<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
( ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
(X) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 1998 to October 8, 1998
Commission File Number 1-10576
SANTA BARBARA RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0403086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 N. HARBOR BLVD.
P.O. BOX 61093
ANAHEIM, CALIFORNIA 92803
(Address of Principal Executive Office) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 491-6400
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 period 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
--- ---
As of November 19, 1998, the registrant had 12,706,032 shares outstanding
of its Common Stock, $.08 par value.
<PAGE> 2
SANTA BARBARA RESTAURANT GROUP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at October 8, 1998 and December 31, 1997 ....... 3
Consolidated Statements of Income for the periods ended October 8, 1998
and September 30, 1997 ................................................... 4
Consolidated Statements of Cash Flows for the periods ended
October 8, 1998 and September 30, 1997 ................................... 5
Notes to Consolidated Financial Statements.................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 11
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS............... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 15
Signatures ................................................................. 15
2
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Part I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements
SANTA BARBARA RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 8, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,929,797 $ 1,129,536
Short-term investments 6,081,384 2,323,181
Accounts and notes receivable, net 1,053,520 276,779
Inventories 969,503 41,300
Other assets 695,876 177,549
------------- ------------
Total current assets 10,730,080 3,948,345
Property and equipment, net 24,491,799 449,144
Property under capitalized leases, net 5,922,942 --
Notes receivable, net 1,820,103 338,763
Costs in excess of net assets acquired, net 17,364,937 --
Other assets 665,520 65,379
------------- ------------
$ 60,995,381 $ 4,801,631
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 4,138,975 $ 283,668
Accrued salaries, wages and employee benefits 2,208,043 114,347
Current portion of long-term debt 354,215 --
Current portion of capital lease obligations 878,674 --
Other current liabilities 5,872,773 25,000
------------- ------------
Total current liabilities 13,452,680 423,015
Long-term debt, excluding current portion 631,366 --
Capital lease obligations, excluding current portion 5,858,096 --
Other long-term obligations 4,543,222 60,687
Shareholders' equity
Common stock, $.08 par value, authorized 50,000,000
shares; 12,706,032 and 6,571,485 shares issued and
outstanding at October 8, 1998 and December 31,
1997, respectively 1,016,482 525,719
Additional paid-in capital 47,023,906 16,329,617
Accumulated deficit (11,530,371) (12,537,407)
-------------- -------------
Total shareholders' equity 36,510,017 4,317,929
------------- -------------
$ 60,995,381 $ 4,801,631
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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SANTA BARBARA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997 January 1, 1998 January 1, 1997
to October 8, to Sept.30, to October 8, to Sept. 30,
1998 1997 1998 1997
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant operations $ 9,968,233 $ 756,439 $ 11,398,600 $ 2,279,900
Franchised restaurants 577,872 489,773 1,417,514 1,239,207
Other 120,546 133,444 301,536 375,202
------------ ------------ ------------ ------------
Total revenues 10,666,651 1,379,656 13,117,650 3,894,309
------------ ------------ ------------ ------------
Restaurant operating costs:
Food and packaging 3,404,000 288,725 3,971,011 862,782
Payroll and other
employee benefits 3,598,310 237,344 4,047,430 697,961
Occupancy and other 2,191,138 245,371 2,593,993 684,991
------------ ------------ ------------ ------------
9,193,448 771,440 10,612,434 2,245,734
------------ ------------ ------------ ------------
Advertising expense 134,978 16,863 173,405 37,410
General and administrative 887,536 406,182 1,515,452 1,179,116
------------ ------------ ------------ ------------
1,022,514 423,045 1,688,857 1,216,526
------------ ------------ ------------ ------------
Operating income 450,689 185,171 816,359 432,049
Interest expense (63,439) -- (63,439) --
Other income, net 103,024 61,819 277,828 170,311
------------ ------------ ------------ ------------
Income before income taxes 490,274 246,990 1,030,748 602,360
Income tax expense 16,691 13,600 23,712 13,600
------------ ------------ ------------ ------------
Net Income $ 473,583 $ 233,390 $ 1,007,036 $ 588,760
============ ============ ============ ============
Basic earnings per share $ .05 $ .04 $ .14 $ .09
============ ============ ============ ============
Diluted earnings per share $ .05 $ .03 $ .12 $ .08
