<PAGE> 1
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 July 15, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
3916 STATE STREET, SUITE 300
SANTA BARBARA, CALIFORNIA 93105
- ---------------------------------------- ----------
(Address of principal executive offices) (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 August 23, 1999, the registrant had 20,746,293 shares outstanding
of its Common Stock, $.08 par value.
<PAGE> 2
SANTA BARBARA RESTAURANT GROUP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of July 15, 1999
and December 31, 1998.....................................................3
Condensed Consolidated Statements of Income for the periods ended
July 15, 1999 and June 30, 1998 ..........................................4
Condensed Consolidated Statements of Cash Flows for the periods ended
July 15, 1999 and June 30, 1998 ..........................................5
Notes to Condensed Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................12
Item 4. Submission of Matters to a Vote of Securities Holders....................12
Item 6. Exhibits and Reports on Form 8-K.........................................13
Signatures.......................................................................13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
July 15, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 4,572 $ 7,043
Short-term investments ..................................... 482 --
Accounts receivable, net of allowance for doubtful accounts
of $248 in 1999 and $125 in 1998.......................... 1,426 874
Current portion of notes receivable ........................ 236 239
Related party notes receivable ............................. 4,593 --
Inventories ................................................ 1,427 990
Deferred income taxes, net ................................. 1,152 1,152
Prepaid expenses ........................................... 1,179 443
Other current assets ....................................... 320 472
-------- --------
Total current assets .............................. 15,387 11,213
Property and equipment, net ................................ 36,876 27,447
Property under capital leases, net ......................... 4,955 5,214
Investments in affiliated companies ........................ 9,421 9,447
Notes receivable, net ...................................... 1,603 1,732
Costs in excess of net assets of businesses acquired, net of
accumulated amortization of $402 in 1999 and $139 in 1998 29,325 20,320
Other assets 2,296 457
-------- --------
$ 99,863 $ 75,830
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 5,208 $ 44
Current portion of capital lease obligations ............... 899 886
Accounts payable and accrued expenses ...................... 6,689 5,151
Accrued salaries, wages and employee benefits .............. 3,980 3,573
Other current liabilities .................................. 5,879 4,829
-------- --------
Total current liabilities ............................ 22,655 14,483
Long-term debt, less current portion ........................ 4,833 585
Capital lease obligations, less current portion ............. 5,150 5,650
Deferred income taxes, net .................................. 336 336
Other long-term liabilities ................................. 5,419 5,302
Shareholders' equity
Common stock, $.08 par value, authorized 50,000,000 shares;
19,246,293 and 15,238,908 shares issued and outstanding
in 1999 and 1998, respectively ............................ 1,539 1,219
Additional paid in capital .................................. 69,874 59,416
Accumulated deficit ......................................... (9,943) (11,161)
-------- --------
Total shareholders' equity ............................. 61,470 49,474
-------- --------
$ 99,863 $ 75,830
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE> 4
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Weeks Three Months Twenty-eight Six Months
Ended Ended Weeks Ended Ended
July 15, June 30, July 15, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations $ 21,567 $ 732 $ 51,216 $ 1,430
Franchised restaurants ................ 631 439 1,576 840
Other ................................. 109 123 254 221
-------- -------- -------- --------
Total revenues ...................... 22,307 1,294 53,046 2,491
-------- -------- -------- --------
Restaurant operating costs:
Food and packaging .................... 7,150 265 17,057 541
Payroll and other employee benefits ... 7,452 226 17,445 449
Occupancy and other operating costs ... 4,803 196 11,249 398
-------- -------- -------- --------
Total restaurant operating costs .... 19,405 687 45,751 1,388
-------- -------- -------- --------
Advertising ........................... 614 58 1,583 78
Pre-opening expense ................... 150 -- 321 --
General and administrative ............ 1,346 334 3,960 647
-------- -------- -------- --------
Total ............................... 2,110 392 5,864 725
-------- -------- -------- --------
Operating income ...................... 792 215 1,431 378
Interest expense ...................... (99) -- (233) --
Other income, net ..................... 342 67 494 162
-------- -------- -------- --------
Income before income tax expense ...... 1,035 282 1,692 540
