<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ------------------
Commission File Number 1-9684
--------------------------
CHART HOUSE ENTERPRISES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0147725
- -------------------------------------------------------------------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
115 South Acacia Avenue, Solana Beach, California 92075-1803
- -------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(619)755-8281
- -------------------------------------------------------------------------------
(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of October 28, 1996:
Common Stock ($.01 par value) - 8,262,513
------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
-1-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
-------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 205 $ 245
Accounts Receivable 3,925 3,973
Income Taxes Receivable 2,294 -
Inventories 3,389 3,900
Prepaid Expenses and Other Current 1,096 1,592
Assets -------- --------
Total Current Assets 10,909 9,710
-------- --------
Property and Equipment, at Cost:
Land 7,655 7,655
Buildings 27,326 27,871
Equipment 39,711 46,376
Leasehold Interests & Improvements 72,689 85,225
Construction in Progress 1,080 3,813
-------- --------
148,461 170,940
Less: Accumulated Depreciation and 52,192 52,924
Amortization -------- --------
Net Property & Equipment 96,269 118,016
-------- --------
Leased Property under Capital Leases,
Less Accumulated Amortization of
$4,372 in 1996 and $4,051 in 1995 5,448 4,456
-------- --------
Assets of Business Transferred Under
Contractual Arrangements 23,429 -
-------- --------
Other Assets and Goodwill, Net 16,131 21,264
-------- --------
$152,186 $153,446
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
-2-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
-------------- ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current Portion of Long-Term Debt $ - $ 3,000
Current Portion of Lease Obligations 611 401
Accounts Payable 3,432 4,240
Accrued Liabilities 11,227 12,941
-------- --------
Total Current Liabilities 15,270 20,582
-------- --------
Long-Term Debt 52,800 46,274
-------- --------
Long-Term Obligations under Capital Leases 6,218 5,420
-------- --------
Deferred Income Taxes 4,518 4,518
-------- --------
Stockholders' Equity:
Preferred Stock, $1.00 par value,
authorized 10,000,000 shares; none
outstanding - -
Common Stock, $.01 par value,
authorized 30,000,000 shares; 8,262,513
shares outstanding in 1996 and 8,216,123
in 1995 83 82
Additional Paid-In Capital 42,145 42,067
Retained Earnings 31,152 34,503
-------- --------
Total Stockholders' Equity 73,380 76,652
-------- --------
$152,186 $153,446
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-3-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Three Months Thirty-Nine Weeks Nine Months
Ended Sept. 30, Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
1996 1995 1996 1995
------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenues $38,812 $47,332 $125,955 $136,667
------- ------- -------- --------
Costs and Expenses:
Cost of Sales 12,266 13,682 38,323 39,449
Restaurant Labor 10,905 12,723 35,824 36,481
Other Operating Costs 8,845 10,845 30,525 31,659
Selling, General and
Administrative Expenses 3,104 3,597 11,898 11,425
Depreciation and Amortization 2,297 2,764 7,386 7,984
Write Down of Assets of Business
Transferred 4,198 - 4,198 -
Interest Expense 1,306 1,238 3,665 3,754
Interest Income (480) (44) (788) (136)
------- ------- -------- --------
Total Costs and Expenses 42,441 44,805 131,031 130,616
------- ------- -------- --------
Income (Loss) Before Income Taxes (3,629) 2,527 (5,076) 6,051
Provision (Benefit) for Income Taxes (1,320) 784 (1,725) 1,879
------- ------- -------- --------
Net Income (Loss) $(2,309) $ 1,743 $ (3,351) $ 4,172
======= ======= ======== ========
Net Income (Loss) Per Common
Share $(.28) $.21 $(.40) $.50
======= ======= ======== ========
Weighted Average Shares Outstanding 8,263 8,276 8,251 8,276
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Nine Months
Ended Sept. 30, Ended Sept. 30,
1996 1995
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (3,351) $ 4,172
Adjustments to Reconcile Net Income (Loss) to
Cash Flows from Operating Activities:
Depreciation and Amortization 7,386 7,984
Deferred Income Taxes - 655
Loss on Retirement and Write-Down of Assets 4,911 253
Change in Net Current Liabilities (4,310) 1,033
-------- --------
Cash Provided by Operating Activities 4,636 14,097
-------- --------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (10,238) (12,228)
Reductions of Other Assets and Goodwill 526 168
Proceeds from Sale/Leaseback of Assets - 905
Proceeds from Disposition of Assets 1,593 428
Payments Received on Notes 204 391
-------- --------
Cash Used in Investing Activities (7,915) (10,336)
-------- --------
Cash Flows from Financing Activities:
Principal Payments on Long-Term Obligations under
Capital Leases (366) (495)
Net Borrowings (Payments) under Revolving Credit
Agreement 6,526 (3,300)
Payment of Long-Term Debt (3,000) -
Proceeds from Common Stock Issuance 79 26
-------- --------
Cash Provided by (Used in) Financing Activities 3,239 (3,769)
-------- --------
Decrease in Cash (40) (8)
Cash, Beginning of Period 245 245
-------- --------
Cash, End of Period $ 205 $ 237
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-5-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Nine Months
Ended Sept. 30, Ended Sept. 30,
1996 1995
------------------ ------------------
<S> <C> <C>
The Change in Net Current Liabilities is Comprised of
the Following:
Decrease in Accounts Receivable $ 576 $1,534
Increase in Income Taxes Receivable (2,294) -
Decrease in Inventories 260 103
Decrease (Increase) in Prepaid Expenses and
Other Current Assets 66 (223)
Decrease in Accounts Payable (808) (374)
Increase (Decrease) in Accrued Liabilities (2,110) (7)
