United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 25, 1998
[ ] 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 000-16791
STACEY'S BUFFET, INC.
(Exact Name of Registrant as specified in its Charter)
Florida 59-2736736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12812 60th Street North, Suite 200, Clearwater, FL 33760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 507-0335
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 [ ] No [X]
The number of shares outstanding of registrant's common stock as of
April 27, 1998 was 2,493,144 shares.
STACEY'S BUFFET, INC.
INDEX
PAGE #
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 25, 1998 and December 31, 1997 3
Statements of Operations for the Twelve Weeks
Ended March 25, 1998 and March 26, 1997 4
Statements of Stockholders' Equity for the Twelve
Weeks Ended March 25, 1998 and March 26, 1997 5
Statements of Cash Flows for the Twelve Weeks
Ended March 25, 1998 and March 26, 1997 6
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
STACEY'S BUFFET, INC.
Balance Sheets
March 25, 1998 and December 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
March 25, December 31,
Assets 1998 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ (58,655) $ 351,998
Short-term investments 266,439 262,395
Receivables 30,639 20,833
Inventory 196,130 264,333
Deferred loan costs - 1,367,446
Prepaid expenses and other current assets 45,840 38,502
------------------------------
Total current assets 480,393 2,305,507
Property and equipment, net 1,253,551 2,013,522
Deposits and other assets 112,188 128,385
Goodwill, net 688,023 1,475,523
------------------------------
$ 2,534,155 $ 5,922,937
==============================
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Accounts payable $ 3,434,083 $ 3,430,166
Line of credit - -
Current portion of obligations under
Capital Leases 10,225 10,826
Current portion of obligations due
Star Buffet, Inc. - 710,000
Accrued severance 895,834 1,025,874
Accrued workers compensation 535,989 558,810
Accrued expenses 2,946,515 2,160,574
Accrued rent 824,961 862,512
Reserve for restaurant closings 3,758,798 3,421,024
------------------------------
Total current liabilities 12,406,405 12,179,786
Obligations under capital leases,
excluding current portion 12,253 13,619
------------------------------
Total liabilities 12,418,658 12,193,405
Stockholders' equity (deficit)
Common stock, $.01 par value.
Authorized 25,000,000 shares;
issued and outstanding 2,493,144
shares at March 25, 1998
and March 26, 1997 24,931 24,931
Additional paid in capital 42,787,602 44,155,048
Accumulated deficit (52,697,036) (50,450,447)
------------------------------
Net stockholders' equity (deficit) (9,884,503) (6,270,468)
Commitments and contingencies - -
------------------------------
$ 2,534,155 $ 5,922,937
==============================
</TABLE>
See accompanying notes to financial statements.
STACEY'S BUFFET, INC.
Statements of Operations
For the Twelve Weeks Ended March 25, 1998
and March 26, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 25, March 26,
1998 1997
----------- ---------
<S> <C> <C>
Restaurant sales $ 7,088,972 $10,187,511
Cost of restaurant sales:
Food cost 2,783,054 3,772,997
Labor cost 2,187,395 2,783,715
Operating cost 956,176 1,448,713
Occupancy cost 508,292 639,694
Depreciation and amortization 111,916 235,870
----------------------------
Total restaurant costs 6,546,833 8,880,989
----------------------------
Restaurant profit 542,139 1,306,522
General and administrative expenses 1,956,332 533,204
Amortization of goodwill 19,050 109,500
Provision for restaurant closings 532,913 -
Impairment of long-lived assets 622,105 -
----------------------------
Operating profit (loss) (2,588,251) 663,818
Gain (loss) on sale of assets 319,322 -
Other income, net 22,350 36,228
----------------------------
Income (loss) before income taxes (2,246,589) 700,046
Income taxes - -
----------------------------
Net income (loss) $(2,246,589) 700,046
============================
Comprehensive income (loss) $(2,246,589) 700,046
============================
Net Income (loss) per share of
common stock-Basic $ (0.90) 0.28
============================
-Diluted (0.90) 0.27
============================
Weighted average number of common
shares outstanding
Basic 2,493,144 2,493,144
Diluted 2,493,144 2,620,644
</TABLE>
See accompanying notes to financial statements.
STACEY'S BUFFET, INC.