Income tax expense .................... 284 1 474 7
-------- -------- -------- --------
Net income ............................ $ 751 $ 281 $ 1,218 $ 533
======== ======== ======== ========
Basic net income per share .............. $ .05 $ .04 $ .08 $ .08
======== ======== ======== ========
Diluted net income per share ............ $ .05 $ .04 $ .08 $ .07
======== ======== ======== ========
Basic weighted average shares outstanding 16,182 6,398 15,733 6,397
======== ======== ======== ========
Diluted weighted average shares
outstanding ........................... 16,294 7,225 15,899 7,519
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Twenty-eight Six Months
Weeks Ended Ended
July 15, June 30,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 1,218 $ 533
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization ....................... 2,165 127
Changes in operating assets and liabilities:
Accounts receivable ................................ (92) (38)
Inventory, prepaids and other current assets ....... 156 (155)
Accounts payable and accrued expenses .............. (699) 158
Accrued salaries, wages and employee benefits ...... (122) 18
Other current liabilities .......................... (400) (19)
-------- --------
Net cash provided by operating activities .......... 2,226 624
-------- --------
Cash flows from investing activities:
Proceeds from maturity of short-term investments ........ -- 10,904
Purchases of short-term investments ..................... (482) (11,703)
Cash received from acquisition, net ..................... 794 --
Issuance of related party notes receivable .............. (1,947) --
Collection of notes receivable .......................... 132 110
Net change in other assets .............................. 249 --
Purchases of property and equipment ..................... (2,281) (752)
-------- --------
Net cash used in investing activities .............. (3,535) (1,441)
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations .................. (487) --
Repayment of long-term debt ............................. (27) --
Proceeds from issuance of common stock .................. -- 28
Net change in other long-term liabilities ............... (648) (5)
-------- --------
Net cash provided by (used in) financing activities. (1,162) 23
-------- --------
Net decrease in cash and cash equivalents ................. (2,471) (794)
Cash and cash equivalents at beginning of period .......... 7,043 1,129
-------- --------
Cash and cash equivalents at end of period ................ $ 4,572 $ 335
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 233 $ --
Income taxes .......................................... $ 40 $ 6
Non cash investing and financing activities:
Issuance of common stock to acquire related party
notes receivable .................................. $ 2,646 $ --
Issuance of common stock to acquire La Salsa ........ $ 7,725 $ --
Issuance of warrants to acquire La Salsa ............ $ 407 $ --
Issuance of convertible subordinated promissory notes
to acquire La Salsa ............................... $ 3,863 $ --
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
SANTA BARBARA RESTAURANT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY
Santa Barbara Restaurant Group, Inc., (formerly known as GB Foods Corporation) a
Delaware corporation, and subsidiaries (the "Company" or "SBRG") is engaged in
the food service industry. Information relating to periods ending prior to
September 1, 1998 included in this report relates to the historical operations
of the Company and, except as otherwise indicated, does not reflect the
operations of Timber Lodge Steakhouse, Inc. ("Timber Lodge") and JB's Family
Restaurants, Inc. ("JB's") which the Company acquired on September 1, 1998.
Additionally, information relating to periods ending prior to July 15, 1999
included in this report, except as otherwise indicated, excludes the operations
of La Salsa Holding Co., Inc. ("La Salsa") and its wholly owned subsidiaries
which the Company acquired on July 15, 1999. As of July 15, 1999, the Company
operated 54 JB's restaurants, 22 Timber Lodge Steakhouse restaurants, 51 La
Salsa restaurants, six Galaxy Diner restaurants and six Green Burrito
restaurants. The Company also has 39 Green Burrito stand-alone franchise
restaurants, 195 dual-concept franchise restaurants, 45 franchised La Salsa
restaurants and 28 franchised JB's restaurants for a total of 446 restaurants.
2. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries 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, 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. During the third quarter of 1998, the Company changed
from a calendar year/quarter to a fiscal year ending the last Thursday of
December. The first and second quarters of fiscal 1999, ended April 22, 1999 and
July 15, 1999, respectively, and included 16 and 12 weeks of operations,
respectively. The first and second quarters of fiscal 1998 include the three
month periods ending March 31, 1998 and June 30, 1998, respectively, and
therefore are not comparable to the first and second quarter of fiscal 1999.
Certain reclassifications have been made to the 1998 amounts to conform to the
1999 presentation.