------- ------
Change in Net Current Liabilities $(4,310) $1,033
======= ======
Supplemental Cash Flow Disclosures:
Cash Paid During the Period for:
Interest (Net of Amount Capitalized) $ 4,153 $4,028
Income Taxes (Net of Refunds) $ 367 $1,049
Non-Cash Investing and Financing Activities:
Notes Received from Sale of 75% of Islands
Restaurant Operations $23,000 $ -
Property Acquired Through Capitalized Leases $ 2,118 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-6-
<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Chart House
Enterprises, Inc. and subsidiaries (the "Company") for the quarterly and nine
month periods ended September 30, 1996 and 1995 have been prepared in accordance
with generally accepted accounting principles, and with the instructions to Form
10-Q. These financial statements have not been audited by independent public
accountants, but include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial condition, results of operations and cash flows
for such periods. However, these results are not necessarily indicative of
results for any other interim period or for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In 1996, the Company switched from a calendar-based fiscal year to a 52/53-
week fiscal year. This reporting method is favored by many companies in the
restaurant and retail industries and will improve future year-to-year
comparisons of operating results. The new fiscal year consists of four equal
13-week quarterly periods ending on the Monday nearest to the calendar quarter
end. In 1996, the fiscal quarter end dates are April 1, July 1, September 30
and December 30. The Company does not anticipate that this change will have a
material effect on reported results for the year. However, the fourth fiscal
quarter of 1996 may be slightly impacted, as the day of December 31, which
historically is the highest sales day for the Chart House restaurants, will fall
into the first fiscal quarter of 1997.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form 10-
K for the year ended December 31, 1995.
Certain balances and amounts for 1995 have been reclassified to conform to
the 1996 presentation.
-7-
<PAGE>
(2) NET INCOME (LOSS) PER COMMON SHARE
Earnings per share calculations are based on the weighted average number of
common shares and common stock equivalents (stock options) outstanding during
the period. Anti-dilutive securities are excluded from calculations of any loss
per share.
(3) LONG-LIVED ASSETS
On a regular basis, the Company evaluates and assesses its assets and
properties for impairment under the guidelines of Financial Accounting Standards
Board Statement No. 121 ("Accounting for Long-Lived Assets and for Long-Lived
Assets to be Disposed of"), and makes appropriate adjustments when an asset is
deemed to be impaired.
(4) LONG-TERM DEBT
The amount of current portion of long-term debt at December 31, 1995
represented an installment under the 6.69% senior secured note, which was paid
in July 1996.
In November 1996, the Company and its lenders amended the debt agreements
to provide a deferral of principal installments of $3,000,000, payable in both
January 1997 and July 1997 under two senior secured notes, until October 1,
1997. In addition, all borrowings under the revolving credit agreement
($21,800,000 at September 30, 1996) will become due on October 1, 1997.
(5) STOCKHOLDERS' EQUITY
In the first nine months of 1996, employees of the Company exercised stock
options to purchase an aggregate of 46,390 shares of common stock under the
Company's 1985 Incentive Stock Option Plan at purchase prices ranging from $1.54
to $2.31 per share.
In May 1996, the Board of Directors adopted and the stockholders of the
Company approved the 1996 Stock Option Plan, which authorizes the grant of non-
qualified stock options to employees to purchase up to 1,000,000 shares of the
Company's common stock. In July 1996, options for 407,000 shares were granted
to employees at an exercise price of $6.50 per share, the fair market value at
that date. One option for 100,000 shares was granted to the Company's chief
executive officer which will vest 50% at the grant date and 50% in February
1998. The remainder of the options granted will vest at a rate of 20% per year
over five years. The options expire ten years from the date of grant.
(6) SALE OF BUSINESS
On May 14, 1996, the Company completed the sale of a 75% interest in its
Islands restaurants operations to two affiliated partnerships of Islands
Restaurants, L.P., the owner/licensor of the Islands concept, for a total sale
price of $23 million in secured notes ($20 million from Islands CA/AZ Holdings,
L.P., and $3 million from Islands Florida, LP), with interest at 9% annually.
The notes are payable over a 20-year amortization period, with the remaining
principal balances due at the end of 15 years. The Company has a 25% interest
as a limited partner in each of the partnerships, and is entitled to periodic
distributions based on available cash flows, as provided in the partnership
agreements. As part of the transaction, the existing area development and
license agreement and management agreement between the Company's subsidiary,
Islands Restaurants, Inc. and Islands Restaurants, L.P. terminated, thereby
relieving the Company of its obligation to continue developing Islands
restaurants, and reverting the
-8-
<PAGE>
license and development rights back to Islands Restaurants, L.P., which also
reassumed responsibility for managing its 15 Islands restaurants in the Los
Angeles and Dallas markets as well as the 18 restaurants acquired from the
Company. There was no initial gain or loss recognized as a result of the
transaction. The combined notes and 25% limited partner's interest are presented
on the consolidated balance sheet under the caption Assets of Business
Transferred under Contractual Arrangements.