Statements of Stockholders' Equity
For the Twelve Weeks Ended March 25, 1998
and March 26, 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional Net
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,493,144 $24,931 44,155,048 (50,450,447) (6,270,468)
Net income (loss) - - - (2,246,589) (2,246,589)
Warrant canceled in connection
with termination of Credit
Agreement with Star (1,367,446) (1,367,446)
------------------------------------------------------------------------
Balances at March 25, 1998 2,493,144 24,931 42,787,602 (52,697,036) (9,884,503)
========================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Net
Common stock paid-in Accumulated stockholders'
Shares Amount capital deficit equity
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 2,493,144 $24,931 42,787,602 (33,872,142) 8,940,136
Net income - - - 700,046 700,046
------------------------------------------------------------------------
Balances at March 26,1997 2,493,144 $24,931 42,787,602 (33,172,096) 9,640,182
========================================================================
</TABLE>
See accompanying notes to financial statements.
STACEY'S BUFFET, INC.
Statements of Cash Flows
For the Twelve Weeks Ended March 25, 1998
and March 26, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 25, March 26,
1998 1997
--------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net earnings (loss) $(2,246,589) $ 700,046
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Impairment of long-lived assets 622,105 -
Depreciation and amortization 130,966 412,949
Provision for restaurant closings 532,913 -
Gain on Sale of Assets (319,322) -
Change in assets and liabilities:
(Increase) decrease in assets:
Short-term investments (4,044) 553,591
Receivables (9,806) 46,365
Inventory 68,203 (22,387)
Prepaid expenses and other current assets (7,338) (56,598)
Deposits and other assets 16,197 200
Increase (decrease) in liabilities:
Accounts payable 3,917 (752,480)
Accrued severance (130,040) -
Accrued workers compensation (22,821) (45,961)
Accrued Expense 785,941 (95,514)
Accrued rent (37,551) (94,253)
Reserve for restaurant closings (221,417) (302,615)
------------------------
Net cash provided by (used in) (838,686) 343,343
operating activities
Cash flows from investing activities:
Capital expenditures (10,000) (77,569)
Proceeds from sale of assets 1,150,000 -
------------------------
Net cash provided by (used in)
investing activities 1,140,000 (77,569)
Cash flows from financing activities:
Payments of advances from Star Buffet, Inc. (710,000) -
(Decrease) increase in line of credit - (340,000)
Proceeds from issuance of capital lease
obligations - -
Payments on capital lease obligations (1,967) (4,759)
------------------------
Net cash provided by (used in)
financing activities (711,967) (344,759)
------------------------
Net (decrease) increase in cash (410,653) (78,985)
Cash and cash equivalents at beginning of period 351,998 252,991
------------------------
Cash and cash equivalents at end of period $ (58,655) $ 174,006
========================
Supplemental disclosure of cash flow information:
Cash payments during the period for:
Interest paid $ 11,873 2,563
========================
</TABLE>
See accompanying notes to financial statements.
STACEY'S BUFFET, INC.
STACEY'S BUFFET, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included. The operating results for the first quarter ended March 25, 1998
are not necessarily an indication of the results that may be expected for
the fiscal year ended December 30, 1998. Except as disclosed herein, there
has been no material change in the information disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. Therefore,
it is suggested that the accompanying financial statements be read in
conjunction with the Company's December 31, 1997 financial statements.
Fiscal Year
The Company's fiscal year ends on the Wednesday nearest December 31.
Cash and Cash Equivalents
Cash and cash equivalents (There were no cash equivalents at December 31,
1997 or March 25, 1998) includes cash and investments with original and
purchased maturities less than 90 days.
Short-Term Investments
Short-term investments consist of U.S. Treasury and corporate bonds and are
carried at market. Substantially all short-term investments have been
pledged as security for the Company's letter of credit used to support its
workers compensation obligations. The carrying amount of short-term
investments approximates fair value because of the short maturity, generally
less than one year, of these instruments.
Deferred Loan Costs
Deferred loan costs of $1,367,446 were incurred in connection with the
issuance of a Warrant by the Company in connection with the October 31, 1997
Credit Agreement with Star Buffet, Inc. Upon the termination of the Credit
Agreement on February 17, 1998, the warrant was canceled and the defered
loan costs were reversed to Paid In Capital in the first quarter. See Note
3.
Inventory
Inventory, which consists principally of food and supplies, is stated at
the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets.
Goodwill
Goodwill relates to the merger with Stacey-Lynn Group, Inc. and is being
amortized over 20 years.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments at December 31,
1997 and March 25, 1998, reflect the fair value amounts which have been
determined using available market information.
Accounting for Long-lived Assets
The Company adopted the provisions of the Financial Accounting Standard
Board's Statement of Financial Accounting Standards No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", on January 3, 1996. This Statement requires that certain long-lived
assets and certain identified intangibles be reviewed for impairment
whenever events or changes indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less cost to sell.