============ ============ ============ ============
Basic weighted average
shares outstanding 8,726,588 6,308,866 7,226,001 6,277,690
============ ============ ============ ============
Diluted weighted average
shares outstanding 9,283,254 8,133,072 8,172,467 7,128,711
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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SANTA BARBARA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
January 1, 1998 January 1, 1997
To October 8, to September 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,007,036 $ 588,760
Adjustments to reconcile net income to net
cash flows provided by (used in) operating activities:
Depreciation and amortization 439,242 227,492
Minority interest in consolidation partnership (3,112) (2,624)
Changes in operating assets and liabilities:
Accounts and notes receivable (152,490) 41,374
Accounts payable and accrued expenses (1,977,068) (83,209)
Other current assets 169,567 (100,403)
Salaries, wages and employee benefits (213,774) (24,384)
Deferred franchise fees 9,000 (12,500)
------------ ------------
Net cash (used in) provided by operating activities (721,599) 634,506
------------ ------------
Cash flows from investing activities:
Proceeds from sale of short-term investments 18,736,807 1,375,936
Purchases of short-term investments (22,484,856) (1,896,634)
Cash received from acquisitions, net of acquisition fees 1,500,871 --
Issuance of new notes receivable (92,000) --
Collections on notes receivable 198,196 --
Net change in other long term assets 22,684 --
Proceeds from the sale of equipment and improvements -- 31,981
Expenditures for property and equipment (932,296) (41,804)
------------ ------------
Net cash used in investing activities (3,050,594) (530,521)
------------ ------------
Cash flows from financing activities:
Net change in bank overdraft (563,616) --
Repayments of long-term debt (3,336) (9,824)
Repayments of capital lease obligations (66,950) --
Proceeds from issuance of common stock under
stock option plan 28,750 182,470
Proceeds from issuance of warrants 5,000,000 --
Proceeds from short term borrowings 200,000 --
Net change in other long term liabilities (22,394) --
Distribution to minority partner -- (8,280)
------------ ------------
Net cash provided by financing activities 4,572,454 164,366
------------ ------------
Net increase in cash and cash equivalents 800,261 268,351
Cash and cash equivalents at beginning of period 1,129,536 753,601
------------ ------------
Cash and cash equivalents at end of period $ 1,929,797 $ 1,021,952
============ ============
</TABLE>
5
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SANTA BARBARA RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
January 1, 1998 January 1, 1997
To October 8, to September 30,
1998 1997
--------------- --------------
<S> <C> <C>
Supplemental Information:
Cash paid during the period for:
Interest $ 15,325 $ 1,266
Income taxes $ 7,021 $ 13,600
Non cash investing and financing activities:
Issuance of common stock to acquire
businesses described in Note 3 $26,150,954 --
Acquisitions, net of cash acquired and
acquisition fees $24,650,083 --
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
SANTA BARBARA RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements of Santa
Barbara Restaurant Group, Inc., formerly GB Foods Corporation, and
subsidiaries (the "Company") have been prepared in accordance with generally
accepted accounting principles, the instructions to Form 10-Q and Article 10
of Regulation S-X. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1997 and the Company's
Joint Proxy Statement /Prospectus dated July 10, 1998, as amended, filed
with the Securities and Exchange Commission on July 31, 1998.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of results expected for a full year. Certain reclassifications
have been made to 1997 amounts to conform to 1998 presentation.
2. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards for
federal tax purposes of approximately $11,906,000 which will expire between
2008 and 2012, and approximately $5,694,000 for state tax purposes which
will expire between 1999 and 2002. These net operating loss carryforwards
resulted in a potential deferred tax asset of approximately $4.4 million as
of December 31, 1997. However, SFAS No. 109 requires that a valuation
allowance be recorded against tax assets which are not likely to be
realized. Due to the uncertain nature of the ultimate realization of the
deferred tax asset, based upon the Company's past operating performance and
expiration dates of the loss carryforwards, the Company established a full
valuation allowance at December 31, 1997 against these carryforward benefits
and is recognizing the benefits only as reassessment demonstrates they are
realizable. Realization is entirely dependent upon future earnings in
specific tax jurisdictions. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of
the carryforwards will be recorded in future operations as a reduction of
the Company's income tax expense.