In October 1996, one of the partnerships, Islands Florida, LP, signed a
definitive agreement for the sale of six Islands restaurant properties to an
unrelated third party. The sale price will consist of $500,000 cash, plus a
quarterly royalty payment equal to 1% of the gross sales of the restaurants
after they are converted to a different concept. In connection with this
transaction, the Company recorded a special charge of $4,198,000 to write down
to net realizable value its note receivable from and investment in Islands
Florida, LP. The closing of the transaction, which is subject to obtaining
landlord consents and satisfying other conditions, is scheduled for completion
by year end.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- ---------------------
The following is a comparative discussion of the results of operations for
the quarterly and nine month periods ended September 30, 1996 and 1995. The
results of operations for the first thirty-nine weeks of 1996 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 30, 1996. The dollar amounts in the table below are in thousands.
<TABLE>
<CAPTION>
Thirteen Weeks Three Months Thirty-Nine Weeks Nine Months
Ended Sept. 30 Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
1996 1995 1996 1995
------------------- ------------------- ------------------- -------------------
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 38,812 100.0 47,332 100.0 125,955 100.0 136,667 100.0
------ ----- ------ ----- ------- ----- ------- -----
Costs and Expenses:
Cost of Sales 12,266 31.6 13,682 28.9 38,323 30.4 39,449 28.9
Restaurant Labor 10,905 28.1 12,723 26.9 35,824 28.4 36,481 26.7
Other Operating Costs 8,845 22.8 10,845 22.9 30,525 24.2 31,659 23.2
Selling, General and
Administrative Expenses 3,104 8.0 3,597 7.6 11,898 9.5 11,425 8.4
Depreciation and
Amortization 2,297 5.9 2,764 5.8 7,386 5.9 7,984 5.8
Write-Down of Assets
of Business Transferred 4,198 10.8 - - 4,198 3.3 - -
Interest Expense 1,306 3.4 1,238 2.6 3,665 2.9 3,754 2.7
Interest Income (480) (1.2) (44) (.1) (788) (.6) (136) (.1)
------ ----- ------ ----- ------- ----- ------- -----
Total Costs and
Expenses 42,441 109.4 44,805 94.6 131,031 104.0 130,616 95.6
------ ----- ------ ----- ------- ----- ------- -----
Income (Loss) Before Income
Taxes (3,629) (9.4) 2,527 5.4 (5,076) (4.0) 6,051 4.4
Provision (Benefit) for
Income Taxes (1,320) (3.4) 784 1.7 (1,725) (1.3) 1,879 1.3
------ ----- ------ ----- ------- ----- ------- -----
Net Income (Loss) (2,309) (6.0) 1,743 3.7 (3,351) (2.7) 4,172 3.1
====== ===== ====== ===== ======= ===== ======= =====
</TABLE>
-9-
<PAGE>
Management believes that the most meaningful approach to analyzing results
of operations is through margin analysis, which requires critically reviewing
the relationships that certain costs and expenses bear to Revenues.
Accordingly, the discussion below follows this approach.
Revenues for the third quarter and thirty-nine weeks of 1996 decreased by
$8,520,000 and $10,712,000 from the respective periods of the prior year. The
disposition of Paradise Bakery (December 1995) and the Islands restaurants (May
1996) accounted for a combined net decrease in revenues of $7,537,000 for the
third quarter and $9,165,000 for the thirty-nine week period. Also, the closure
or temporary shut down of certain restaurants in the Chart House division
accounted for a decrease of approximately $1,100,000 and $3,000,000 for the
third quarter and thirty-nine week periods, respectively. One new Chart House,
which opened in April 1996, contributed revenues of $1,014,000 to the third
quarter and $1,773,000 year to date. Chart House comparable sales (sales at
restaurants open the entire period of both years) were down by approximately 1%
from the prior year's third quarter and thirty-nine weeks due to lower average
check amounts resulting from the introduction in 1996 of certain lower-priced
menu items. Customer counts were up slightly in 1996 over 1995.
Restaurant operating margins have been lower in 1996 than in 1995.
Generally, increased operating expenses without corresponding revenue increases
have placed significant pressure on restaurant-level margins, contributing to
unfavorable operating results. Changes in the product mix through the
introduction of new menu items at Chart House restaurants, beginning in the
early part of 1996, most of which are priced lower than other existing menu
items, resulted in significantly higher percentage food and hourly restaurant
labor costs. Other operating costs at the restaurants remained at a constant
level as a percentage of revenues with the prior year's quarter, as efforts have
been focused on reducing certain controllable operating expenses.
The disposition of the Paradise Bakeries in December 1995 and Islands
restaurants in May of 1996 had some impact on third quarter percentage
comparisons of operating-related costs and expenses, in particular food costs,
though the overall effect on profits was not significant. Paradise Bakery and
Islands historically had lower percentage food costs than Chart House
restaurants which stand-alone were approximately 30% for the 1995 third quarter.
Conversely, the disposed operations had higher percentage other operating costs
than Chart House restaurants.