3. MERGER WITH TIMBER LODGE AND ACQUISITION OF JB'S AND LA SALSA
On July 15, 1999, the Company acquired La Salsa pursuant to an Agreement and
Plan of Merger. As a result of the acquisition, the stockholders of La Salsa
received 3.0 million shares of SBRG common stock and convertible subordinated
promissory notes ("notes") valued at $3.9 million, convertible into 1.5 million
shares of SBRG common stock. The notes were subsequently converted into common
stock upon approval at the Company's annual shareholder meeting on August 16,
1999 (see note 6). Additionally, stockholders of La Salsa received warrants to
purchase an aggregate of 500,000 shares of the Company's common stock at
exercise prices ranging between $7.00-$7.50 per share, valued at $407,000. At
the time of the acquisition, La Salsa owned 51 restaurants in California and
Nevada and franchised 45 restaurants in 8 states, predominantly in the western
United States, and Puerto Rico.
The Company, in recording the fair value of assets acquired and liabilities
assumed, has made certain estimates. These estimates consist primarily of i)
recording property and equipment at estimated fair value, ii) providing for
negative operating cash flows on certain underperforming restaurants acquired,
and iii) the cost of closing the existing corporate office of La Salsa. This
acquisition has been accounted for as a purchase and the resulting estimated
costs in excess of net assets of business acquired in the amount of $9.5 million
are being amortized using a straight-line method over a 40 year period. The
allocation of purchase price to the fair value of assets acquired and
liabilities assumed is dependent upon certain valuations and other studies that
have not progressed to a stage where there is sufficient information to make a
definitive allocation. Although the purchase price allocation is preliminary,
the Company does not anticipate that there will be significant changes necessary
to arrive at a final allocation.
The Company assumed La Salsa's obligations associated with a $10.0 million
credit agreement with Bank Boston, N.A. At the completion of the acquisition, La
Salsa had an outstanding term loan of $5.1 million and an outstanding revolving
loan of $400,000. The term loan carries an interest rate of LIBOR plus 4.00%.
Quarterly principal payments of $300,000 are due commencing September 30, 1999.
The revolving loan carries an interest rate of LIBOR plus 3.75%, and is due
September 30, 2003.
6
<PAGE> 7
The merger with Timber Lodge and acquisition of JB's was completed on September
1, 1998 and the purchase price allocation of these transactions has been
finalized.
The following table presents selected unaudited pro forma results of operations
for the Company, assuming the Timber Lodge, JB's, and La Salsa acquisitions had
occurred on January 1, 1998. The unaudited pro forma results of operations do
not reflect certain cost savings that management believes may be realized
following the transactions. 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, 1998, nor are they
indicative of future operating results.
<TABLE>
<CAPTION>
Twenty-eight Six Months
Weeks Ended Ended
July 15, June 30,
1999 1998
------------ -----------
(In thousands, except per
share amounts)
<S> <C> <C>
Total revenues .............................. $70,636 $61,255
Net income .................................. 981 1,341
EPS - basic ................................. .05 .08
EPS - diluted ............................... .05 .08
Weighted average shares outstanding - basic . 20,682 17,026
Weighted average shares outstanding - diluted 20,794 17,852
</TABLE>
4. SEGMENT AND RELATED INFORMATION
Prior to the acquisitions described in Note 3, the Company had one reportable
segment. As a result of the acquisitions, the Company has three reportable
segments in fiscal 1999: Family Dining, Steakhouse and Quick Serve Mexican.
The Family Dining segment includes the Company's JB's and Galaxy Diner
restaurants which serve breakfast, lunch and dinner. The Steakhouse segment is
comprised of Timber Lodge Steakhouse which serves dinner only. The Quick Serve
Mexican segment is comprised of Green Burrito and La Salsa restaurants which are
positioned in the "fast food" segment of the restaurant industry. La Salsa
assets are included in the Quick Serve Mexican segment in 1999, but no operating
results of La Salsa are included in the table below as the acquisition was not
consummated until July 15, 1999. The Company evaluates the performance of its
operating segments based on income before income taxes.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The corporate assets consist of corporate cash and
cash equivalents and short-term investments for all periods presented. In 1999,
total assets in the corporate column also include investments in affiliated
companies, related party notes receivable, and deferred income taxes. The
corporate component of segment profit before tax for the twenty-eight weeks
ended July 15, 1999 includes $630,000 of costs incurred related to the attempted
acquisition of Long John Silver's Restaurants, Inc. ("Long John Silver's"),
corporate general and administrative expenses, and interest income earned on
corporate assets.
