<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 15,1999
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 Identification No.)
incorporation or organization)
360 S. HOPE STREET, SUITE C300
SANTA BARBARA, CALIFORNIA 93105
(Address of principal executive offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 563-3644
3916 STATE STREET, SUITE 300
SANTA BARBARA, CALIFORNIA 93105
(Former address of principal executive offices) (Zip Code)
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SANTA BARBARA RESTAURANT GROUP, INC.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
(a) Financial statements of business acquired. Financial statements
required by this item are filed as an Exhibit.
(b) Pro forma financial information. The pro forma financial information
relative to the acquisition of La Salsa Holding Co. ("La Salsa") is
an exhibit to this filing.
(c) Exhibits.
Exhibit No.
99.2 Audited annual financial statements and interim unaudited
financial statements of La Salsa.
99.3 Pro forma financial information relative to La Salsa as
described in Item 7(b) above.
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 undersigned hereunto duly authorized.
Date: September 27, 1999
Santa Barbara Restaurant Group, Inc.
(Registrant)
/s/ THEODORE ABAJIAN
--------------------
Theodore Abajian
Executive Vice President & Chief Financial Officer
2
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
99.2 Audited annual financial statements and unaudited interim financial
statements of La Salsa.
99.3 Pro-forma Financials described in Item 7(b) above.
3
<PAGE> 1
EXHIBIT 99.2
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
La Salsa Holding Co.:
We have audited the accompanying consolidated balance sheet of La Salsa Holding
Co. and subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of La Salsa Holding Co. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Los Angeles, California
February 26, 1999
<PAGE> 2
LA SALSA HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 28, December 31,
1999 1998
---------- ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) .......................................... $ 793 $ 493
Accounts receivable due from founder/shareholder (Notes 10 and 11) .......... -- 289
Accounts receivable, net of allowance for doubtful accounts of $92
at June 28, 1999 and $97 at December 31, 1998 ...................... 431 649
Inventories (Note 2) ........................................................ 529 398
Prepaid expenses (Note 2) ................................................... 648 495
-------- --------
Total current assets ................................................... 2,401 2,324
Property and equipment, net (Notes 2 and 3) ................................. 10,060 8,895
Lease rights, net of accumulated amortization of $818
at June 28, 1999 and $711 at December 31, 1998 (Note 2) ............ 1,453 1,560
Other assets, net (Note 4) .................................................. 505 859
-------- --------
$ 14,419 $ 13,638
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 1,641 $ 1,690
Accrued salaries, wages and employee benefits ............................... 376 461
Deferred revenue (Note 2) ................................................... 142 165
Accrued sales tax ........................................................... 185 421
Other current liabilities ................................................... 1,264 441
Current portion of long-term debt (Note 5) .................................. 1,000 537
Line of credit (Note 5) ..................................................... -- 969
-------- --------
Total current liabilities .............................................. 4,608 4,684
Long-term debt, less current portion (Note 5) ................................ 4,577 242
Subordinated notes payable (Note 5) .......................................... -- 1,798
Deferred revenue (Note 2) .................................................... 80 140
Redeemable preferred stock, $25,445 and $27,226 aggregate liquidation
preference at June 28, 1999 and December 31, 1998, respectively
(Notes 6 and 11):
Series A, $.01 par value, 10,200,000 shares authorized; 9,118,665
shares issued; 7,337,196 shares outstanding at June 28, 1999 and
9,118,665 shares outstanding at December 31, 1998 ........................ 8,353 9,119
Series B, $.01 par value, 4,800,000 shares authorized; 4,633,000 shares
issued and outstanding at June 28, 1999 and December 31, 1998 ............ 6,950 6,950
Series C, $.01 par value, 1,500,000 shares authorized; 1,333,000 shares
issued and outstanding at June 28, 1999 and December 31, 1998 ............ 2,000 2,000
Series D, $.01 par value, 12,800,000 shares authorized; 6,105,252
shares issued and outstanding at June 28, 1999 and December 31, 1998 ..... 9,157 9,157
-------- --------
Total redeemable preferred stock ....................................... 26,460 27,226
-------- --------