Income Taxes
The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109 ("Statement 109"), "Accounting for Income Taxes." Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that included the enactment date.
Earnings (Loss) Per Share
The Company accounts for its net earnings (loss) per share in accordance
with Financial Accounting Standards Board Statement No 128 "Earnings per
Share." Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The
calculation of the Company's basic and diluted earnings (loss) per share
reported is illustrated below.
<TABLE>
<CAPTION>
For the Quarter Ended
-----------------------------------------------------------------------------
March 25, March 26,
1998 1997
------------------------------------- ------------------------------------
Income (loss) Shares Per Share Income (loss) Shares Per Share
------------- ------ --------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings
Per Share
Net Income $(2,246,589) 2,493,144 $(.90) $700,046 2,493,144 $.28
Diluted Earnings
Per Share
Effect of Dilutive
Stock Options - - - - 127,500
-------------------------------------------------------------------------
Net Income $(2,246,589) 2,493,144 $(.90) $700,046 2,620,644 $.27
</TABLE>
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial satements in
conformity with generally acepted accounting principles. Actual results
could differ from these estimates.
Reclassifications
Certain amounts in the 1997 financial statement have been reclassified to
conform to the 1998 financial statments presentation.
Accounting Standards
In June 1997, SFAS No. 130, "Comprehensive Income" (Statement 130), was
issued which becomes effective for the Company's 1998 fiscal year.
Statement 130 requires reclassification of earlier financial statements for
comparative purposes. Statement 130 requires that changes in the amounts of
certain items, including foreign currency translation adjustments and gains
and losses on certain securities, be shown in the financial statements.
Statement 130 does not require a specific format for the financial statement
in which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement.
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (Statement 131), was issued. This statement will
change the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products,
services an entity provides the material countries in which it holds assets
and reports revenues, and its major customers. Statement 131 is effective
for fiscal years beginning after December 15, 1997.
(2) Going Concern
The Company has incurred net losses of $16,578,050, $1,565,255, and
$8,109,179 for the years ended December 31, 1997, January 1, 1997, and
January 3, 1996. The Company also reported a net loss of $2,246,589 for the
qurter ended March 25, 1998 as compared to a profit of $700,046 in the
comparable quarter a year ago. These losses have caused a considerable
strain on the Company's cash flow. At March 25,1998, the Company had a
working capital deficit of $11,926,013 and a net stockholders' deficit of
$9,884,503. In order to alleviate some of this strain, the Company entered
into agreements with certain of its creditors to allow the Company to
delay payment of a substantial portion of its then due accounts payable.
Although these agreements have expired, many of these creditors have
continued to permit the Company to delay payments. There can be no
assurance that these creditors will continue to extend these
extraordinary payment terms to the Company. Some creditors are demanding
that the Company revert to regular payment terms or have obtained
judgements against the Company for money owed. Based on the developments it
is highly probable that the Company would need to take measures, as described
in the following paragraph, to maintain its business.
Exacerbating the Company's financial position is the fact that it is
currently entering the slow season for its Florida operations and it is
expected that the Company's cash flow will be negatively impacted over
the next four to six months. If the Company is unable to generate
positive cash flow from asset sales or by other extraordinary means in the
near future, the Company's financial resources are insufficient for the
Company to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets or the amount and classification of liabilities that might
be necessary in the event the Company cannot continue in existence. The
Company has taken steps to improve revenues, reduce operating expenses, sell
assets, and close store locations that do not generate positive cash flow,
to restructure operations to achieve positive cash flow during the slow
season. As there can be no assurances that such steps would successfully
sustain operations, the Company is preparing for a filing for protection
from creditors in order to enable the Company to reorganize its finances,
merge with another company and/or sell all or substantially all of the
Company's assets. The financial statements do not include any adjustments
that would result from such a filing.
(3) Long Term Debt
On October 31, 1997, the Company executed a Credit Agreement with Star
Buffet that provided for advances up to $4.5 million to the Company.
Interest was payable monthly at prime plus four per cent up to $4,000,000
and prime plus 5 per cent on amounts above $4,000,000. All advances
were due on October 31, 2002. The Agreement was secured by substantially
all the Compnay's assets. As of February 17, 1998, Star had advanced
$710,000 to the Company under this Agreement. As a result of the
termination of the alliance with Star and the sale of three restaurants
to Star, the Credit Agreement was terminated and the advances were repaid
on February 17, 1998.