<TABLE>
<CAPTION>
Family Quick Serve
Dining Steakhouse Mexican Corporate Total
------ ---------- ----------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Twenty-eight Weeks Ended July 15, 1999
- --------------------------------------
Revenues ....................... $ 30,292 $ 20,503 $ 2,251 $ -- $ 53,046
Interest revenue ............... 101 25 15 280 421
Interest expense ............... (233) -- -- -- (233)
Depreciation & amortization .... 1,015 1,022 128 -- 2,165
Pre-opening expense ............ -- 321 -- -- 321
Segment profit before tax ...... 1,205 716 306 (535) 1,692
Total assets as of July 15, 1999 $ 31,080 $ 26,908 $ 24,312 $ 17,563 $ 99,863
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Family QuickServe
Dining Steakhouse Mexican Corporate Total
------ ---------- ---------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1998
- ------------------------------
Revenues ........................... $ -- $ -- $ 2,491 $ -- $ 2,491
Interest revenue ................... -- -- -- 162 162
Interest expense ................... -- -- -- -- --
Depreciation & amortization ........ -- -- 127 -- 127
Segment profit before tax .......... -- -- 378 162 540
Total assets as of December 31, 1998 $34,091 $24,760 $ 2,004 $14,975 $75,830
</TABLE>
5. RELATED PARTY NOTES RECEIVABLE
The Company acquired an aggregate principal amount of $4.9 million of 13.0%
senior secured Checkers Drive-In Restaurants, Inc. ("Checkers") debt from three
unaffiliated parties during the quarter ended April 22, 1999. First, on March
30, 1999, the Company acquired $3.0 million of Checkers' senior secured debt in
exchange for approximately 998,000 unregistered shares of the Company's common
stock. The Company recorded the difference between the fair market value of the
Company's common stock and the stated value of the note receivable as a
reduction, or discount, to the note receivable from Checkers in the amount of
$350,000. Second, on April 8, 1999, the Company acquired, for cash,
approximately $1.9 million of Checkers' senior secured debt from two
unaffiliated parties. The $4.9 million of 13% senior secured debt provides for
the payment of monthly interest, and the principal balance is due on April 30,
2000.
The Company and Checkers share certain officers and directors. Additionally, CKE
Restaurants, Inc., and Fidelity National Financial, Inc., related parties of the
Company, maintain an equity interest in Checkers and/or hold notes receivable
from Checkers.
On August 9,1999 Checkers and Rally's Hamburgers, Inc. ("Rally's") completed a
merger and Checker's shareholders approved a 1-for-12 reverse stock split.
6. SUBSEQUENT EVENTS
On August 16, 1999, SBRG's shareholders voted to convert the $3.9 million of
convertible subordinated notes issued to the shareholders of La Salsa into 1.5
million shares of the Company's common stock.
Pursuant to the Checker's and Rally's merger and simultaneous reverse stock
split (see note 5), SBRG now owns 399,471 shares, or 4.3%, of the outstanding
Checkers' common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On September 1, 1998, the Company completed the acquisitions of Timber Lodge and
JB's. The following Management's Discussion and Analysis should be read in
conjunction with the unaudited condensed consolidated financial statements and
the notes thereto. The addition of 86 Company-operated and 29 franchised
restaurants associated with the merger and acquisition are the principal reasons
for the significant differences when comparing results of operations for the 12
and 28 week periods ended July 15, 1999 with the results of operations for the
three and six month periods ended June 30, 1998. The comparability of future
periods will also be affected by the aforementioned transactions, the
acquisition of La Salsa which was completed on July 15, 1999, and may continue
to 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, "foward-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 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.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's condensed
consolidated statements of income for the twelve and twenty-eight week periods
ended July 15, 1999 and the three and six month periods ended June 30, 1998. The
twelve-week period ended July 15, 1999 is referred to throughout this document
as the second quarter of fiscal 1999 and the three-month period ended June 30,
1998 is referred to as the second quarter of fiscal 1998.