Selling, general and administrative expenses decreased by $493,000 from the
1995 third quarter, and as a percentage of revenues increased from 7.6% to 8.0%.
The nine month comparison reflects an increase in 1996 of $473,000, and as a
percentage of revenues, an increase from 8.4% to 9.5%. The year to date amount
in 1996 includes a total of approximately $1.3 million in certain special
charges from severance and compensation costs and other unusual items recorded
in the first and second quarters. The decrease in selling, general and
administrative expenses in the third quarter is primarily the result of the
disposition of the Islands restaurants and reduction in administrative payroll
costs. Partially offsetting these decreases are increases in consulting,
product development and marketing related expenditures in 1996 in connection
with the Company's strategic plan.
The third quarter and thirty-nine week period of 1996 includes a charge of
$4,198,000 to write down to net realizable value the Company's investment in
Islands Florida, LP, a limited partnership that operates six Islands restaurants
in Florida. The partnership intends to dispose of the restaurants in the fourth
quarter of 1996.
-10-
<PAGE>
The increase in interest expense in the 1996 third quarter was primarily
due to a $50,000 fee the company paid to its lenders in connection with
obtaining an amendment to debt agreements and waiver of loan covenant violations
in August of this year. In addition, certain capitalized lease additions have
increased interest expense. Interest on a year to date basis is lower than the
prior year because of reduced average revolving credit borrowings (the result of
cash proceeds received from the sale of Paradise Bakery, Inc. in December 1995)
and from lower prevailing interest rates under the revolving credit agreement in
1996.
Interest income increased over the 1995 periods due to interest earned on a
note received in connection with the sale of the Islands restaurant operations
in May 1996.
The provision for income taxes reflects an effective rate of 31% for the
1995 periods. The significant loss reported in 1996 from the write-down of
assets has generated a tax benefit, which may be applied against previous years'
taxable income. The effective rates for the benefit for income taxes were 36%
and 34% for the quarter and thirty-nine week periods, respectively.
As a result of the foregoing, net income decreased by $4,052,000 for the
third quarter of 1996 and $7,523,000 for the thirty-nine weeks of 1996, from the
respective periods of the prior year.
Operating Trends
- ----------------
The introduction of new menu items at Chart House restaurants in 1996,
which include pasta entrees at all restaurants and other specialty dishes and
appetizers at the majority of restaurants, represented an initial phase of a
long-term program to revitalize the Chart House restaurants. The program, in
addition to placing a greater emphasis on food, will also rely on remodeling and
marketing efforts to drive restaurant sales increases. The immediate impact of
the changes in the menu has been an increase in operating expenses, especially
food costs and hourly restaurant labor costs, which has had a significantly
adverse effect on 1996 restaurant operating results. In addition, management
believes that organizational changes, particularly at the operations management
level following the replacement of the Company's chief executive officer on
April 1, 1996, created temporary operating difficulties.
Currently, management is committed to improving operating results under
these circumstances. The Company hired new members of the management team to
evaluate and begin making necessary changes to recipes, purchasing and menu
pricing. Labor scheduling and other processes are being reviewed for cost-
saving opportunities, and the Company has taken steps to reduce certain
controllable expenses at both restaurant and corporate levels.
Management believes 1996 is a difficult transition year and anticipates
that food and labor costs will remain high through the end of this fiscal year.
Management believes that certain measures taken currently, especially in the
food cost area, will begin to have a positive effect on operating results
towards the end of 1996 and early 1997. However, there can be no assurances
that such improvements in operating results, if any, will occur.
On October 1, 1996, the Federal minimum hourly wage increased from $4.25 to
$4.75 per hour. As part of the two-phase increase, the rate will rise to $5.15
on September 1, 1997. Additionally, in November 1996, California voters passed
an initiative which will increase the minimum hourly wage to employees based in
California (a state in which the Company operates 19 restaurants) from the
current Federal minimum wage rate to $5.00 on March 1, 1997, increasing again to
$5.75 on March 1, 1998. Management believes these measures will significantly
increase the Company's labor costs. To help offset
-11-
<PAGE>
the effect of the increases, the Company put through a slight menu price
increase (about 2%) in October 1996, and may make other operating adjustments,
as necessary.
Liquidity and Capital Resources
- -------------------------------
The Company requires capital principally for the acquisition and
construction of new restaurants and the remodeling and refurbishing of existing
restaurants. The Company's primary sources of working capital are cash flows
from operations and borrowings under a revolving credit agreement with three
banks which provides a $24,000,000 line of credit (reduced from $40,000,000 in
August 1996, as discussed below) with interest at the agent bank's base rate.
Net cash flows from operating, investing and financing activities are used
primarily to reduce or increase those borrowings. In the first three quarters
of 1996, the Company increased its revolving credit debt by $6,526,000. At
September 30, 1996, the Company had outstanding borrowings of $21,800,000 under
the revolving credit agreement.
In July, the Company paid the first principal installment of $3,000,000
under a 10.4% senior secured note.