Star Warrant
On October 31, 1997, as part of the Credit Agreement with Star, the
Company issued a warrant to purchase 1,342,422 shares of the Company's
common stock at $1.00 per share to Star. The warrant was valued at
$1,367,446 using the Black-Scholes method. As a result of the
termination of the alliance with Star, the warrant was canceled on
February 17, 1998 and the deferred loan costs were reversed to paid in
capital in the first quarter.
(4) Contingencies
Purchase Commitments
The Company relies on Sysco Food Services ("Sysco") for a significant
portion of its purchases of food used in its restaurant operations. For
the year ended December 31, 1997, the Company purchased approximately
$4,600,000 from Sysco, which was 43% of its food purchases. The Company
is not current in its payments to Sysco and continues to receive
deliveries from Sysco under an informal agreement.
The Company maintains purchase commitments with R.C Cola and Coca Cola
for the supply of soft drinks to its restaurants. At March 25, 1998 the
Company owed approximately $307,624 to R. C. Cola and $215,000 to Coca
Cola under current and previous purchase commitments. Management
believes that it is in its best interest to continue with a single
supplier. Management is negotiating to resolve this matter, but no
assurance can be given that it will be resolved with a favorable outcome
for the Company.
Workers Compensation
At March 25, 1998, the Company had $266,439 in short term investments, which
were being used to secure a $250,000 letter of credit supporting self-funded
worker's compensation and general liability programs. In February 1998, the
Company's workers' compensation insurance carrier notified the Company that
this letter of credit must be increased from $250,000 to $550,000 immediately
which will require a commensurate increase in the investment collateral. The
Company notified the carrier that it is not in a position to respond to this
requirement at the present time and can give no assurance that it will be
able to fulfill this request in the near future. In a letter dated April 23,
1998, the carrier notified the Company that is does not intend to renew the
Company's insurance coverage in its present form on the renewal date of
July 1, 1998. The Company is continuing to discuss alternatives with the
carrier and others. In the event that the Company is not able to obtain
alternatives for the programs, it could be forced to discontinue operations,
declare bankruptcy, or take other extraordinary action to remain in business.
Leases
On October 31, 1997, the Company entered into standstill agreements with
twenty-two of its landlords from which the Company leased property in order to
stay defaults pertaining to the underlying leases. In the standstill
agreements, the Landlords agreed not to take any collection action on past due
amounts owed by the Company until either December 1, 1997 or January 1, 1998
provided the Company made current lease payments for the month of November
1997, for the December 1 standstill or current payments for November and
December 1997 for the January 1, 1998. The standstill agreements have
expired, and the certain landlords have taken adverse actions to collect
on past due rents, including obtaining judgement.
At December 31, 1997, the Company owed approximately $650,000 in past due
rent payments to landlords, representing approximately three months rent in
arrears. At June 11, 1998, this amount had increased to approximately
$1,100,000.
Legal Matters
With regard to the workers compensation and general liability claims for which
the Company is self funded, it is important to recognize that the risk of loss
is borne by the Company. The Company is required to provide a letter of
credit to secure these self funded programs. The insurance company requested
in February 1998 that the letter of credit be increased from $250,000 to
$550,000 which will require a commensurate increase in the investment
collateral which the Company has been unable to provide. In a letter dated
April 23, 1998, the carrier has notified the Company that it does not intend
to renew the Company's insurance coverage in its present form on its renewal
date of July 1, 1998. The Company is continuing to discuss alternatives with
the carrier and others. In the event that the Company is not able to obtain
alternative sources for the programs, the inability of the Company to obtain
alternatives would have a material impact on the Company.
The Company was subject to a lawsuit by four employees claiming sexual
harassment by a manager of one of the Company's restaurants. The settlement
agreement provides for the payment of $235,000 to the plaintiffs on September
7, 1998. If the payment is not made at that time, then pursuant to a court
order, the plaintiffs are entitled to judgement against the Company. Any
default in payment of the foregoing amount could result in an expedited
judgement against the Company, upon which court-authorized collection
action could be commenced.
The Company has been threatened with a lawsuit by Shoney's, Inc. ("Shoney's")
claiming the Company is in violation of a prior agreement regarding the claims
by Shoney's that the Company's trade dress is similar to that of Shoney's.
Management believes that it will be able to resolve this issue.
In recent months, the Company has been the subject of an increasing number of
collection actions by various vendors, landlords and others. See Note 2.