<TABLE>
<CAPTION>
Twelve Weeks Three Months Twenty-Eight Six Months
Ended Ended Weeks Ended Ended,
July 15, 1999(1) June 30, 1998 July 15, 1999(1) June 30, 1998
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations 96.7% 56.6% 96.6% 57.4%
Franchised restaurants and other ..... 3.3 43.4 3.4 42.6
----- ----- ----- -----
Total revenues .................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Restaurant operating costs: (2)
Food and packaging ................... 33.1 36.2 33.3 37.8
Payroll and other employee benefits .. 34.6 30.9 34.0 31.4
Occupancy and other operating costs .. 22.3 26.8 22.0 27.8
----- ----- ----- -----
90.0 93.9 89.3 97.0
Advertising (2) ........................ 2.8 7.9 3.1 5.5
Pre-opening expense (2) ................ 0.7 -- 0.6 --
General and administrative ............. 6.0 25.8 7.5 26.0
----- ----- ----- -----
Operating income ....................... 3.6 16.6 2.7 15.2
Interest expense ....................... (0.4) -- (0.4) --
Other income, net ...................... 1.5 5.2 0.9 6.5
Income before income taxes ............. 4.7 21.8 3.2 21.7
Income tax expense ..................... 1.3 0.1 0.9 0.3
----- ----- ----- -----
Net income ............................. 3.4% 21.7% 2.3% 21.4%
===== ===== ===== =====
</TABLE>
- -----------------
(1) Includes the operating results of Timber Lodge and JB's for the entire
fiscal 1999 period presented.
(2) As a percentage of revenues from Company-operated restaurants.
Revenues from Company-operated restaurants increased $20.8 million to $21.6
million for the second quarter of fiscal 1999 as compared with revenues of
$732,000 during the second quarter of fiscal 1998. Revenues from
Company-operated restaurants increased $49.8 million to $51.2 million for the
twenty-eight weeks ended July 15, 1999 as compared with revenues of $1.4 million
during the six months ended June 30, 1998. The increase in revenues for both
periods is primarily attributable to the addition of JB's and Timber Lodge
restaurants on September 1, 1998. JB's generated $12.5 million and $29.5 million
in revenues, respectively, during the second quarter and twenty-eight weeks
ended July 15, 1999. Timber Lodge generated $8.6 million and $20.5 million in
revenues, respectively, during the second quarter and twenty-eight weeks ended
July 15, 1999.
Revenues from franchised restaurants increased $192,000 to $631,000 for the
second quarter of fiscal 1999 as compared with revenues of $439,000 during the
second quarter of fiscal 1998. The increase in revenues from franchised
restaurants is principally due to the addition of royalties earned by the JB's
franchise system ($321,000), partially offset by reduced franchise fees and
royalties earned by Green Burrito due to six fewer dual-brand conversions in the
second quarter of 1999 as compared to the prior year period. Revenues from
franchised restaurants increased $736,000 to $1.6 million for the twenty-eight
weeks ended July 15, 1999 as compared with revenues of $840,000 during the six
months ended June 30, 1998. The increase in revenues from franchised restaurants
for the twenty-eight weeks ended July 15, 1999 as compared with revenues of
$840,000 during the six months ended June 30, 1998 is principally due to the
addition of royalties earned by the JB's franchise system ($785,000).
Food and packaging costs as a percentage of revenue from Company-operated
restaurants decreased to 33.1% for the second quarter of fiscal 1999 as compared
with 36.2% during the second quarter of fiscal 1998. For the twenty-eight weeks
ended July 15, 1999, food and packaging costs as a percentage of revenue from
Company-operated restaurants decreased to 33.3% as compared with 37.8% for the
six months ended June 30, 1998. The decrease in food and packaging costs as a
percentage of revenue from Company-operated restaurants for both the second
quarter of fiscal 1999 and the twenty-eight weeks ended July 15, 1999, as
compared with the prior year, is primarily due to the addition of JB's
restaurants in September 1998, which operate with significantly lower food and
packaging costs as compared to Green Burrito.
9
<PAGE> 10
Payroll and other employee benefits increased as a percentage of revenue from
Company-operated restaurants to 34.6% for the second quarter of fiscal 1999 as
compared with 30.9% for the second quarter of fiscal 1998. For the twenty-eight
weeks ended July 15, 1999, payroll and other employee benefits increased as a
percentage of revenue from Company-operated restaurants to 34.0% as compared
with 31.4% for the six months ended June 30, 1998. The increase in payroll and
other employee benefits as a percent of revenue from Company-operated
restaurants for both the second quarter of fiscal 1999 and the twenty-eight
weeks ended July 15, 1999, as compared with the prior year, is attributable to
the addition of JB's and Timber Lodge in September 1998 which operate with
higher payroll and other employee benefits costs as a percentage of revenue from
Company-operated restaurants than Green Burrito.