Capital expenditures for the first three quarters of 1996, which totalled
approximately $10.2 million, included, among other things, expenditures for
major remodels of two Chart House restaurants and a newly-opened Chart House
restaurant in the Cincinnati, Ohio/Northern Kentucky metropolitan area. The
Company does not anticipate opening any new restaurants in the remainder of
1996. The Company's strategic plan initially allocates capital resources to
revitalizing the existing base of Chart House restaurants. The Company plans to
invest a significant amount of capital over the next three or four years under
the Chart House revitalization program. The Malibu Chart House was the first
restaurant remodel completed under the program, in April 1996. A second
restaurant remodel, in Cardiff, California, was completed in August 1996. The
remodels under the revitalization program have featured a new decor package and
upgraded kitchen and cookline to accommodate a greatly expanded and more
sophisticated menu. The newly-opened Chart House in Cincinnati is modeled
similarly. The Company will undergo a critical evaluation of operating results
for the two remodeled restaurants and the new Cincinnati restaurant, and make
adjustments to the plan, as necessary. Management's plan for future Chart House
restaurant remodels is subject to, among other things, achievement of improved
operating results referred to above and resolution of financial matters
described in the following paragraphs.
In August 1996, the Company and its lenders amended the existing debt
agreements, including the revolving credit agreement with the banks and the two
senior secured note agreements with an insurance company, and the lenders waived
the Company's non-compliance with two loan covenant ratios as of the end of the
1996 second quarter. The revolving credit agreement was amended to reduce the
amount of the banks' revolving credit commitment from $40 million to $24
million. The loan covenants covered by the waiver were an interest coverage
ratio and a fixed charge coverage ratio which were not in compliance for the
twelve-month period ended July 1, 1996. The Company recorded restructuring
charges and certain special charges in the fourth quarter of 1995 and first half
of 1996, respectively, which contributed to the lower earnings amounts used in
computing the two ratios. Pending the outcome of further discussions with the
lenders, the Company elected to postpone any significant capital expenditures
for remodels of restaurants as part of the Chart House restaurant revitalization
program.
In November 1996, the Company and its lenders agreed to further amend
certain terms of the existing debt agreements, and extend the maturities of
scheduled principal installments to October 1, 1997. On that date, all revolving
credit borrowings will become due. In addition, the principal payments of
$3,000,000 payable in January 1997 and $3,000,000 payable in July 1997 under two
senior secured notes will be
-12-
<PAGE>
deferred until October 1, 1997. In connection with these amendments, the lenders
waived the Company's non-compliance with the same two loan covenant ratios
referred to above for the third quarter of 1996. New loan covenant measures were
set for future quarterly periods beginning with the fourth quarter of 1996.
The Company has begun a process to seek and obtain alternative financing in
order to reduce the amounts owed to its existing lenders and to provide capital
needed to enable the Company to move forward with its revitalization plan.
Management believes that adequate alternative sources of financing are
available; however, financing costs will most likely increase significantly
under the above circumstances.
New Accounting Pronouncements
- -----------------------------
On January 1, 1996, the Company adopted the Financial Accounting Standards
Board Statement No. 121 ("Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of"). The initial adoption of this
standard did not have a material effect on the Company's financial statements.
On an ongoing basis, management will continue to evaluate and assess assets and
properties for impairment under the guidelines of this standard.
The Company also was required to adopt Statement No. 123 ("Accounting for
Stock-Based Compensation"), effective for the 1996 fiscal year. This standard
establishes a fair value based method of accounting for stock options and other
equity instruments. However, as permitted under the standard, the Company will
continue to use the intrinsic value method included in APB Opinion No. 25
("Accounting for Stock Issued to Employees") to account for compensation cost
associated with employee stock option plans. Statement No. 123 does require
significantly expanded disclosures in the footnotes to the fiscal year end 1996
financial statements, including disclosure of the pro forma amount of net income
and earnings per share as if the fair value based method were used to account
for stock-based compensation.
Seasonality and Other Information
- ---------------------------------
Historically, the Company's business is seasonal in nature with Revenues
and Net Income for the second and third quarters being greater than in the first
and fourth quarters.
This report contains forward-looking statements that were made within the
safe harbor provisions of the Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the forward-looking
statements.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. 10.1(6) Waiver of Specified Defaults; Amendment of Credit
Agreement dated as of August 14, 1996.
10.3(2) Waiver of Specified Defaults; Amendment of Note
Agreements dated as of August 15, 1996.
27 Financial Data Schedule (required for electronic
filing only).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter of which this report is filed.
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.
CHART HOUSE ENTERPRISES, INC. (Registrant)
Date: November 13, 1996 By: /s/ HARRY F. ROBERTS
--------------------------------------
Harry F. Roberts
President and Chief Executive Officer
By: /s/ WILLIAM R. KUNTZ, JR.
--------------------------------------
William R. Kuntz, Jr.
Executive Vice President - Finance and
Administration, General Counsel and
Secretary
By: /s/ JAMES C. WENDLER
--------------------------------------
James C. Wendler
Vice President and Chief Accounting
Officer
-14-
<PAGE>
EXHIBIT 10.1(6)
August 14, 1996
CHART HOUSE, INC., a Delaware corporation
115 South Acacia Avenue
Solana Beach, California 92075
Attn: William R. Kuntz, Jr.,
Vice President, Chief Financial Officer and General Counsel
Re: Waiver of Specified Defaults; Amendment of Credit Agreement
-----------------------------------------------------------
Ladies and Gentlemen:
Reference is hereby made to that certain Amended and Restated Revolving
Credit and Term Loan Agreement dated as of December 17, 1993 (as amended to
date, the "Credit Agreement," and with capitalized terms not otherwise defined
herein used with the meanings given such terms in the Credit Agreement) by and
among Chart House, Inc. (the "Company"), the Guarantors, the Banks and Sanwa
Bank California, as successor to The First National Bank of Boston, as the Agent
for the Banks.