The Company recently terminated payments under its Severance and
Noncompetition Agreement with the Marrier Group, Inc. of which Mr. Marrier, a
former director and the former chief executive officer of the Company, is an
employee. That agreement, which was based on the Star alliance, had provided
for payment to the Marrier Group, Inc. of $1,000,000 in the form of 96
biweekly installments of $10,417. On March 31, 1998, the Company received a
letter from the Marrier Group's attorneys threatening a collection action.
Mr. Marrier resigned his position on the Board of Directors, effective April
30, 1998.
STACEY'S BUFFET, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Stacey's Buffet, Inc. (the "Company") has experienced substantial losses and
declining sales for the past several years. These trends intensified in
recent months and, with the February 1998 termination of the Star Buffet,
Inc. alliance discussed below, the Company's financial condition has become
very critical and may cause the Company to file for protection from its
creditors in the near future, while the Company reorganizes its operations,
merges or sells all or substantially all of its assets. In addition to
reporting a loss for 1997 and the first fiscal quarter of 1998, the Company's
cash flow from operations is declining and the Company is operating with the
forbearance of several vendors whose payables are considerably out of term as
well as with the forbearance of many landlords whose leases with the Company
are in default. Also, in the past year, four of the Company's five directors
have resigned without replacement, and all of the Company's officers have
resigned or been terminated.
Under these circumstances, a member of the Board of Directors has recently
assumed the titles of interim President, CEO, and Chairman of the Board of
Directors. The Company is continuing to operate with negative working
capital and very limited financial and managerial resources. If the Company
is unable to generate a positive cash flow in the very near future, the
Company's financial resources will be insufficient to finance the Company's
working capital needs or to permit the Company to continue as a going
concern.
Certain statements in this Form 10-Q may constitute "forward-looking
statements" within the meaning of the Securities Act of 1933 and the
Securities Exchange Act of 1934. Forward-looking statements by their nature
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: General business conditions; the
impact of competitive products and pricing; success of operating
initiatives; development and operating costs, advertising and promotional
efforts; access to credit or sale of individual restaurants; adverse
publicity; acceptance of new product offerings; consumer trial and
frequency; availability, locations and terms of sites for restaurant
development; changes in business strategy or development plans; quality of
management and availability; terms and the deployment of capital; the
results of financing efforts; business abilities and judgment of personnel;
availability of qualified personnel; food, labor and employee benefit costs;
changes in or the failure to comply with, government regulations; weather
conditions, construction schedules; and other factors referenced in this
Form 10-Q.
RESULTS OF OPERATIONS
Results of operations are for the twelve weeks ("first quarter") ended March
25, 1998, as compared to the twelve weeks ended March 26, 1997. At the end
of the first quarter 1997, there were 24 Company-owned restaurants in
operation compared to 15 at the end of the first quarter of 1998. No
restaurants were closed or sold in the first quarter of 1997, but four
restaurants were closed and one sold later in the year. Four restaurants
were sold in the first quarter of 1998, three to Star Buffet, Inc. and one
to an employee. See Subsequent Events.
RESTAURANT SALES were $7,088,972 for the first fiscal quarter of 1998 which
ended March 25, 1998 compared to sales of $10,187,511 for last year's first
quarter ended March 26, 1997. This represents a decrease of $3,098,539 or
30.4% from the same quarter in 1997. The decrease in sales is primarily due
to more stores open during the first quarter of 1997 compared to 1998, as
same store sales (stores open at the end of the first quarter of 1998 that
were also open for all of the first quarter of 1997 and 1998) declined 11.6%.
COST OF RESTAURANT SALES includes food, labor, operating, occupancy and
depreciation and amortization expenses. Operating costs consist primarily
of costs of supplies, utilities, maintenance, personal property taxes, and
insurance.
Cost of food as a percentage of sales for the twelve weeks ended March 25,
1998 totaled 39.3% compared to 37.0% for the twelve weeks ended March 26,
1997. Food costs as a percentage of sales have grown due to cost increases
and food preparation inefficiencies as sales have declined. Labor costs as a
percentage of sales increased to 30.8% in the first quarter of 1998 compared
to 27.3% in the same quarter last year. This increase was related to the
increase in the minimum wage put into effect in the second half of 1997 and
the decline in sales relative to the semi-variable nature of certain labor
costs. Other operating costs, occupancy and depreciation as a percentage of
sales, were 22.2% for the twelve weeks ended March 25, 1998 compared to 22.8%
in the comparable period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES increased by $1,423,017 for the twelve
weeks ended March 25, 1998 as compared to the same period for the previous
year. Total general and administrative expenses, as a percentage of sales,
were 27.6% for the first quarter of 1998, as compared to 5.2% for the first
quarter of 1997. This increase is a primarily result of the Company accruing
$1,140,000 to provide for state sales and use tax assessments proposed by the
Stated of Floride and New York. The Company also incurred additional
professional and consulting fees of approximately $300,000 in the first
quarter of 1998 due to the management fees incurred from the Star agreement
and expenses related to changes in operations caused by the termination of
the Star agreement.