As of October 8, 1998, the Company has continued to provide a valuation
allowance to offset the related deferred tax assets due to the uncertainty
of realizing any benefit therefrom. The Company will continue to evaluate
the need for a 100% valuation allowance.
3. MERGER WITH TIMBER LODGE STEAKHOUSE, INC. AND ACQUISITION OF JB'S FAMILY
RESTAURANTS, INC.
On September 1, 1998, the Company acquired Timber Lodge Steakhouse, Inc., a
Minnesota corporation ("Timber Lodge"), pursuant to an Amended and Restated
Agreement and Plan of Merger, dated as of June 9, 1998 (as amended, the
"Merger Agreement") a copy of which was included as an annex to the
Company's Joint Proxy/Prospectus filed with the Securities and
7
<PAGE> 8
Exchange Commission on July 31, 1998. As a result of the merger, each of the
issued and outstanding shares of Timber Lodge common stock was converted
into 0.9543 shares of the Company's common stock. The exchange ratio was
increased to 0.9543 from 0.8000 pursuant to the adjustment provisions of the
Merger Agreement. As of July 20, 1998, there were 3,637,415 outstanding
shares of Timber Lodge common stock which converted to 3,471,185 shares of
the Company's common stock. At the time of the merger, Timber Lodge owned
and operated 18 Timber Lodge Steakhouse restaurants in Minnesota, Wisconsin,
South Dakota, upstate New York and northern Illinois. Timber Lodge also
owned and operated 14 JB's Restaurants and two Galaxy Diner restaurants,
which were acquired from CKE Restaurants, Inc. ("CKE") in connection with
the Merger.
On September 1, 1998, the Company and Timber Lodge acquired 64 JB's
Restaurants, the JB's Restaurants franchise system and six Galaxy Diner
Restaurants from subsidiaries of CKE in two transactions. First, the Company
acquired all of the outstanding shares of JB's Family Restaurants, Inc., an
indirect wholly-owned subsidiary of CKE ("JBFRI"), in exchange for 1,000,000
shares of the Company's common stock. At the time of the acquisition, JBFRI
owned and operated 48 JB's Restaurants and four Galaxy Diner restaurants,
and the JB's Restaurant franchise system consisted of 20 JB's Restaurants.
Then, Timber Lodge acquired all of the outstanding shares of JB Parent
Corp., a wholly-owned subsidiary of CKE ("JBPC"), in exchange for 687,890
shares of Timber Lodge common stock (which were subsequently converted into
656,453 shares of the Company's Common Stock upon completion of the Merger).
At the time of the acquisition, JBPC owned and operated 14 JB's Restaurants
and two Galaxy Diner restaurants (which were transferred to JBPC from JBFRI
prior to the acquisition). The Company intends to continue to operate all of
the Timber Lodge Steakhouse restaurants. The Company intends to convert
certain of the restaurants acquired by Timber Lodge from JBPC into Timber
Lodge Steakhouse restaurants and presently intends to continue operating the
remaining JB's Restaurants, and the related JB's Restaurants franchise
system, and Galaxy Diner restaurants acquired from JBFRI.
The results of operations for the acquired businesses are included in the
Company's accompanying consolidated statements of income from the date of
acquisition, September 1, 1998. The Company, in recording the fair value of
assets acquired and liabilities assumed, has made certain estimates to
adjust the historical carrying value of certain assets and liabilities of
the acquired businesses. These adjustments consist primarily of i)
reductions to the historical carrying value of property and equipment to
properly reflect their estimated fair value, ii) increases to certain
liabilities to reflect the estimated net present value of the underlying
obligation, and iii) the establishment of a reserve for the net present
value of the estimated excess of future minimum lease payments over
operating cash flows on certain underperforming restaurants acquired. These
acquisitions have been accounted for as a purchase and the resulting costs
in excess of net assets acquired ($17.4 million) are being amortized using a
straight-line method, over a 40 year period.
8
<PAGE> 9
The following table presents selected unaudited pro forma results of
operations for the periods ending October 8, 1998 and September 30, 1997
assuming the aforementioned acquisitions had occurred on January 1, 1997.
The unaudited pro forma results of operations do not reflect certain cost
savings that management believes may be realized following the merger. The
pro forma results of operations are not indicative of the results of
operations of the combined companies that would have occurred had the
acquisitions occurred on January 1, 1997, nor are they indicative of future
operating results.