There exist certain Defaults under the Credit Agreement consisting of the
breach by the Company of certain financial covenants. The Company has requested
the Agent and the Banks to waive such Defaults and the Agent and the Banks have
agreed to do so on the terms and subject to the conditions set forth below:
1. Waiver. On the terms and subject to the conditions set forth herein,
------
effective as of the Effective Date (as defined in Paragraph 8 below), the Agent
and each of the Banks hereby waive the Defaults existing under the Credit
Agreement by virtue of the failure of the Company to have been in compliance
with the financial covenants set forth in (S)11.7 and (S)11.32 thereof as of
July 1, 1996.
2. Reduction of Revolving Credit Commitment Amount. To reflect the
-----------------------------------------------
agreement of the Agent, the Banks and the Company to the reduction of the
Revolving Credit Commitment Amount, effective as of the Effective Date the
definition of "Revolving Credit Commitment Amount" set forth in (S)1 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"Revolving Credit Commitment Amount. At any date of determination,
----------------------------------
$24,000,000, as such amount is reduced pursuant to (S)2.2 and (S)6.4
hereof."
1
<PAGE>
3. Additional Financial Information. Pursuant to subsection (g) of
--------------------------------
(S)11.9 of the Credit Agreement, the Banks hereby request, and the Company
hereby agrees to provide to the Banks, the following information:
(a) No later than September 15, 1996, an updated forecast, by month,
consisting of balance sheet, profit and loss and cash flow of the Parent and its
consolidated Subsidiaries for each of September, October, November and December
1996; and
(b) Within 30 days following the end of each fiscal quarter of the
Parent, consolidated statements of income, balance sheets and cash flow
statements of the Parent and its consolidated Subsidiaries, accompanied in each
case by the Certificates referred to in subsections (c) and (d) of (S)11.9 of
the Credit Agreement.
4. Use of Proceeds. To reflect the agreement of the Company and the
---------------
Guarantors to restrict the use of proceeds of the Revolving Credit Loans,
effective as of the Effective Date (S)11.3 of the Credit Agreement is hereby
amended to read in its entirety as follows:
"(S)11.3 Use of Revolving Credit Loan Proceeds. The Company and the
-------------------------------------
Guarantors shall use the proceeds of the Revolving Credit Loans to fund
capital expenditures relating to the maintenance of existing properties and
assets and completion of pending minor remodeling projects for which
contractual commitments were made prior to August 14, 1996 and for working
capital purposes."
5. Restriction on Capital Expenditures. To reflect the agreement of the
-----------------------------------
Company and the Parent to limit the dollar amount and nature of capital
expenditures of the Parent and its Subsidiaries during calendar year 1996,
effective as of the Effective Date (S)11.8 of the Credit Agreement is hereby
amended to insert the following proviso immediately preceding the period in the
last line thereof:
"; provided, however, that notwithstanding anything contained herein,
capital expenditures of the Parent and its Subsidiaries during the 1996
calendar year shall not exceed $11,000,000 in the aggregate and in no event
shall at any time following August 15, 1996 funds of the Parent or any of
its Subsidiaries, including, without limitation, proceeds of the Revolving
Credit Loans, be utilized for capital expenditures other than expenditures
for the purpose of the maintenance of existing properties and assets and
completion of pending minor remodeling projects for which contractual
commitments were made prior to August 14, 1996."
6. Approval of Disposition of Assets. To reflect the agreement of the
---------------------------------
Agent and the Banks with respect to the sale of the assets of the recently
closed Long Beach Chart House, effective as of the Effective Date:
2
<PAGE>
(a) The Agent and the Banks hereby approve the sale thereof at not less
than fair market value; and
(b) The Agent and the Banks agree that the Net Proceeds of such sale
need not be applied to reduce the principal balance of the Loans as required
pursuant to (S)6.4 of the Credit Agreement.
7. Reaffirmation of Obligations; No Additional Waiver or Amendment. The
---------------------------------------------------------------
Company and the Parent and the Guarantors, by executing this letter in the space
provided below, reaffirm all of their respective obligations under the Credit
Agreement and the other Loan Documents and the Guaranties, as applicable, and
all documents, instruments and agreements executed in connection therewith or
otherwise relating thereto and acknowledge and agree that such obligations are
not altered, modified or affected in any manner or to any extent except to the
extent expressly provided herein. The Company, the Parent and the Guarantors
further acknowledge that the waiver set forth in Paragraph 1 above is the sole
waiver made by the Agent and the Banks with respect to the existence of Defaults
(or possible occurrence or existence of additional Defaults or Events of
Defaults) under the Credit Agreement and the other Loan Documents and the
Guaranties, regardless of whether the Agent or the Banks are aware of, or would
upon investigation have discovered, the existence of such additional Defaults or
Events of Default.
