<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 29, 1997
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-9684
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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
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(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 27, 1997:
COMMON STOCK ($.01 PAR VALUE) - 11,726,998
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
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<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 29, December 30,
ASSETS 1997 1996
------------------- -------------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Equivalents $ 3,141 $ 204
Accounts Receivable 2,868 4,807
Refundable Income Taxes 801 1,852
Inventories 2,679 3,226
Prepaid Expenses and Other Current Assets 590 882
-------- --------
Total Current Assets 10,079 10,971
-------- --------
Property and Equipment, at Cost:
Land 6,582 7,655
Buildings 20,503 27,207
Equipment 29,372 39,530
Leasehold Interests & Improvements 43,940 72,011
Construction in Progress 2,154 787
-------- --------
102,551 147,190
Less: Accumulated Depreciation and Amortization 41,350 53,643
-------- --------
Net Property & Equipment 61,201 93,547
-------- --------
Leased Property under Capital Leases, Less Accumulated
Amortization of $5,245 in 1997 and $4,561 in 1996 5,259 5,672
-------- --------
Assets of Business Transferred Under Contractual
Arrangements 17,001 23,416
-------- --------
Deferred Tax Asset 5,399 -
-------- --------
Other Assets and Goodwill, Net 9,116 15,319
-------- --------
$108,055 $148,925
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
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<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 29, December 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------- -------------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current Portion of Long-Term Debt $ 4,000 $ 6,000
Current Portion of Obligations under Capital Leases 818 772
Accounts Payable 5,132 3,303
Accrued Liabilities 18,451 13,466
-------- --------
Total Current Liabilities 28,401 23,541
-------- --------
Long-Term Debt 15,000 44,200
-------- --------
Long-Term Obligations under Capital Leases 5,947 6,299
-------- --------
Deferred Income Taxes - 3,577
-------- --------
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; 11,725,534 shares outstanding in 1997 and
8,262,513 in 1996 117 83
Additional Paid-In Capital 61,103 42,145
Retained Earnings (Deficit) (2,513) 29,080
-------- --------
Total Stockholders' Equity 58,707 71,308
-------- --------
$108,055 $148,925
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
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<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks Thirty-Nine Weeks Thirty-Nine Weeks
Ended Sept. 29, Ended Sept 30, Ended Sept. 29, Ended Sept. 30,
1997 1996 1997 1996
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 39,273 $38,812 $116,964 $125,955
-------- ------- -------- --------
Operating Expenses:
Cost of Sales 12,217 12,266 35,904 38,323
Restaurant Labor 10,851 10,905 31,989 35,824
Other Operating Costs 9,351 8,845 27,977 30,525
Selling, General and Administrative
Expenses 3,784 3,104 9,875 10,569
Depreciation and Amortization 2,378 2,297 7,128 7,386
Write Down of Assets and
Restructuring and Unusual Charges 43,241 4,198 44,174 5,527
Interest Expense 586 1,306 2,738 3,665
Interest Income (450) (480) (1,439) (788)
-------- ------- -------- --------
Total Costs of Expenses 81,958 42,441 158,346 131,031
-------- ------- -------- --------
Loss Before Income Taxes (42,685) (3,629) (41,382) (5,076)
Benefit for Income Taxes (10,193) (1,320) (9,789) (1,725)
-------- ------- -------- --------
Net Loss $(32,492) $(2,309) $(31,593) $ (3,351)
======== ======= ======== ========
Net Loss Per Common Share $ (2.78) $ (.28) $ (3.06) $ (.40)
======== ======= ======== ========
Weighted Average Shares Outstanding 11,696 8,263 10,341 8,251
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirty-Nine Weeks
Ended September 29, Ended September 30,
1997 1996
------------------- -------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(31,593) $ (3,351)
Adjustments to Reconcile Net Loss to
Cash Flows from Operating Activities:
Depreciation and Amortization 7,128 7,386
Deferred Income Taxes (8,976) -
Loss on Write-Down and Disposition of Assets 38,627 4,911
Change in Net Current Liabilities 10,642 (4,310)
-------- --------