Stockholders' deficit (Notes 2 and 7):
Common stock ................................................................ 1 1
Additional paid in capital .................................................. 63 63
Accumulated deficit ......................................................... (21,370) (20,516)
-------- --------
Total stockholders' deficit ..................................... (21,306) (20,452)
-------- --------
$ 14,419 $ 13,638
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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LA SALSA HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Six Year
Weeks Ended Weeks Ended Ended
June 28, June 29, December
1999 1998 31, 1998
------------- ------------- ------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C>
Revenues:
Company-operated restaurant operations .............. $ 14,513 $ 10,069 $ 21,621
Franchised restaurants (Notes 2 and 10) ............. 3,078 2,289 5,600
-------- -------- --------
Total revenues ..................................... 17,591 12,358 27,221
-------- -------- --------
Restaurant operating costs:
Food and packaging .................................. 4,619 3,149 6,784
Payroll and other employee benefits ................. 4,067 2,573 5,647
Occupancy and other operating costs ................. 3,998 2,690 5,732
-------- -------- --------
Total restaurant operating costs ................... 12,684 8,412 18,163
-------- -------- --------
Advertising ......................................... 556 316 757
Pre-opening expense ................................. 71 13 53
Franchise ........................................... 2,238 1,773 4,341
General and administrative .......................... 2,303 1,510 3,212
-------- -------- --------
Total .............................................. 5,168 3,612 8,363
-------- -------- --------
Operating income (loss) ............................. (261) 334 695
Interest expense (Note 5) ........................... 289 121 266
Income (loss) before income tax expense and ......... (550) 213 429
cumulative effect of change in accounting principle
Income tax expense (Notes 2 and 9) ................ 8 21 32
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle, net of income taxes ......... (558) 192 397
-------- -------- --------
Cumulative effect on prior years of retroactive
application of expensing preopening costs, net
of income taxes .................................. 296 -- --
-------- -------- --------
Net income (loss) ................................... $ (854) $ 192 $ 397
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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LA SALSA HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock
Class A; $0.001 Par
Value
33,300,000 Shares
Authorized Additional Accum-
----------------------- Paid-In ulated
Shares Amount Capital Deficit Total
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 322,957 $ 1 $ 63 $(20,913) $(20,849)
Exercise of stock options (Note 439 -- -- -- --
7)
Net income -- -- -- 397 397
-------- -------- -------- -------- --------
BALANCE, December 31, 1998 323,396 $ 1 $ 63 $(20,516) $(20,452)
======== ======== ======== ======== ========
</TABLE>
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LA SALSA HOLDING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Twenty-six Twenty-six Year
Weeks Ended Weeks Ended Ended
June 28, June 29, December 31,
1999 1998 1998
----------- ----------- ------------
(unaudited) (unaudited) (audited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................... $ (854) $ 192 $ 397
Adjustments to reconcile net income (loss) to net
cash flows provided by operating activities:
Depreciation and amortization ....................... 933 662 1,478
Cumulative effect of change in accounting principle.. 296 -- --
Impairment of long-lived assets ..................... -- -- 148
Changes in operating assets and liabilities:
Accounts receivable due from founder/shareholder .... -- -- (249)
Accounts receivable ................................. 218 (179) (206)
Inventory and prepaid expenses ...................... (284) 81 (440)
Accounts payable and accrued expenses ............... (49) (185) 542
Accrued salaries, wages and employee benefits ....... (85) 362 99
Deferred revenue .................................... (83) 199 75
Accrued sales tax and other current liabilities ..... 587 (117) 304
------- ------- -------
Net cash provided by operating activities ............. 679 1,015 2,148
------- ------- -------
Cash flows from investing activities:
Proceeds from maturity of short-term investments ....... -- -- 2,589
Purchases of short-term investments .................... -- -- (1,500)
Net change in other assets ............................. 354 (76) (524)
Purchases of property and equipment .................... (1,783) (694) (4,332)
------- ------- -------
Net cash used in investing activities ................ (1,429) (770) (3,767)
------- ------- -------