8. Effective Date. This letter agreement, including, without limitation,
--------------
the waiver of the Agents and the Banks set forth in Paragraph 1 above, shall be
effective on the date (the "Effective Date") upon which there shall have been
delivered each of the following:
(a) To the Agent for distribution to the Banks, a copy of this letter
agreement, duly executed by all signatories set forth below (which may be
counterpart originals); and
(b) To the Agent for distribution to the Banks pro rata in accordance
with their Commitment Percentages, a waiver fee in the amount of $25,000.
If the Effective Date shall not have occurred on or before August 15, 1996, then
the agreements of the Agent and the Banks set forth herein shall, at the option
of the Agent and the Banks as evidenced by written notice to such effect
delivered by the Agent to the Company, terminate and be of no further force or
effect.
9. Authorization; Representations and Warranties. The Company, the Parent
---------------------------------------------
and the Guarantors hereby represent and warrant to the Agent and the Banks as
follows:
(a) The execution, delivery and performance of this letter agreement by
the officers of each of said parties executing the same has been duly authorized
by all
3
<PAGE>
necessary corporate action (each of said parties hereby committing to
deliver to the Agent no later than 10 days following the Effective Date
corporate resolutions and incumbency certificates evidencing the accuracy of
such representation and warranty); and
(b) Upon the Effective Date and after giving effect to the waiver set
forth in Paragraph 1 above, all representations and warranties of the Company
and the Guarantors contained in the Credit Agreement are accurate and complete
in all material respects on and as of the Effective Date.
10. Counterparts. This letter agreement may be executed in counterparts,
------------
all of which taken together shall constitute one and the same instrument.
Very truly yours,
SANWA BANK CALIFORNIA,
as Agent and a Bank
By: /s/ DAVID L. BEALL
------------------------------------------
David L. Beall, Vice President and Manager
THE FIRST NATIONAL BANK OF BOSTON,
as a Bank
By: /s/ THOMAS F. FARLEY, JR.
-------------------------------------
Name: Thomas F. Farley, Jr.
-----------------------------------
Title: Director
----------------------------------
THE SUMITOMO BANK OF CALIFORNIA,
as a Bank
By: /s/ MATTHEW R. VAN STEENHUYSE
-------------------------------------
Name: Matthew R. Van Steenhuyse
----------------------------------
Title: Vice President
----------------------------------
4
<PAGE>
ACKNOWLEDGED AND AGREED TO
this 14 day of August, 1996
CHART HOUSE, INC.
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------
Name: William R. Kuntz, Jr.
--------------------------
Title: Executive Vice President
-------------------------
CHART HOUSE ENTERPRISES, INC.
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------
Name: William R. Kuntz, Jr.
--------------------------
Title: Executive Vice President
-------------------------
BIG WAVE, INC. (formerly known as Islands Restaurants, Inc.)
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------
Name: William R. Kuntz, Jr.
--------------------------
Title: Vice President
-------------------------
5
<PAGE>
EXHIBIT 10.3(2)
[LETTERHEAD OF METLIFE/R/]
August 15, 1996
Chart House, Inc.
115 South Acacia Avenue
Solana Beach, California 92075
Attn: William R. Kuntz, Jr.
Vice President, Chief Financial Officer and General Counsel
Re: Waiver of Specified Events of Default; Amendment of Note Agreements
-------------------------------------------------------------------
Ladies and Gentlemen:
Reference is hereby made to those certain Note Purchase and Guarantee
Agreements dated as of December 30, 1993 (as amended to date, the "Note
Agreements" and with capitalized terms not otherwise defined herein used with
the meanings given such terms in the Note Agreements) by and among Chart House,
Inc. (the "Company"), the Guarantors and Metropolitan Life Insurance Company
("MetLife").
There exist certain Events of Default under the Note Agreements consisting
of the breach by the Company of certain financial covenants. The Company has
requested MetLife, as holder of the entire outstanding principal amount of the
Notes, to waive such Events of Default and MetLife has agreed to do so on the
terms and subject to the conditions set forth below.
1. Waiver. On the terms and subject to the conditions set forth herein,
------
effective as of the Effective Date (as defined in Paragraph 6 below), MetLife
hereby waives the Events of Default existing under the Note Agreements by virtue
of the failure of the Company to have been in compliance with the financial
covenants set forth in (S)7.7 and (S)7.31 thereof as of July 1, 1996.
2. Additional Financial Information. Pursuant to subsection (g) of
--------------------------------
(S)7.9 of the Note Agreements, MetLife hereby requests, and the Company hereby
agrees to provide to MetLife, the following information:
(a) No later than September 15, 1996, an updated forecast, by month,
consisting of balance sheet, profit and loss and cash flow of the
Parent and its consolidated Subsidiaries for each of September,
October, November and December 1996; and
(b) Within 30 days following the end of each fiscal quarter of the
Parent, consolidated statements of income, balance sheets and cash
flow statements of the Parent and its consolidated Subsidiaries,
accompanied in each case by the Officers' Certificates referred to
in subsections (c) and (d) of (S)7.9 of the Note Agreements.