<TABLE>
<CAPTION>
January 1, 1998 January 1, 1997
to October 8, to September 30,
1998 1997
--------------- ----------------
<S> <C> <C>
Total Revenues $73,545,000 $66,111,000
Net income 1,600,000 536,000
EPS - basic $0.13 $0.04
EPS - diluted $0.12 $0.04
Weighted average shares
outstanding - basic 12,527,461 12,405,328
Weighted average shares
outstanding - diluted 13,473,927 13,256,349
</TABLE>
4. EXERCISE OF COMMON STOCK PURCHASE WARRANTS
On September 1, 1998, the Company issued 1,000,000 shares of its common
stock to Fidelity National Financial, Inc. ("Fidelity") due to the exercise
by Fidelity of 1,000,000 warrants at $5.00. As a result of this warrant
exercise and the Merger, Fidelity beneficially owns 4,709,765 shares of the
Company's Common Stock (including 2,470,000 shares issuable upon the
exercise of warrants to purchase Common Stock), or approximately 31.0% of
the outstanding shares (assuming exercise of such warrants), and CKE
beneficially owns 1,656,453 shares of the Company's Common Stock, or
approximately 13.0% of the outstanding shares.
5. CHANGE IN FISCAL YEAR END
On October 2, 1998, the Company announced a change in fiscal year end. The
Company is converting to a fiscal year that includes 13 four-week accounting
periods with each week ending on a Thursday. The change is effective with
the Company's third fiscal quarter of 1998 which, under the old fiscal
calendar, would have ended on September 30, 1998. Under the new fiscal
calendar, the third fiscal quarter of 1998 ended on October 8, 1998.
The Company's fourth fiscal quarter will end on December 31, 1998 and
subsequent fiscal years will end on the last Thursday of December. Beginning
in 1999, the Company's first fiscal quarter will include 16 weeks of
operating results and the second, third and fourth quarters will each
include 12 weeks of operating results.
9
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6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS130 does not require a
specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for
the period covered by that financial statement. SFAS 130 requires an
enterprise to (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The Company did not have any additional items that were required to be
disclosed under SFAS 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information"("SFAS 131"). SFAS 131 establishes standards for public
business enterprises to report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. SFAS 131 requires, among other items, that a public business
enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets, information about the
revenues derived from the enterprise's products or services, and major
customers. SFAS 131 also requires that the enterprise report descriptive
information about the way that the operating segments were determined and
the products and services provided by the operating segments. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for
earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods
in the second year of application. Management has not determined whether
the adoption of SFAS 131 will have a material impact on the Company's
segment reporting.
In December 1997, the American Institute of Certified Public Accountants
approved for issuance the Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs
incurred during a start-up activity (including organization costs) be
expensed as incurred. SOP98-5 is effective for fiscal years beginning after
December 15, 1998. The Company currently amortizes pre-opening costs over
one year from the time they are incurred. As a result of the adoption of
SOP 98-5 the Company expects to expense approximately $300,000 of existing
unamortized pre-opening costs during the first quarter of fiscal 1999.
Also, during the first quarter of fiscal 1999 the Company will begin
expensing, as incurred, pre-opening costs associated with restaurant
conversions referenced in liquidity and capital resources.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On September 1, 1998 the Company completed the merger and acquisition
described in note 3 of this Report. The following Management's Discussion and
Analysis should be read in conjunction with the unaudited consolidated financial
statements, and the notes thereto found elsewhere in this Report. The addition
of 86 company operated and 20 franchised restaurants associated with these
transactions are the principal reasons for the significant differences when
comparing results of operations for the period ending October 8, 1998 with the
results of operations for the period ending September 30,1997. The comparability
of future periods will also be affected by the aforementioned transactions and
may also from time to time be affected by the implementation of the Company's
acquisition strategy. The costs associated with integrating new restaurants or
underperforming or unprofitable restaurants, if any, acquired or otherwise
operated by the Company, may have a material adverse effect on the Company's
results of operations.