Cash Provided by Operating Activities 15,828 4,636
-------- --------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (4,133) (10,238)
Reductions of Other Assets 489 526
Proceeds from Disposition of Assets 3,069 1,593
Payments Received on Notes 718 204
-------- --------
Cash Used in Investing Activities 143 (7,915)
-------- --------
Cash Flows from Financing Activities:
Principal Payments on Obligations under
Capital Leases (576) (366)
Net Borrowings (Payments) under Revolving Credit
Agreement (19,200) 6,526
Payments of Long-Term Debt (12,000) (3,000)
Net Proceeds from Sale/Issuance of Common Stock 18,742 79
-------- --------
Cash Provided by (Used in) Financing Activities (13,034) 3,239
-------- --------
Increase (Decrease) in Cash 2,937 (40)
Cash, Beginning of Period 204 245
-------- --------
Cash, End of Period $ 3,141 $ 205
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
CHART HOUSE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Thirty-Nine Weeks
Ended September 29, Ended September 30,
1997 1996
------------------- -------------------
<S> <C> <C>
The Change in Net Current Liabilities is Comprised of
the Following:
Decrease in Accounts Receivable $ 1,939 $ 576
Decrease (Increase) in Refundable Income Taxes 1,050 (2,294)
Decrease in Inventories 547 260
Decrease in Prepaid Expenses and Other
Current Assets 292 66
Increase (Decrease) in Accounts Payable 1,829 (808)
Increase (Decrease) in Accrued Liabilities 4,985 (2,110)
------- -------
Change in Net Current Liabilities $10,642 $(4,310)
======= =======
Supplemental Cash Flow Disclosures:
Cash Paid During the Period for:
Interest (Net of Amount Capitalized) $ 3,222 $ 4,153
Income Taxes (Net of Refunds) $(2,082) $ 367
Non-Cash Investing and Financing Activities:
Note 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 29, 1997
(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 29, 1997 and September 30, 1996 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.
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 30, 1996.
(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.
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The
statement specifies the computation, presentation, and disclosure requirements
for earnings per share. The statement is effective for financial statements for
periods ending after December 15, 1997. Earlier application is not permitted.
However, management believes that pro forma earnings per share amounts computed
using SFAS 128 would not be significantly different from the amounts shown in
the accompanying consolidated statements of operations.
-7-
<PAGE>
(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 if and when an
asset is deemed to be impaired.
(4) SPECIAL CHARGES
In the third quarter of 1997, the Company's Board of Directors approved
further restructuring actions to be taken in connection with the Company's
strategy to revitalize its core Chart House restaurants, dispose of non-core
assets and selected underperforming Chart Houses, and reduce debt levels. These
and other actions resulted in special charges in the 1997 third quarter of $43.2
million.
The charges are primarily the result of write downs of assets either to be
used in ongoing operations or to be disposed of. The amount included (i)
approximately $21.2 million in write downs to estimated net realizable value of
non-core assets (including the Islands note and limited partnership interest)
and certain Chart House restaurants held for disposal, and other restaurant
assets to be disposed of in connection with the plan to revitalize the Chart
House restaurants, and (ii) approximately $17.0 million in write downs to
estimated fair value of several Chart House restaurants to be used in ongoing
operations and other non-cash charges, including a $4.2 million write down of
goodwill associated with impaired assets. The write down of the assets to be
used in ongoing operations has been taken to reflect a greater emphasis on
economic performance over the estimated useful life for each restaurant property
as well as a determination to dispose of, or otherwise take remedial action on,
underperforming locations. A portion of the total charge, approximately $5.0
million in charges, included among other things, costs associated with hiring
the Company's new chief executive officer, severance and other costs related to
management and organizational changes, and estimated termination benefits to be
paid to employees in connection with the planned relocation of the Company's
headquarters.