Cash flows from financing activities:
Net borrowings under line of credit .................... -- -- 969
Proceeds from issuance of long-term debt ............... 5,500 10 581
Repayment of long-term debt ............................ (3,469) -- (498)
Repayment of founder's liabilities ..................... (981) -- --
------- ------- -------
Net cash provided by financing activities ............ 1,050 10 1,052
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..... 300 255 (567)
Cash and cash equivalents at beginning of period ......... 493 2,149 1,060
------- ------- -------
Cash and cash equivalents at end of period ............... $ 793 $ 2,404 $ 493
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................. $ 289 $ 121 $ 312
Income taxes ......................................... $ 8 $ 21 $ 32
Non-cash investing and financing activities:
Forgiveness of accounts receivable due from founder... $ 296 $ --- $ ---
Repurchase of preferred stock ........................ $ 766 $ --- $ ---
Assumption of founder's liabilities .................. $ 981 $ --- $ ---
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE> 6
LA SALSA HOLDING CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 (AUDITED) AND THE
TWENTY-SIX WEEKS ENDED JUNE 28, 1999 (UNAUDITED) AND JUNE 29, 1998
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
La Salsa Holding Co., a Delaware corporation, and its wholly owned
subsidiaries, La Salsa Franchise, Inc. and La Salsa of Nevada, Inc.,
develop, operate, license and franchise restaurants that feature fresh,
healthy, authentic Mexican foods under the name "La Salsa Fresh Mexican
Grill." At December 31, 1998, there were 43 company-owned, 5 licensed and 56
franchised restaurants operating principally in California, and also in
Arizona, Colorado, Connecticut, Nevada, Ohio, Puerto Rico, Texas and Utah.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information reported for the twenty-six weeks ended June 28,
1999 and June 29, 1998, which is not necessarily indicative of the results
for a full year, is unaudited but includes all adjustments which the Company
considers necessary for a fair presentation. All such adjustments are normal
recurring adjustments.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of La Salsa Holding Co. and its subsidiaries, La Salsa
Franchise Inc. and La Salsa of Nevada, Inc. (collectively, the "Company").
All significant intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS - The Company classifies all highly liquid
investments purchased with maturities of three months or less as cash
equivalents.
INVENTORIES - Inventories consist principally of food and beverages and are
stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
PREOPENING COSTS - Preopening costs consist of direct expenses incurred in
connection with opening new restaurants and principally include hiring,
training and salary costs. Prior to January 1, 1999, these costs were
capitalized and amortized over one year. Amortization expense related to
preopening costs was $53,000 for the year ended December 31, 1998.
Unamortized preopening costs were $296,000 at December 31, 1998 and are
included in prepaid expenses on the accompanying December 31, 1998
consolidated balance sheet.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Cost of Start-up
Activities" ("SOP 98-5"). This statement requires that all start-up
activities, including preopening costs, be expensed as incurred. The Company
adopted SOP 98-5 effective January 1, 1999. The initial application of this
statement is reported as a cumulative effect of a change in accounting
principle.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation and amortization. Fixtures, equipment and buildings
are depreciated over estimated useful lives of 5 to 31.5 years. Leasehold
improvements are amortized over the shorter of their estimated useful lives
or the life of the lease. Depreciation and amortization are computed using
the straight-line method.
LEASE RIGHTS - Lease rights consist of costs incurred to purchase lease
rights to the Company's operating facilities and are amortized using the
straight-line method over the terms of the leases.
REVENUE RECOGNITION - In connection with its franchising and licensing
activities, the Company receives initial franchise fees, licensing fees,
area development fees and continuing royalties. The Company recognizes
franchise fee, license fee and area development fee revenue when it has
completed performance of substantially all obligations specified in the
related underlying agreements. Payments received from franchisees and
licensees prior to the completion of these obligations are reflected as
deferred revenue on the accompanying balance sheets. Royalties, which are
based upon amounts specified in franchise and license agreements, are
generally 5% of franchised and licensed restaurant sales and are recognized
as such sales occur.