Amortization of goodwill was $19,050 for the first quarter of 1998 compared to
$109,500 in 1997. The amount declined because of the Statement 121 provision
for impairment of fixed assets taken in fiscal 1997.
PROVISION FOR RESTAURANT CLOSINGS. Because of losses and negative cash flow
of certain restaurants, it was necessary to establish a reserve for the
costs associated with closing these restaurants. These costs consist of the
write off of the net book value of assets that will not be retained, the
estimated costs of terminating long term leases and other costs associated
with closing a restaurant.
During the quarter ended March 25, 1998, $532,913 was added to the existing
reserve for restaurant closings. This increase was attributable to
management's plans to close restaurants that are not performing as the
Company enters its traditionally slow season.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company undertook a further review of
its assets in the first fiscal quarter of 1998, due to the planned closing of
restaurants and a more rapid decline in sales than anticipated in certain
markets. Accordingly an impairment reserve of $622,105 was charged against
operations during the quarter ended March 25, 1998.
GAIN ON SALE OF ASSETS. The Company recorded a gain on the sale of three
restaurants to Star and one restaurant to an employee totaling $319,322 in
the first quarter of 1998. There were no gains of this nature in the first
quarter of 1997.
OTHER INCOME (EXPENSE) for the first quarter, 1998 was $22,350 compared to
$36,228 in the same quarter, last year. Other income (expense) consists
primarily of royalty fees earned, interest income, interest expense. The
reduction in other income relates to the reduction in the number of
restaurants being operated under license agreements in 1998 compared to
1997 and an increase in interest expense.
INFLATIONARY FACTORS were minimal on the operating results of the Company.
Wholesale food costs, except for certain items, have remained stable during
the first quarter of 1998, and there have not been any noticeable increases
in the cost of supplies and other items.
LIQUIDITY AND CAPITAL RESOURCES
The operating losses incurred in recent years have exhausted the Company's
cash reserves. At March 25, 1998 the Company's current liabilities exceeded
current assets by approximately $11,926,012 and the Company's
stockholders equity fell to a negative $9,884,503. The ability of
the Company to generate a positive cash flow from operations in the near term
is made especially difficult by the fact that all of its currently operating
restaurants are located in Florida, a highly seasonal market that has
traditionally suffered from negative cash flow from April to October of each
year. To bolster cash flow, the Company has taken steps to improve revenues,
reduce operating expenses, sell assets, and close store locations that do not
generate positive cash flow during the slow season. As there can be no
assurances that such steps would successfully sustain operations, the Company
is preparing for a filing for protection from creditors in order to enable
the Company to reorganize its finances, merge with another company and/or
sell all of the Company's assets.
Historically, the Company's liquidity has been obtained through cash from
operations, credit from trade suppliers, and the sale of common stock
related to the merger in December 1993 with the Stacey Lynn Group. The
continued deterioration in operating results, as indicated by the net cash
used in operations of $838,686 versus cash provided of $343,343 last year,
was a result of the decline in sales and the fixed or semi-fixed nature of
many of the Company's operating costs and increased expenses associated with
the search for a strategic partner. With the retrenchment of the Company
primarily to the Florida market, the seasonality of the Company's operations
has increased. Such increase in seasonality will further impair cash flows
during the approaching summer and fall.
The Company's cash flows from investing activities were $1,140,000 related
to capital expenditures for store openings or the sale of stores and/or
restaurant equipment. The Company's cash flow from investing activities were
$1,150,000 in the first quarter of 1998 due to the sale of four restaurants.
In the 1997 first quarter, no restaurants were sold and cash flows used in
investing were $77,569.
The Company's cash flows used in financial activities was approximately
$711,767 for the quarter ended March 25, 1998 compared to $349,759 in last
year's first quarter. In 1998, the Company repaid $710,000 advanced by Star
under the Credit Agreement while in previous years cash flows used in
financial activities was primarily related to capital lease obligations and a
line of credit. The advance was repaid to Star in February 1998. See
accompanying notes to the financial statements.