All statements, other than statements of historical fact, included in
this Form 10-Q are, or may be deemed to be, "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve assumptions, 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 contained
in this Form 10-Q. Such potential risks and uncertainties include, without
limitation, competitive pricing and other pressures from other restaurant
operations, economic conditions generally and in the Company's primary markets,
consumer spending patterns, perceived quality and value of the Company's
products, availability of capital, cost of labor, food costs, occupancy costs
and other risk factors detailed in the company's Joint Proxy/Prospectus dated
July 10, 1998 and in other of the Company's filings with the Securities and
Exchange Commission. The forward-looking statements are made as of the date of
this Form 10-Q and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those projected in such forward-looking statements. Therefore, readers are
cautioned not to place undue reliance on these forward-looking statements.
RESULTS OF OPERATIONS
The Company's revenues are primarily derived from restaurant operations
at Company-owned stores and franchise royalties and fees received from
franchised stores. Total revenues for the third quarter ended October 8, 1998
increased $9.3 million or 664% to $10.7 million compared with revenues of $1.4
million during the third quarter ended September 30, 1997. The increase in
revenues is entirely attributable to the addition of 86 company operated
restaurants as of September 1, 1998 which generated $9.3 million in revenues
during the period ended October 8, 1998. Total revenues for the year to date
period ended October 8, 1998 increased $9.2 million or 237% to $13.1 million
compared to $3.9 million for the year to date period ended September 30, 1997.
The $9.2 million increase in revenues is entirely the result of revenues
generated by the aforementioned acquired restaurants.
11
<PAGE> 12
On an aggregate basis, restaurant operating costs expressed as a
percentage of total revenues have increased during both the third quarter and
the year to date periods ended October 8, 1998 as compared to the respective
periods ended September 30, 1997. These unfavorable increases are the direct
result of the aforementioned acquisitions which added $9.3 million in revenues
from company operated restaurants which operate with significantly higher cost
of sales and occupancy and other expenses than the predominantly franchise
oriented revenues generated by the Company prior to such acquisitions.
Accordingly, meaningful comparisons to prior year periods are unavailable.
Advertising costs increased by $118,000 and $136,000, respectively,
during the third quarter and the year to date periods ended October 8, 1998 as
compared to the respective periods ended September 30, 1997. These increases are
entirely attributable to the addition of 86 company operated restaurants during
the period ended October 8, 1998 and the associated advertising costs of those
restaurants.
General and administrative costs increased by $471,000 and $325,000,
respectively, during the third quarter and the year to date periods ended
October 8, 1998 as compared to the respective periods ended September 30, 1997.
The $471,000 increase in general and administrative costs during the third
quarter ended October 8, 1998 as compared to the prior year period is entirely
attributable to the Company's acquisitions in 1998. The increase in general and
administrative costs for the year to date period ended October 8, 1998, as
compared to the prior year period, has been partially offset by reductions in
corporate payroll, legal and consulting expenses during 1998.
Interest expense reflects interest costs associated with capitalized
real property leases associated with JB's restaurants acquired on September 1,
1998.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of data-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the 1900 rather than the year 2000,
which could result in miscalculations or system failures. The Company is
investigating the impact of the Year 2000 problem on its business, including the
Company's operational, information and financial systems, as well as the
operational systems of the businesses recently acquired by the Company. Based on
the preliminary review of the Company's existing and recently acquired
businesses, the Company does not expect the Year 2000 problem, including the
cost of making the Company's computerized information systems Year 2000
compliant, to have a material adverse impact on the Company's financial position
or results of operations in future periods. However, the inability of the
Company to resolve all potential Year 2000 problems in a timely manner could
have a material adverse impact on the Company. The Company has also initiated
communications with significant suppliers and vendors on which the Company
relies in an effort to determine the extent to which the Company's business is
vulnerable to the failure by these third parties' to remediate their Year 2000
problems. While the Company has not been informed of any material risks
associated with the Year 2000 problem on these entities, there can be no
assurance that the computerized information systems of these third parties will
be Year 2000 compliant on a timely basis. The inability of these third parties
to remediate their Year 2000 problems could have a material adverse impact on
the Company.
12
<PAGE> 13
The Company's preliminary review of its information systems and those of
the businesses recently acquired indicates that the point of sale cash register
systems in certain restaurants must be replaced. In addition, the Company will
have to modify certain applications and replace some of the hardware used in the
processing of financial information. In conjunction with these upgrades, the
Company believes it will have addressed any potential Year 2000 issues. Total
expenditures related to the upgrade of the information systems are expected to
range from $1.5 million to $2.0 million. As of October 8, 1998, the Company has
incurred and expensed approximately $60,000 of expenditures consisting of
internal staff costs as well as outside consulting and other expenditures
related to this upgrade process. These costs are being funded through operating
cash flows. To the extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the event of failure
of the Company's or third parties' computer information systems.