Occupancy and other operating costs decreased as a percentage of revenue from
Company-operated restaurants to 22.3% for the second quarter of fiscal 1999 as
compared with 26.8% for the second quarter of fiscal 1998. For the twenty-eight
weeks ended July 15, 1999, occupancy and other operating costs as a percentage
of revenue from Company-operated restaurants decreased to 22.0% as compared with
27.8% for the six months ended June 30, 1998. The decrease in occupancy and
other operating costs as a percent of revenue from Company-operated restaurants
for both the second quarter of fiscal 1999 and the twenty-eight weeks ended July
15, 1999, as compared with the prior year, is attributable to the addition of
JB's restaurants and Timber Lodge in fiscal 1998, which operate with lower
occupancy and other costs as a percentage of revenue from Company-operated
restaurants than Green Burrito.
Advertising costs decreased to 2.8% of revenue from Company-operated restaurants
for the second quarter of fiscal 1999 as compared with 7.9% for the second
quarter of fiscal 1998. For the twenty-eight weeks ended July 15, 1999,
advertising costs as a percentage of revenue from Company-operated restaurants
decreased to 3.1% as compared with 5.5% for the six months ended June 30, 1998.
The decrease in advertising costs as a percent of revenue from Company-operated
restaurants for both the second quarter of fiscal 1999 and the twenty-eight
weeks ended July 15, 1999, as compared with the prior year, is entirely due to
the addition of JB's restaurants and Timber Lodge in fiscal 1998 which typically
spend three to four percent of restaurant sales on advertising costs.
Pre-opening expense of $321,000 for the twenty-eight weeks ended July 15, 1999
and $150,000 for the twelve weeks ended July 15, 1999 represents costs
associated with the conversion of two JB's restaurants to Timber Lodge
Steakhouse restaurants.
General and administrative costs were $1.3 million or 6.0% of total revenues for
the second quarter of fiscal 1999 as compared with $334,000 or 25.8% of total
revenues for the second quarter of 1998. For the twenty-eight weeks ended July
15, 1999, general and administrative costs were $4.0 million or 7.5% of total
revenues and include a charge of approximately $630,000 for costs incurred by
the Company related to the attempted acquisition of Long John Silver's. General
and administrative expenses were $647,000 or 26.0% of total revenues for the six
months ended June 30, 1998. The decrease in general and administrative expense
as a percentage of total revenues for both the second quarter of fiscal 1999 and
the twenty-eight weeks ended July 15, 1999, as compared with the prior year, is
attributable to the addition of JB's restaurants and Timber Lodge, which are
primarily comprised of Company-operated restaurants that operate with
significantly lower general and administrative expenses as a percentage of total
revenue than the primarily franchise oriented operations of the Company prior to
the acquisitions.
Interest expense primarily reflects interest costs associated with capitalized
real property leases associated with JB's restaurants.
Other income, net, primarily reflects interest income on invested cash,
short-term investments and notes receivable. During the second quarter of fiscal
1999, other income, net, increased $275,000 to $342,000 as compared to $67,000
during the second quarter of fiscal 1998. For the twenty-eight weeks ended July
15, 1999 other income, net, increased $332,000 to $494,000 as compared to
$162,000 for the six months ended June 30, 1998. The increases in other income,
net, are primarily due to an increase in cash and cash equivalents and the
addition during the first quarter of fiscal 1999 of $4.9 million of related
party notes receivable, bearing interest at 13% (see note 5).
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 date-sensitive
software may recognize a date using "00" as the year 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
10
<PAGE> 11
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 learned 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.
The Company's 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 or modified in order to be Year 2000
compliant. In addition, the Company has modified certain applications and
replaced some of the hardware used in the processing of financial information.
In conjunction with these upgrades, which are expected to be completed by the
end of 1999, the Company believes it will have addressed any potential
significant Year 2000 issues. Total expenditures related to the upgrade of the
information systems are expected to range from $1.3 million to $1.5 million. As
of July 15, 1999, the Company has incurred and expensed approximately $150,000
of expenditures consisting of internal staff costs, as well as outside
consulting and other expenditures related to this upgrade process. In addition,
the Company has incurred costs related to the acquisition of new equipment of
approximately $50,000 which have been capitalized. 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
Food and labor costs are significant inflationary factors in the Company's
operations. 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. In addition, most of the Company's leases require it to pay
base rents with escalation provisions based on the consumer price index, in
addition to percentage rentals based on revenues, and to pay taxes, maintenance,
insurance, repairs, and utility costs, all of which are expenses subject to
inflation. The Company has generally been able to offset the effects of
inflation and increases in the minimum wage through small menu price increases.