In early November 1997, three Chart House restaurants were closed. Included
in property and equipment in the accompanying balance sheet at September 29,
1997 are restaurant assets held for disposal of approximately $2.2 million. The
amount of write-down and resulting carrying value of the respective assets, and
other assets held for disposal, at September 29, 1997 include management's best
estimates of the amounts to be realized on the disposition of the assets. The
amounts the Company will ultimately realize may differ from the amounts assumed
in arriving at the aforementioned write-down. In determining estimated fair
values and realizable values, the Company generally used appraisals and
discounted cash flow valuations.
-8-
<PAGE>
(5) LONG-TERM DEBT
Long-term debt of the Company is as follows (in 000's):
<TABLE>
<CAPTION>
Sept. 29, Dec. 30,
1997 1996
----------- ----------
<S> <C> <C>
Notes Payable to Banks under
Credit Agreement $ - $19,200
6.69% Senior Secured Note 16,000 19,000
10.4% Senior Secured Note 3,000 12,000
------- -------
19,000 50,200
Less: Current Portion 4,000 6,000
------- -------
$15,000 $44,200
======= =======
</TABLE>
The amount of current portion of long-term debt at December 30, 1996
represented two installments due under the 6.69% and 10.4% senior secured notes
($3,000,000 each), which were paid in March 1997 (See Note 5). The two
succeeding principal installments under the 10.4% senior note ($3,000,000 each,
due in July 1998 and July 1999) were prepaid in June 1997. The next scheduled
debt payment is a $4,000,000 installment under the 6.69% senior note due in
January 1998, which is shown as a current liability on the balance sheet at
September 29, 1997.
In March 1997 and June 1997, the Company and its lenders amended certain
terms of the existing debt agreements to, among other things, provide for early
payment of debt (without prepayment penalty) with proceeds from the sale of
shares of common stock (see Note 5). In June 1997, the Company obtained a new,
three-year credit facility with its banks. The amended and restated credit
agreement provides for a commitment of $20.0 million with interest at the lead
bank's base rate or LIBOR plus a maximum 1.25%. The Company is required to pay
a facility fee of .25% per annum on the total commitment. The Company must also
maintain certain specified financial ratios.
(6) STOCKHOLDERS' EQUITY
In March 1997, the Company agreed to sell 3,400,000 newly-issued shares of
common stock in a private placement to an investment company at $5.75 per share
for a total sale price of $19.5 million. The initial sale of 1,641,750 shares
for $9.4 million was completed in March 1997. The additional 1,758,250 shares
were sold for $10.1 million following shareholder approval at the annual meeting
held in May 1997. Transaction costs were approximately $1.1 million. The
Company used the net proceeds from the transaction to repay $12.0 million of
scheduled principal installments under two senior secured notes (See Note 4),
with the remainder of the net proceeds from the sale applied to reduce
outstanding borrowings under the bank credit agreement.
In the first nine months of 1997, options for an aggregate of 366,500
shares of common stock were granted to employees of the Company under the 1996
Stock Option Plan at an exercise prices ranging from $5.625 to $8.375 per share.
An option for 100,000 shares was granted in May 1997 to a director of the
Company at an exercise price of $6.75 per share, the fair market value at date
of grant. This option grant, which is not covered under the Company's option
plans, becomes exercisable subject to and upon approval by the stockholders of
the Company at the next stockholders' meeting, and expires
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<PAGE>
in ten years from date of grant. Additionally, an option for 400,000 shares was
granted (also outside of the Company's option plans) in July 1997 to an officer
of the Company at an exercise price of $8.25 per share, the fair market value at
date of grant. This option also expires ten years from date of grant.
In the first nine months of 1997, former employees of the Company exercised
stock options to purchase an aggregate of 57,050 shares of common stock under
certain of the Company's stock option plans at purchase prices ranging from
$2.31 to $7.25 per share.
