, Minnesota. The sale of these restaurants
generated proceeds of approximately $957,000. The gain recognized on the sale
of the two restaurants sold was $521,563. During fiscal 1998 these restaurants
generated approximately $3,475,000 of sales, $28,000 of net losses and $146,000
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 $487,000 as of December 27, 1998.
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 February 1, 1999, no Warrants had been redeemed by the Company.
As of December 27, 1998, 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 December 27, 1998. Subsequent to December 27, 1998 and
through February 1, 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, proceeds from the sale of its remaining full-service
restaurant 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. 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 not yet made an estimate of the costs
involved, but does not expect such costs to be material.
12
<PAGE>
FORWARD LOOKING STATEMENTS
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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports of Form 8-K
None.
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/ Phillip R. Danford
----------------------
Phillip R. Danford
President
/s/ Scott P. McGuire
--------------------
Scott P. McGuire
Vice President of Finance
Dated February 8, 1999
15
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<PERIOD-START> JUN-29-1998
<PERIOD-END> DEC-27-1998
<CASH> 472,378
<SECURITIES> 0
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