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INCOME TAXES - Deferred income taxes are provided for temporary differences
between the accounting for financial statement purposes and the accounting
for income tax purposes. Deferred income taxes represent amounts that will
be paid or received in future periods based on enacted income tax rates in
effect when temporary differences are expected to reverse.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets for
impairment and recognizes a loss if expected future undiscounted cash flows
are less than the carrying value of assets; such losses are measured as the
difference between the carrying value and the fair value of the assets. Fair
value is determined using a method based upon a multiple of annual earnings
before interest, income taxes, depreciation and amortization.
ACCOUNTING FOR STOCK-BASED COMPENSATION - Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
requires compensation expense equal to the fair value of the option grant to
be estimated using accepted option policy formulas when the option is
granted. The compensation may either be charged to the statement of
operations or set forth as pro forma information in the footnotes to the
consolidated financial statements, depending on the method elected by the
Company upon adoption of the standard. The Company adopted the disclosure
requirements of SFAS No. 123 and elected to continue using the intrinsic
value method prescribed in Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," for stock options.
PERVASIVENESS OF ESTIMATES - The Company prepares its consolidated financial
statements in conformity with generally accepted accounting principles,
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - Certain financial instruments potentially
subject the Company to concentrations of credit risk. These financial
instruments consist primarily of cash and cash equivalents and receivables.
The Company places its cash and cash equivalents with high credit quality
financial institutions. The Company's accounts receivable consist
principally of amounts due from franchisees and licensees for royalties and
food purchases. The Company performs ongoing credit evaluations of its
franchisees and licensees and maintains an allowance for possible credit
losses.
FISCAL YEAR - The Company's fiscal year is the 52- or 53-week period ending
the Monday closest to December 31. For clarity of presentation, the
Company's 1998 fiscal year, which represents the 52-week period ended
December 28, 1998, has been described in these consolidated financial
statements as the year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998
(In
thousands)
-------------
<S> <C>
Leasehold improvements $ 6,860
Fixtures and equipment 5,354
Buildings 1,015
Land 134
Construction in progress 15
----------
Total 13,378
Less accumulated depreciation and amortization 4,483
----------
Property and equipment, net $ 8,895
==========
</TABLE>
Buildings includes $660,000 related to certain buildings the Company
purchased in December 1998 in anticipation of its January 1999 acquisition
of six stores from its founder/shareholder. The Company did not occupy the
buildings during fiscal year 1998 (see Note 11).
7
<PAGE> 8
4. OTHER ASSETS
Other assets consist of the following:
1998
(In thousands)
--------------
<TABLE>
<CAPTION>
<S> <C>
Deposits $281
Acquisition costs 385
Other 288
----
Total 954
Less accumulated amortization 95
----
Other assets, net $859
====
</TABLE>
Acquisition costs include amounts advanced to various parties prior to
December 31, 1998 in anticipation of its January 1999 acquisition of six
stores from its founder/shareholder (see Note 11).
5. DEBT
LINE OF CREDIT - In September 1998, the Company executed a line of credit
agreement providing for maximum borrowings of $1,000,000. Advances under the
agreement accrue interest at LIBOR (which was 5.1% per annum at December 31,
1998) plus 2.5%, payable monthly, and are collateralized by substantially
all of the Company's assets.
LONG-TERM DEBT - Long-term debt consists primarily of notes collateralized
by related property and equipment. The notes accrue interest, payable
monthly, at fixed rates ranging from 8% to 14% per annum.
SUBORDINATED NOTES PAYABLE - Subordinated notes payable are unsecured and
accrue interest at 12% per annum, payable semiannually.
In January 1999, the Company executed a $10 million credit facility, repaid
all outstanding balances under the aforementioned debt instruments, and
terminated its previous line of credit agreement (see Note 11).