There can be no assurance that the Company will be able to continue to offset
the effects of inflation through menu price increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, cash equivalents and short-term investments of
approximately $5.1 million at July 15, 1999 and $7.0 million at December 31,
1998. The decrease in cash, cash equivalents and short-term investments is
primarily due to the use of approximately $1.9 million to fund the purchase of
notes receivable (see note 5), $2.3 million to fund purchases of equipment and
other capital improvements and $1.2 million utilized in financing activities,
partially offset by $2.2 million provided by operating activities and cash
received from the La Salsa acquisition of $800,000.
Net cash provided by operating activities was $2.2 million during the
twenty-eight week period ended July 15, 1999 which included net income and
depreciation and amortization of $3.4 million offset by a decrease in accounts
payable and accrued expenses of $699,000 and a decrease of $400,000 in other
current liabilities. Investing activities required the Company to use $1.9
million in cash to fund the purchase of related party notes receivable (see note
5) and $2.3 million of cash to fund capital additions. In addition, the Company
received net cash from the acquisition of La Salsa of $800,000. Financing
activities required the Company to use $648,000 of cash to reduce other
long-term liabilities and $487,000 of cash to repay capital lease obligations.
During the twenty-eight week period ended July 15, 1999, the Company completed
the conversion of two under-performing JB's restaurants to the Timber Lodge
Steakhouse concept at an average conversion cost of approximately $850,000,
including pre-opening costs. The Company expects to complete one additional JB's
to Timber Lodge conversion by the end of the third quarter of fiscal 1999. In
addition, in the second quarter of fiscal 1999, the Company completed the
remodel of one JB's restaurant. The Company expects to remodel five additional
JB's restaurants during the remainder of fiscal 1999 at an average cost of
approximately $150,000. The Company also plans to open one new Timber Lodge
restaurant in Minnesota during the fourth quarter of fiscal 1999 which will
require the use of approximately $1.1 million of cash. The Company expects to
fund JB's conversions to Timber Lodge, JB's remodels and new unit development
through available cash and cash equivalents on hand and cash flow from
operations.
During the third quarter of fiscal 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 $1.3 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, the sale of assets or from other sources. In addition, substantially
all of the real properties owned by the Company and used for its restaurant
operations are unencumbered and could be used by the Company as collateral for
debt financing; however, there can be no assurance that real estate financing or
other financing will be available or that, if available, such financing will be
obtainable on terms favorable to the Company.
11
<PAGE> 12
MARKET RISK
The Company maintains investments in the publicly-traded common stock of certain
affiliated companies. The fair value of these securities at July 15, 1999 was
$5.5 million. The potential loss in fair value, using hypothetical 10% and 20%
declines in prices, is estimated to be approximately $550,000 and $1.1 million,
respectively. Such loss in fair value would not impact the Company's financial
position, results of operations or cash flows, unless the Company liquidated
their investments in affiliated companies, as such investments are accounted for
under the equity method of accounting. Accordingly, such investments will not be
adjusted to market value unless an other than temporary impairment exists.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 11, 1998, Jack and Terry Brown and Green Burrito #22, Alhambra, a
California limited partnership, filed an action entitled Brown, et al. v. Santa
Barbara Restaurant Group, et al., in Superior Court of the State of California
for the County of Orange and on March 5, 1999 filed a first amended complaint
alleging causes of action for unfair competition, unfair trade practices,
intentional misrepresentation, negligent misrepresentation, concealment and
suppression, breach of fiduciary duty arising from agency, accounting, breach of
covenant of good faith and fair dealing and common law unfair competition. It is
difficult to quantify plaintiffs' alleged damages. Volume incentives paid to the
Company which could be attributed to plaintiffs' purchases of food products is
less than $50,000. Plaintiffs, however, have made additional claims for damages
which at this time the Company is unable to quantify. For example, plaintiffs
seek to act on behalf of other, as yet undisclosed, franchisees and on behalf of
the public. Plaintiffs also claim damages to the value of their franchises.
Discovery has been completed and the case is set for trial on September 7, 1999.
Although the results in litigation are always uncertain, the Company believes it
has meritorious defenses to plaintiffs' allegations and intends to vigorously
defend against the claims.