At March 25, 1998, the Company had $266,439 in short term investments, which
were being used to secure a $250,000 letter of credit supporting self-funded
worker's compensation and general liability programs. In February 1998, the
Company's workers' compensation insurance carrier notified the Company that
its letter of credit must be increased by $300,000 to $550,000 immediately
which will require a commensurate increase in the investment collateral.
The Company has notified the carrier that it is not in a position to respond
to this requirement at the present time and can give no assurance that it
will be able to fulfill this request in the near future. In a letter dated
April 23, 1998, the carrier has notified the Company that it does not intend
to renew the Company's programs on the renewal date of July 1, 1998. The
Company is continuing to discuss alternatives with the carrier and others.
In the event that the Company is not able to obtain alternative sources for
the programs, it could be forced to discontinue operations, declare
bankruptcy, or take other extraordinary action to remain in business.
As part of the strategic alliance with Star Buffet, Star Buffet agreed,
subject to certain conditions, to make loans from time to time up to a
maximum principal amount of $4.5 million. On February 17, 1998, the Company
announced the termination of the strategic alliance with Star and the sale
to Star of three the Company's restaurants for $1,100,000. Proceeds from
the transaction were used to repay $710,000 of loans that Stacey's had
previously received from Star under the Credit Agreement and $390,000 of
fees and expenses charged to the Company by Star pursuant to the Business
Services Agreement to the date of termination. In addition, the warrant to
purchase common stock of the Company that had been issued to Star was canceled.
In connection with entering into the Credit Agreement with Star, the Company
entered into agreements with certain of its creditors to forgo collection
efforts for a period up to 60 days provided that the Company make payments
representing current purchases or rent payments on a weekly or monthly
basis. Although these stand-still agreements have since expired, the
Company is continuing to operate with the forbearance of its creditors. Some
of the Company's creditors have discontinued their forbearance, which may
force the Company in the near future to discontinue operations, declare
bankruptcy or take other extraordinary action to remain in business.
In addition, the withdrawal of the financial and management support by Star
has required that the Company immediately seek professional management and
new sources of capital, and to more aggressively pursue the sale of stores
to raise capital for operating purposes in order to continue to operate.
There can be no assurance that the Company will be successful, that the sale
of stores can be consummated on terms that will enable the Company to
continue its business, or that professional management can be recruited and
put in place expeditiously. The Company has engaged the firm of Harrison
Hurley & Co., who have been consulting with and advising the Company since
1996, to seek buyers for the Company as a whole or its assets in part. Peter
J. Hurley, the Company's President, CEO, and Chairman of the Board, is the
owner of Harrison Hurley & Co. There can be no assurance that such buyers
can be found on a timely basis or that such buyers will be willing to
purchase the Company or its assets on terms favorable to the Company's
stockholders.
On March 6, 1998, a restaurant in Florida was sold to an employee in
exchange for the employee assuming the Company's obligations under the
restaurant's lease and the payment of $50,000. At March 25, 1998, the
Company was operating 15 buffet restaurants: 13 in Florida and two in the
Northeast.
SUBSEQUENT EVENTS
In a letter dated April 30, 1998, Mr. Stephen J. Marrier, resigned from the
Board of Directors, effective April 30, 1998.
Also, on May 11, 1998, the Company closed its restaurant in Stuart, Florida
and on May 15, 1998, the restaurant in Ft. Meyers, Florida was closed. On
May 19th, the Company closed its restaurant in Moorestown, NJ, on May 29th,
the restaurant in Pinellas Park, Florida closed, and on May 30th, the St.
Petersburg and Port Richey, Florida restaurants closed. Also, on June 5, 1998,
the restaurant in Mt. Dora closed and on June 11th Lancaster, PA was closed.
In total this fiscal year the Company has closed eight restaurants through June
11, 1998.
STACEY'S BUFFET, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
With regard to the workers conpensation and general liability claims for which
the Company is self funded, it is important to recognize that the risk of loss
is borne by the Company. The Company is required to provide a letter of
credit to secure these self funded programs. The insurance company requested
in February 1998 that the letter of credit be increased from $250,000 to
$550,000 which will require a commensurate increase in the investment
collateral which the Company has been unable to provide. In a letter dated
April 23, 1998, the carrier notified the Company that it was not going to
renew the Company insurance coverage in its present form upon their expiration
on July 1, 1998. The Company is continuing to negotiate with the carrier and
others to obtain alternatives. The inability of the Company to find
alternatives for these programs could have a material impact on the Company.
See Note 4 to the financial statements.