6. PREFERRED STOCK
Preferred stock consists of redeemable, convertible voting Series A, Series
B, Series C and Series D preferred stock. Dividends are declared at the
discretion of the Board of Directors.
Series A, Series B and Series C preferred stock are redeemable upon consent
of the majority of each class of shareholders for $1.00, $1.50 and $1.50 per
share, respectively, plus any accrued and unpaid dividends. Series A, Series
B and Series C preferred stock may not be redeemed if any Series D preferred
stock is outstanding. Beginning in March 2000, the holders of the Series D
preferred stock may redeem their shares for cash in an amount equal to $1.50
per share, plus any accrued and unpaid dividends. Additionally, the holders
of the Series D preferred stock may redeem their shares, plus any accrued
and unpaid dividends, for cash upon a change of control of the Company, as
defined. Redemptions are payable in three equal annual installments. The
carrying value of the preferred stock has been increased to its redemption
value through periodic charges to accumulated deficit. At December 31, 1998,
the Series A, Series B, Series C and Series D preferred stock are stated at
their respective redemption values.
Each share of preferred stock is convertible, at the holder's option, into
one share of common stock and contains antidilution provisions. Subject to
certain conditions, there is an automatic conversion of the preferred stock
into common stock in connection with an initial public offering and sale of
the Company's common stock. The holders may require the Company to register
any such automatically converted shares.
Upon liquidation, the Series A, Series B, Series C and Series D preferred
stockholders are entitled to receive $1.00, $1.50, $1.50 and $1.50 per
share, respectively, plus any accrued and unpaid dividends. This right is
senior to common stockholders; the rights of the Series D preferred
stockholders are senior to the rights of the Series A, Series B and Series C
stockholders.
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<PAGE> 9
7. STOCK OPTIONS AND WARRANTS
The Company has granted options to employees to purchase shares of its
common stock at exercise prices ranging from $0.15 to $0.50 per share. The
options generally have a ten-year term and vest over periods varying from
three to four years. The weighted-average contractual life of the options
outstanding was 87 months at December 31, 1998. Options to purchase
2,350,451 shares of the Company's common stock were vested and exercisable
at December 31, 1998. The weighted-average exercise price of these options
was $0.23 at December 31, 1998.
Activity under the option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding as of December 31, 1997 2,452,803 0.24
Granted 288,000 0.50
Exercised (439) 0.50
Canceled (677) 0.50
--------- -------
Outstanding as of December 31, 1998 2,739,687 $ 0.27
========= =======
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value based accounting method described in SFAS
No. 123, the Company's net income for the year ended December 31, 1998 would
have been reduced by approximately $30,000. That amount is based on an
estimated minimum value for each option computed as (a) the current price of
the stock on the date of grant reduced to exclude the present value of any
expected dividends during the option's life minus (b) the present value of
the exercise price. Assumptions used in the computation include a risk-free
interest rate of 5.15%, no dividends, and expected lives of 10 years from
grant date.
Warrants to purchase 130,000 shares of the Company's common stock at
exercise prices ranging from $0.50 to $2.50 per share were outstanding at
December 31, 1998. The weighted-average exercise price of these warrants was
$1.04. The exercise price is subject to adjustment under certain conditions.
The warrants expire during 2000.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
operating leases expiring at various dates through 2010. Certain leases
provide for monthly rent expense equal to the greater of a fixed payment or
a percentage of gross sales. The leases are subject to annual adjustments
for inflation and contain renewal options. Rent expense was $2,245,000
(including contingent rentals as a percentage of sales of $185,000) for the
year ended December 31, 1998.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows: 1999, $3,092,000; 2000, $2,910,000; 2001,
$2,584,000; 2002, $2,064,000; 2003, $1,699,000; and thereafter, $14,170,000.
The Company is also contingently liable under certain restaurant leases,
including leases involving the Company's founder/shareholder; future minimum
lease payments under these leases at December 31, 1998 are as follows: 1999,
$102,000; 2000, $102,000; 2001, $102,000; and 2002, $76,500.