The Company is from time to time the subject of complaints or lawsuits from
customers alleging illness, injury or other food quality, health or operational
concerns. The Company also is the subject of claims or allegations from
employees and franchisees from time to time. The Company believes that these
lawsuits and claims are not material to the Company's financial condition or
results of operations
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On August 16, 1999, the Company held its Annual Meeting of Stockholders pursuant
to a Notice and Proxy Statement dated July 15, 1999. At the meeting, the
stockholders elected William P. Foley, II (14,634,965 for and 113,944 withheld),
Frank P. Willey (14,479,697 for and 269,212 withheld), C. Thomas Thompson
(14,477,430 for and 271,479 withheld), Dermont Rowland (14,643,202 for and
105,707 withheld), Bert Sugarman (14,643,377 for and 105,532 withheld), Charles
Rolles (14,476,550 for and 272,359 withheld), and Andrew F. Puzder (14,480,242
for and 268,667 withheld) as directors. The Stockholders also approved an
amendment to the Santa Barbara Restaurant Group, Inc. 1998 Stock Option Plan and
ratified certain stock option grants made under such plan with 9,957,576 shares
voting for the proposal, 653,629 shares voting against it and 24,731 shares
abstaining. The Stockholders also approved an amendment to the Company's
Restated Certificate of Incorporation to authorize the issuance of Preferred
Stock with 10,054,477 shares voting for the proposal, 557,383 shares voting
against it and 24,076 shares abstaining. Finally, the Stockholders approved the
conversion of Parent Notes to be issued to the former shareholders of La Salsa
Holding Company, Inc. under an agreement and plan of merger with 10,544,291
shares voting for the proposal, 64,130 shares voting against it and 27,515
shares abstaining.
12
<PAGE> 13
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) Current Reports on Form 8-K:
(i) A current report on Form 8-K was filed on July 28, 1999 to report that
on July 15, 1999 the Company acquired all of the issued and outstanding
stock of La Salsa Holding Co., pursuant to the terms of an Agreement
and Plan of Merger.
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: August 27, 1999 By: /s/ TED ABAJIAN
--------------------------------
Ted Abajian
Chief Financial Officer
(Principal Financial and
Accounting Officer)
13
<PAGE> 1
EXHIBIT 11
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Twelve Weeks Three Months Twenty-eight Six Months
Ended Ended Weeks Ended Ended
July 15, 1999 June 30, 1998 July 15, 1999 June 30, 1998
--------------- --------------- -------------- --------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator
Net income ......................... $ 751 $ 281 $ 1,218 $ 533
======== ======== ======== ========
Denominator
Weighted average shares
outstanding ...................... 16,282 6,577 15,872 6,576
Escrowed restricted shares ......... (100) (179) (139) (179)
-------- -------- -------- --------
Basic weighted average
shares outstanding ............... 16,182 6,398 15,733 6,397
======== ======== ======== ========
Basic earnings per share: .......... $ .05 $ .04 $ .08 $ .08
======== ======== ======== ========
Diluted Earnings Per Share:
Numerator
Net income ......................... $ 751 $ 281 $ 1,218 $ 533
======== ======== ======== ========
Denominator
Basic weighted average
shares outstanding ............... 16,182 6,398 15,733 6,397
Incremental common shares attributable
to exercise of:
Escrowed restricted shares ....... 100 179 139 179
Outstanding options .................. 12 72 27 163
Outstanding warrants ................. -- 576 -- 780
-------- -------- -------- --------
112 827 166 1,122
Diluted weighted average shares
outstanding ........................ 16,294 7,225 15,899 7,519
======== ======== ======== ========
Diluted earnings per share ........... $ .05 $ .04 $ .08 $ .07
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-15-1999
<CASH> 4,572,000
<SECURITIES> 482,000
<RECEIVABLES> 1,674,000
<ALLOWANCES> 248,000
<INVENTORY> 1,427,000
<CURRENT-ASSETS> 15,387,000
<PP&E> 40,530,000
<DEPRECIATION> 3,654,000
<TOTAL-ASSETS> 99,863,000
<CURRENT-LIABILITIES> 22,655,000
<BONDS> 0
0
0
<COMMON> 1,539,000
<OTHER-SE> 59,931,000
<TOTAL-LIABILITY-AND-EQUITY> 99,863,000
<SALES> 51,216,000
<TOTAL-REVENUES> 53,046,000
<CGS> 34,502,000
<TOTAL-COSTS> 45,751,000
<OTHER-EXPENSES> 5,864,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 233,000
<INCOME-PRETAX> 1,692,000
<INCOME-TAX> 474,000
<INCOME-CONTINUING> 1,218,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,218,000
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