In the first nine months of 1997, a total of 5,971 shares of common stock
were issued to directors of the Company under the 1996 Nonemployee Director
Stock Compensation Plan.
-10-
<PAGE>
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 29, 1997 and September 30,
1996. The results of operations for the first nine months of 1997 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 29, 1997. The dollar amounts in the table below are in thousands.
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks Thirty-Nine Weeks Thirty-Nine Weeks
Ended Sept. 29, Ended Sept. 30, Ended Sept. 29, Ended Sept. 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 39,273 100.0 38,812 100.0 116,964 100.0 125,955 100.0
------- ----- ------ ----- ------- ----- ------- -----
Operating Expenses:
Cost of Sales 12,217 31.1 12,266 31.6 35,904 30.7 38,323 30.4
Restaurant Labor 10,851 27.6 10,905 28.1 31,989 27.4 35,824 28.4
Other Operating Costs 9,351 23.8 8,845 22.8 27,977 23.9 30,525 24.2
Selling, General and
Administrative Expenses 3,784 9.6 3,104 8.0 9,875 8.4 10,569 8.4
Depreciation and Amortization 2,378 6.1 2,297 5.9 7,128 6.1 7,386 5.9
Write Down of Assets and
Restructuring and Unusual Charges 43,241 110.1 4,198 10.8 44,174 37.8 5,527 4.4
Interest Expense 586 1.5 1,306 3.4 2,738 2.3 3,665 2.9
Interest Income (450) (1.1) (480) (1.2) (1,439) (1.2) (788) (.6)
------- ----- ------ ----- ------- ----- ------- -----
Total Costs and Expenses 81,958 208.7 42,441 109.4 158,346 135.4 131,031 104.0
------- ----- ------ ----- ------- ----- ------- -----
Loss Before Income Taxes (42,685) 108.7 (3,629) (9.4) (41,382) (35.4) (5,076) (4.0)
Benefit for Income Taxes (10,193) (26.0) (1,320) (3.4) (9,789) (8.4) (1,725) (1.3)
------- ----- ------ ----- ------- ----- ------- -----
Net Loss (32,492) (82.7) (2,309) (6.0) (31,593) (27.0) (3,351) (2.7)
======= ===== ====== ==== ======= ===== ======= =====
</TABLE>
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 increased by $461,000 from $38,812,000 in
1996 to $39,273,000 in 1997, and for the nine month period decreased by
$8,991,000 from $125,955,000 in 1996 to $116,964,000 in 1997. The disposition
of the Islands restaurants in May 1996 accounted for a decrease in revenues of
$11,095,000 for the nine month period. Revenues for Chart House restaurants
increased by $327,000 for the third quarter and $1,455,000 for the nine months,
over the respective periods of the prior year, due primarily to one new
restaurant opening (in April 1996) and the reopening of two restaurants
following remodels (in March and July 1996). Comparable sales increased by .2%
over the previous year's third quarter, and remained even with last year for the
nine month comparison. Increased
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<PAGE>
sales at Solana Beach Baking Co., primarily from the growth of the Starbucks and
one other retail account, accounted for an increase in revenues of $134,000 for
the third quarter and $649,000 for the nine month period.
Several cost and expense categories in the consolidated statements of
operations were lower in the 1997 nine month period than 1996 because of the
disposition of the Islands restaurants. The disposition did not have a material
effect on third quarter comparisons.
Chart House restaurant operating margins in 1997 overall showed a slight
improvement year to date over 1996, although cost pressures caused a slight
decrease in the 1997 third quarter. Cost of sales as a percentage of revenues
was lower in the 1997 third quarter primarily because of changes to the product
mix, the effect of which was partially offset by higher commodity costs.
Restaurant labor has been lower as a percentage of revenues in the 1997 periods,
as the Company has focused efforts on further controlling hourly labor costs to
counter the effects of Federal and state minimum wage increases. Other operating
costs as a percentage of revenues increased in the third quarter primarily due
to higher insurance costs and apparel expense (resulting from a uniform change-
out).