EFFECT OF INFLATION
The Company's food and labor costs are subject to inflation. Many of the
Company's employees are paid hourly rates related to the statutory minimum wage,
therefore, increases in the minimum wage increase the Company's costs. On
September 1, 1997 the California minimum wage was increased to $5.15 per hour.
The California minimum wage was again increased on March 1, 1998 to $5.75 per
hour. The Company also operates restaurants in the state of Minnesota, which has
also undertaken increases to the statutory minimum wage. The continued increase
in the statutory minimum wage has negatively impacted the Company's margins in
its direct operations. In addition, most of the Company's leases have escalation
provisions based on the consumer price index and increases in store revenues.
Most leases also require the Company to pay taxes, maintenance, insurance,
repairs, and utility costs, all of which are expenses subject to inflation. The
Company has been able to offset the majority of the effects of inflation to date
through small price increases and economies resulting from the purchase of food
products in increased quantities due to the increased number of franchise
stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments of
$8.0 million at October 8, 1998 and $3.5 million at December 31, 1997. The
increase in cash, cash equivalents and short-term investments is primarily due
to the Company's receipt of $5.0 million from the exercise of 1.0 million common
stock purchase warrants by Fidelity in connection with the Company's acquisition
of Timber Lodge Steakhouse and JB's restaurants on September 1, 1998.
Net cash used in operating activities was $722,000 during the period
January 1, 1998 to October 8, 1998 which included the use of $2.0 million in
cash to pay down accounts payable assumed in the acquisition of JB's
restaurants. Investing activities required the Company to use $3.1 million of
cash to fund the net purchase of $3.8 million of short-term investments and
$932,000 of capital additions partially offset by net cash received from
acquisitions of $1.5 million. Financing activities generated $4.6 million of
cash primarily as result of the receipt of $5.0 million from the exercise of 1.0
million common stock purchase warrants by Fidelity.
During the period ended October 8, 1998 the Company completed the
conversion of three under-performing JB's restaurants to the Timber Lodge
Steakhouse concept (the conversions were initiated by JB's prior to the
completion of the acquisition) at an average conversion cost of approximately
$850,000 including pre-opening costs. Over the next year, the Company expects to
complete the conversion of up to nine additional JB's restaurants at a
conversion cost of
13
<PAGE> 14
approximately $750,000 to $875,000 per restaurant. In addition, in 1999, the
Company plans to begin remodeling certain JB's restaurants to improve and update
the customer areas of the restaurants. These remodels are expected to cost
between $75,000 and $100,000 per restaurant and the Company plans to complete
between 12 and 20 of these remodels in 1999. The Company expects to fund JB's
conversions to Timber Lodge and JB's remodels through available cash on hand,
the sale of short-term investments and cash flow from operations.
During the first quarter of 1999, the Company will begin replacing
certain point of sale cash registers in the Company's restaurants and other
hardware in order to meet year 2000 requirements. The Company expects to utilize
equipment lease financing to fund the anticipated $1.5 million to $2.0 million
cost of these replacements. The Company may require additional funds to support
its working capital requirements or for other purposes, including acquisitions,
and may seek to raise such additional funds through public or private equity
and/or debt financings or from other sources. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to the Company.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On September 1, 1998, the Company held its Annual Meeting of
Stockholders pursuant to a Notice and Proxy Statement dated July 31, 1998. At
the meeting, stockholders adopted a merger agreement and issued shares of Common
Stock of the Company to Timber Lodge Steakhouse, Inc. in an amount based on an
exchange ratio subject to adjustment based on the price of GB Foods stock near
the closing of the transaction based on a vote of 3,943,349 for the merger,
5,310 against the merger and 17,366 abstaining from voting. The stockholders
voted to issue 1,000,000 shares of Common Stock of the Company to CKE
Restaurants, Inc. for all of the capital stock of JB's Restaurants, Inc. based
on a vote of 3,944,934 for the issuance, 17,194 against and 3,896 abstaining
from the voting. The stockholders elected William P. Foley II (5,741,041 for and
30,633 withheld), Andrew F. Puzder (5,739,041 for and 32,633 withheld), T.