The Company was subject to a lawsuit by four employees claiming sexual
harassment by a manager of one of the Company's restaurants. The settlement
agreement provides for the payment of $235,000 to the plaintiffs on September
7, 1998. If the paymeent is not made, the plaintiffs are entitled to proceed
against the Company pursuant to a final order of the court which is not
subject to the defenses that the Compnay might have had to the original
claims. Any default in payment of the foregoing amount could result in an
expedited judgement against the Company, upon which court-authorized
collection action could be commenced.
The Company has been threatened with a lawsuit by Shoney's, Inc. ("Shoney's")
claiming the Company is in violation of a prior agreement regarding the claims
by Shoney's that the Company's trade dress is similar to that of Shoney's.
Management believes that it will be able to resolve this issue.
In recent months, the Company has been the subject of an increasing number of
collection actions by various vendors, landlords and others. See Note 4.
The Company recently terminated payments under its Severance and
Noncompetition Agreement with the Marrier Group, Inc. of which Mr. Marrier, a
former director and the former chief executive officer of the Company, is an
employee. That agreement, which was based on the Star alliance, had provided
for payment to the Marrier Group, Inc. of $1,000,000 in the form of 96
biweekly installments of $10,417. On March 31, 1998, the Company received a
letter from the Marrier Group's attorneys threatening a collection action.
Mr. Marrier resigned from the Board of Directors, effective April 30, 1998.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8K
a) Exhibits:
None
b) Reports on Form 8K:
The Company filed reports on Form 8K dated as follows during the
quarter ended March 25, 1998.
Current report on Form 8-K, dated March 6, 1998, relating to the
appointment of Peter J. Hurley as the Company's President, CEO. and
Chairman of the Board and the resignation of Garret Hunter as a
director, effective March 6, 1998
Current report on Form 8-K, dated February 17, 1998, relating to the
termination of the strategic alliance with Star Buffet, Inc., the sale
of three restaurants to Star Buffet, and the repayment of a loan from
Star Buffet. The 8-K also reported the resignation of Robert Wheaton
from the Board of Directors and as Chief Executive Officer of Stacey's
Buffet, Inc. and the resignation of Theodore Abajian from Stacey's
Board of Directors. The 8-K also reported that Peter J. Hurley, a
member of Stacey's Board of Directors, was appointed interim Chief
Executive Officer.
STACEY'S BUFFET, INC.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STACEY'S BUFFET, INC.
(Registrant)
Dated: June 15, 1998 By /s/ Peter J. Hurley
------------------ Peter J. Hurley
President, CEO, and Chairman
of the Board
Dated: June 15, 1998 By /s/ Mike Kehoe
------------------ Mike Kehoe
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Stacey's Buffet, Inc., for the quarterly periods ended
March 25, 1998 and March 26, 1997, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-30-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-02-1997
<PERIOD-END> MAR-25-1998 MAR-26-1997
<CASH> (58,655) 351,998
<SECURITIES> 266,439 262,395
<RECEIVABLES> 56,425<F1> 126,628
<ALLOWANCES> 25,786 10,000
<INVENTORY> 196,130 264,333
<CURRENT-ASSETS> 480,393 2,305,507
<PP&E> 1,253,551<F2> 2,013,522
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,534,155 5,922,937
<CURRENT-LIABILITIES> 12,406,405 12,179,786
<BONDS> 12,253 13,619
0 0
0 0
<COMMON> 24,931 24,931
<OTHER-SE> (9,909,434) (6,295,399)
<TOTAL-LIABILITY-AND-EQUITY> 2,534,155 5,922,937
<SALES> 7,088,972 10,187,511
<TOTAL-REVENUES> 7,442,517 10,226,302
<CGS> 2,783,054 3,772,997
<TOTAL-COSTS> 6,546,833 8,880,989
<OTHER-EXPENSES> 1,975,372 642,704
<LOSS-PROVISION> 1,155,018 0
<INTEREST-EXPENSE> 11,873 2,563
<INCOME-PRETAX> (2,246,589) 700,046
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,246,589) 700,046
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,246,589) 700,046
<EPS-PRIMARY> (.90) .28
<EPS-DILUTED> (.90) .27
<FN>
<F1>Receivable consist of--
Accounts Receivable--net $30,639 $116,628
Notes Receivable 0 0
Income Taxes Receivable 0 0
------- --------
$30,639 $116,628
======= ========
<F2>PP&E is net of accumulated depreciation and amortization of $9,533,336 and
$9,264,464 respectively.
</FN>
</TABLE>