Selling, general and administrative expenses increased by $680,000 for the
third quarter but were $694,000 under last year in the nine month comparison.
As a percentage of revenues, selling, general and administrative expenses
increased from 8.0% in the third quarter of 1996 to 9.6% in 1997, and remained
at 8.4% for the nine month periods of both years. The increase in third quarter
expenses is primarily the result of higher professional fees and consulting
costs primarily incurred in connection with the Company's strategic planning and
revitalization efforts. The disposition of Islands accounted for approximately
$450,000 of the decrease in the nine month period comparison.
Depreciation and amortization increased slightly as a percentage of
revenues because of significant capital spending at certain Chart House
restaurants in 1996.
The 1997 third quarter included special charges of $43.2 million,
consisting of asset write downs and other charges. The amount included (i)
approximately $21.2 million in write downs to estimated realizable value of non-
core assets (including the Islands note and limited partnership interest) and
certain Chart House restaurants held for disposal, and other restaurant assets
to be disposed of in connection with the plan to revitalize the Chart House
restaurants, and (ii) approximately $17.0 million in asset write downs to
estimated fair value of several Chart House restaurants to be used in ongoing
operations, including a $4.2 million write down of goodwill associated with
impaired assets. The write down of the assets to be used in ongoing operations
has been taken to reflect a greater emphasis on economic performance over the
estimated useful life for each restaurant property as well as a determination to
dispose of, or otherwise take remedial action on, underperforming locations. A
portion of the total charge, approximately $5.0 million in charges, included
among other things, costs associated with hiring the Company's new chief
executive officer, severance and other costs related to management and
organizational changes, and estimated termination benefits to be paid to
employees in connection with the planned relocation of the Company's
headquarters. Total special charges for the 1997 nine month period were $44.2
million, which additionally included severance costs for terminated management
employees in the 1997 second quarter. In the 1996 third quarter and nine month
period, special charges amounted to $4,198,000 and $5,527,000, respectively,
relating primarily to write downs of assets that were sold and management
severance costs.
-12-
<PAGE>
Interest expense was $720,000 lower in the 1997 third quarter than in 1996,
mostly because the Company reduced outstanding debt balances through the sale of
shares of common stock, which was completed in the second quarter of 1997.
Revolving credit debt balances have also been reduced over the course of 1997
from excess cash flows from operating activities over investing activities, the
effect of which has reduced interest expense.
Interest income of $450,000 for the 1997 third quarter was not
significantly different than income of $480,000 in the 1996 third quarter. The
income is earned principally from the note received in connection with the sale
of the Islands restaurant operations in May 1996.
The effective rate for the benefit for income taxes was approximately 24%
for the third quarter and nine month periods of 1997. The significant loss
reported in the 1997 periods from the special charges generated a tax benefit
which will be applied against previous years' and estimated future taxable
income. The effective rates for the benefit for income taxes for the third
quarter and nine month periods of 1996 were 36% and 34%, respectively. The
losses for those periods were applied against previous years' taxable income to
generate income tax refunds in the 1997 fiscal year.
Operating profits at Solana Beach Baking Co. increased by approximately
$58,000 for the quarter and $348,000 for the nine month period from the
respective periods of the prior year, primarily as a result of the increase in
sales referred to above.
As a result of the foregoing, net loss increased by $30,183,000 for the
third quarter of 1997 and $28,242,000 for the nine month period of 1997, from
the respective periods of the prior year.
Liquidity and Capital Resources
- -------------------------------
The Company requires capital principally for the acquisition and
construction of new restaurants and for the remodeling and refurbishing of
existing restaurants. The Company's primary sources of working capital are cash
flows from operations and borrowings under a credit agreement with two banks
which provides a $20,000,000 line of credit (reduced from $20,400,000 in June
1997 under an amended and restated agreement, as discussed below) with interest
at the lead bank's base rate (or LIBOR plus a maximum 1.25%). Net cash flows
from operating, financing and investing activities are used primarily to reduce
or increase those borrowings. During the nine months of 1997, the Company
decreased its line of credit borrowings by $19,200,000. At September 29, 1997,
the Company had no outstanding borrowings under the bank credit agreement.