Anthony Gregory 5,741,041 for and 30,633 withheld), Bruce H. Haglund (5,741,041
for and 30,633 withheld), C. Thomas Thompson (5,739,041 for 32,633 withheld),
Frank P. Willey (5,739,041 for 32,633 withheld). The stockholders approved an
amendment to the Company's Non-Qualified Stock Option Plan increasing options
authorized to 975,000 shares based on a vote of 3,692,813 for, 234,593 votes
against and 38,618 votes abstaining. The stockholders voted to approve the
adoption of the Company's 1998 Stock Option Plan based on a vote of 3,639,913
votes for, 264,610 votes against with 61,501 votes abstaining. The stockholders
voted to approve the name change of the Company from GB Foods Corporation to
Santa Barbara Restaurant Group, Inc. based on a vote of 5,735,774 votes for,
21,024 votes against, 14,876 votes abstaining.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 Calculation of Earnings per Share
Exhibit 27 Financial Data Schedule (included in electronic
filing only)
(b) Reports on Form 8-K:
(i) A current report on Form 8-K dated September 1, 1998, as
amended by the current report on Form 8-K/A dated November
13, 1998, was filed to report the Company's merger with
Timber Lodge Steakhouse, Inc., acquisition of JB's Family
Restaurants, Inc. from CKE and the Company's name change from
GB Foods Corporation to Santa Barbara Restaurant Group, Inc.
(ii) A current report on form 8-K dated October 2, 1998 was filed
to report the Company's change in fiscal year-end.
(iii) A current report on form 8-K dated November 11, 1998 was
filed to report the Company's change in auditors.
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.
Santa Barbara Restaurant Group, Inc.
(Registrant)
Date: November 23, 1998 By: /s/ TED ABAJIAN
--------------------------------
Ted Abajian
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
July 1, 1998 July 1, 1997 January 1, 1998 January 1,1997
to October 8, to September 30, to October 8, to September 30,
1998 1997 1998 1997
------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator
Net income $ 473,583 $ 233,390 $1,007,036 $ 588,760
========== ========== ========== ==========
Denominator
Weighted average
shares outstanding 8,905,159 6,487,437 7,404,572 6,456,261
Escrowed restricted shares 178,571 178,571 178,571 178,571
---------- ---------- ---------- ----------
8,726,588 6,308,866 7,226,001 6,277,690
========== ========== ========== ==========
Basic earnings per share $. 05 $ .04 $ .14 $ .09
========== ========== ========== ==========
Diluted Earnings Per Share:
Numerator
Net income $ 473,583 $ 233,390 $1,007,036 $ 588,760
========== ========== ========== ==========
Denominator
Basic weighted average
shares outstanding 8,726,588 6,308,866 7,226,001 6,277,690
Incremental common shares attributable
to exercise of:
Escrowed restricted shares 178,571 178,571 178,571 178,571
Outstanding options 265,249 240,425 486,906 17,617
Outstanding warrants 112,846 1,405,210 280,989 654,833
---------- ---------- ---------- ----------
556,666 1,824,206 946,466 851,021
Diluted weighted average shares
outstanding 9,283,254 8,133,072 8,172,467 7,128,711
========== ========== ========== ==========
Diluted earnings per share $. 05 $ .03 $ .12 $ .08
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-08-1998
<CASH> 1,930
<SECURITIES> 6,081
<RECEIVABLES> 1,185
<ALLOWANCES> 131
<INVENTORY> 970
<CURRENT-ASSETS> 10,730
<PP&E> 26,422
<DEPRECIATION> 1,930
<TOTAL-ASSETS> 60,995
<CURRENT-LIABILITIES> 13,453
<BONDS> 0
0
0
<COMMON> 1,016
<OTHER-SE> 35,494
<TOTAL-LIABILITY-AND-EQUITY> 60,995
<SALES> 11,399
<TOTAL-REVENUES> 13,118
<CGS> 8,018
<TOTAL-COSTS> 8,018
<OTHER-EXPENSES> 6,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 1,031
<INCOME-TAX> 14
<INCOME-CONTINUING> 1,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,007
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.12
</TABLE>