1
<PAGE>
3. Restriction on Capital Expenditures. To reflect the agreement of the
-----------------------------------
Company and the Parent to limit the dollar amount and nature of capital
expenditures of the Parent and its Subsidiaries during calendar year 1996,
effective as of the Effective Date, (S)7.8 of the Note Agreements is hereby
amended to insert the following proviso immediately preceding the period in the
last line thereof:
"; provided, however, that notwithstanding anything contained herein,
capital expenditures of the Parent and its Subsidiaries during the 1996
calendar year shall not exceed $11,000,000 in the aggregate and in no event
shall at any time following August 15, 1996 funds of the Parent or any of
its Subsidiaries, including, without limitation, proceeds of the Revolving
Credit Loans, be utilized for capital expenditures other than expenditures
for the purpose of the maintenance of existing properties and assets and
completion of pending minor remodeling projects for which contractual
commitments were made prior to August 14, 1996".
4. Approval of Disposition of Assets. To reflect the agreement of MetLife
---------------------------------
and the Company with respect to the sale of the assets of the recently closed
Long Beach Chart House, effective as of the Effective Date, MetLife hereby
approves the sale thereof at not less than fair market value.
5. Reaffirmation of Obligations; No Additional Waiver or Amendment. The
---------------------------------------------------------------
Company and the Parent and the Guarantors, by executing this letter in the space
provided below, reaffirm all of their respective obligations under the Notes,
the Note Agreements and the other Loan Documents and the Guarantees, as
applicable, and all documents, instruments and agreements executed in connection
therewith or otherwise relating thereto and acknowledge and agree that such
obligations are not altered, modified or affected in any manner or to any extent
except to the extent expressly provided herein. The Company, the Parent and the
Guarantors further acknowledge that the waiver set forth in Paragraph 1 above is
the sole waiver made by MetLife with respect to the existence of Defaults or
Events of Default (or possible occurrence or existence of additional Defaults or
Events of Default) under the Note Agreements and the other Loan Documents and
the Guarantees, regardless of whether MetLife is aware of, or would upon
investigation have discovered, the existence of such additional Defaults or
Events of Default.
6. Effective Date. This letter agreement, including, without limitation,
--------------
the waiver of MetLife set forth in Paragraph 1 above, shall be effective on the
date (the "Effective Date") upon which there shall have been delivered to
MetLife each of the following:
(a) a copy of this letter agreement, duly executed by all signatories
set forth below;
(b) a waiver fee in the amount of $25,000; and
(c) a duly executed copy of a letter agreement from the Banks
substantially in the form of Annex 1 hereto.
If the Effective Date shall not have occurred on or before August 15,
1996, then the agreements of MetLife set forth herein shall, at the option of
MetLife as evidenced by written notice to such effect delivered by MetLife to
the Company, terminate and be of no further force or effect.
7. Authorization; Representation and Warranties. The Company, the
--------------------------------------------
Parent and the Guarantors hereby represent and warrant to MetLife as follows:
2
<PAGE>
(a) The execution, delivery and performance of this letter agreement
by the officers of each of said parties executing the same has been duly
authorized by all necessary corporate action (each of said parties hereby
committing to deliver to MetLife no later than 10 days following the
Effective Date corporate resolutions and incumbency certificates evidencing
the accuracy of such representation and warranty); and
(b) Upon the Effective Date and after giving effect to the waiver set
forth in Paragraph 1 above, all representations and warranties of the
Company and the Guarantors contained in the Note Agreements are accurate and
complete in all material respects on and as of the Effective Date.
8. Counterparts. This letter agreement may be executed in counterparts,
------------
all of which taken together shall constitute one and the same instrument.
Very truly yours,
METROPOLITAN LIFE INSURANCE COMPANY
By: /s/ JACQUELINE D. JENKINS
-----------------------------------
Jacqueline D. Jenkins
ACKNOWLEDGED AND AGREED TO
this 15th day of August, 1996
CHART HOUSE, INC.
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------------
Name: William R. Kuntz, Jr.
--------------------------------
Title: Executive Vice President
-------------------------------
CHART HOUSE ENTERPRISES, INC.
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------------
Name: William R. Kuntz, Jr.
--------------------------------
Title: Executive Vice President
-------------------------------
3
<PAGE>
BIG WAVE, INC. (formerly known as Islands Restaurants, Inc.)
By: /s/ WILLIAM R. KUNTZ, JR.
----------------------------------
Name: William R. Kuntz, Jr.
--------------------------------
Title: Vice President
-------------------------------
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JUL-02-1996
<PERIOD-END> SEP-30-1996
<CASH> 205
<SECURITIES> 0
<RECEIVABLES> 6,219
<ALLOWANCES> 0
<INVENTORY> 3,389
<CURRENT-ASSETS> 10,909
<PP&E> 148,461
<DEPRECIATION> 52,192
<TOTAL-ASSETS> 152,186
<CURRENT-LIABILITIES> 15,270
<BONDS> 59,018
0
0
<COMMON> 83
<OTHER-SE> 73,297
<TOTAL-LIABILITY-AND-EQUITY> 152,186
<SALES> 38,812
<TOTAL-REVENUES> 38,812
<CGS> 12,266
<TOTAL-COSTS> 12,266
<OTHER-EXPENSES> 22,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,306
<INCOME-PRETAX> (3,629)
<INCOME-TAX> (1,320)
<INCOME-CONTINUING> (2,309)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,309)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