However, the Company expects to increase its borrowings through the end of the
year to fund working capital and capital expenditure needs.
The Company planned limited capital investment activity in 1997 for
approximately twenty restaurants. Capital resources are primarily being directed
toward restaurant level improvements that management believes will be noticed by
Chart House customers: paint, carpeting, lighting, sound systems, and cookline
upgrades, among other things. Capital expenditures through the nine months of
1997 were $4.1 million. The current projection for capital spending in 1997 is
about $7 million. The Company does not plan to open any new restaurants in 1997.
Management believes that cash flows from operations will be sufficient to fund
planned capital expenditure activity in 1997. Borrowings under the bank credit
agreement are available to meet other funding requirements.
In the first quarter of 1997, the Company completed a process that had
begun in late-1996 to seek and obtain alternative financing in order to reduce
the amounts owed to its existing lenders and to
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<PAGE>
provide capital needed to enable the Company to move forward with its plan to
revitalize the Chart House restaurants.
On March 10, 1997, the Company agreed to sell 3,400,000 newly-issued shares
of common stock in a private placement to an investment company at $5.75 per
share, for a total sale price of $19.5 million. The initial sale of 1,641,750
shares for $9.4 million was completed in March 1997. An additional 1,758,250
shares were sold for $10.1 million, following approval by the Company's
shareholders at the annual meeting held in May 1997. The Company used the net
proceeds of approximately $18.4 million from the transaction to repay an
aggregate of $12 million of scheduled principal installments under the two
senior secured notes and to reduce outstanding borrowings under the bank credit
agreement.
In June 1997, in connection with the completion of the additional stock
sale transaction, the Company obtained a new, longer term credit facility with
its banks. The restated credit agreement provides for a $20,000,000 revolving
loan credit limit (including availability for letters of credit, primarily
covering insurance reserves, of which approximately $2.9 million are currently
outstanding) with interest at the lead bank's base rate or LIBOR plus a maximum
1.25%. The credit facility matures in June 2000.
Management believes that the Company has sufficient liquidity as a result
of its de-leveraging and securing of a new bank credit agreement. The Company
may seek additional financing in connection with the development of its
strategic plan, depending on the extent and timing of the program to revitalize
the restaurants. In addition, the Company adopted plans in 1997 to divest
itself of non-core assets (including the Islands note receivable and limited
partnership interest) and certain Chart House restaurant properties. It is
anticipated that any cash proceeds from the sale of these assets would be used
to reduce remaining outstanding indebtedness.
Cost Increases
- --------------
On September 1, 1997, the Federal minimum hourly wage increased from $4.75
to $5.15 per hour. Additionally, the minimum hourly wage to employees based in
California (a state in which the Company operates 19 restaurants), increased
from its current rate of $5.00 to $5.15 per hour, with a further increase to
$5.75 effective March 1, 1998. Management believes these measures will increase
the Company's future labor costs and is taking steps to minimize the impact of
the increased wage rates.
The Company expects to incur higher costs over the next several periods,
particularly in the general and administrative area, in connection with the
planned relocation of the Company's headquarters and development and
implementation of the Chart House restaurant revitalization plan.
Seasonality and Other Information
- ---------------------------------
Historically, the Company's business is seasonal in nature with Revenues
and Net Income for the second and third quarters generally 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.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. 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 12, 1997 By: /s/ RICHARD E. RIVERA
------------------------------------------
Richard E. Rivera
President and Chief Executive Officer
By: /s/ JAMES C. WENDLER
------------------------------------------
James C. Wendler
Vice President - Finance and Chief
Financial Officer
-15-
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