The Company is involved in various disputes arising out of the ordinary
conduct of its business. While the ultimate results of these disputes cannot
be predicted with certainty, management does not expect that these matters
will have a material effect on the consolidated financial statements.
9. INCOME TAXES
The income tax provision for the year ended December 31, 1998 consists
solely of a current provision of $32,000. The provision for income taxes
differs from that which would result from applying the federal statutory tax
rate to pretax income due principally to state income taxes and utilization
of federal and state net operating loss carryforwards.
At December 31, 1998, the Company had $5,020,000 and $646,000 of deferred
income tax assets and liabilities, respectively. The net deferred income tax
assets were fully offset by valuation allowances at December 31, 1998. The
Company's deferred income tax assets and liabilities result principally from
net operating loss carryforwards, impairment losses and depreciation.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $11,424,000 available to reduce future federal and state
taxable income. The net operating loss carryforwards expire at various dates
between 1999 and 2011. During 1998, the Company reduced its current
provision by approximately $280,000 through the utilization of operating
loss carryforwards.
9
<PAGE> 10
10. RELATED PARTIES
The founder/shareholder of the Company owns and operates certain restaurants
as a franchisee. Commissary sales, which are included in franchised
restaurant revenue, were $253,000 from restaurants owned by the
founder/shareholder in 1998. Franchise royalties were $209,000 from
restaurants owned by the founder/shareholder in 1998. Accounts receivable
due from the restaurants owned by the founder/shareholder were $289,000 at
December 31, 1998.
11. SUBSEQUENT EVENTS
In January 1999, the Company acquired six La Salsa franchise locations and
1,781,469 shares of the Company's Series A preferred stock from its
founder/shareholder in exchange for $689,000 cash, its forgiveness of
$296,000 of accounts receivable due from the founder/shareholder, and its
assumption of $981,000 of the founder/shareholder's liabilities. The Company
allocated $766,000 of the purchase price to the preferred stock and the
remainder to the stores.
In January 1999, the Company executed a $10,000,000 credit agreement,
composed of a $5,100,000 term loan and a $4,900,000 revolving line of credit
(the "credit facility"). The credit facility is collateralized by
substantially all of the Company's assets. The term loan is due September
2003; interest, which accrues at LIBOR plus 4%, and principal are payable
quarterly. The revolving line of credit is due September 2003; interest is
payable quarterly at LIBOR plus 3.75%. The Company used $5,100,000 of the
credit facility to retire certain debt existing at December 31, 1998, to pay
for certain costs related to the acquisition described in the preceding
paragraph, and to build cash reserves. In conjunction with the credit
facility, the Company issued warrants to the lender to purchase 505,882
shares of the Company's common stock at $0.01 per share. The warrants are
exerciseable immediately and expire on December 31, 2004.
On July 15, 1999, Santa Barbara Restaurant Group, Inc. ("SBRG") acquired all
of the issued and outstanding stock of La Salsa Holding Co., pursuant to the
terms of an Agreement and Plan of Merger (the "Merger"). As a result of the
Merger, the stockholders of La Salsa received: (i) an aggregate of three
million (3,000,000) shares of Common Stock of SBRG ("SBRG Common Stock"),
(ii) convertible subordinated promissory notes from SBRG (the "Notes")
valued at $3.9 million, (iii) warrants to purchase an aggregate of two
hundred fifty thousand (250,000) shares of SBRG Common Stock at an exercise
price of seven dollars ($7.00) per share and (iv) warrants to purchase an
aggregate of two hundred fifty thousand (250,000) shares of SBRG Common
Stock at an exercise price of seven dollars and 50/100 ($7.50) per share.
The Notes issued pursuant to the Merger automatically converted into shares
of SBRG Common Stock upon stockholder approval at the annual meeting of the
stockholders of SBRG held on August 16, 1999. The conversion rate for the
Notes was (1) share of SBRG Common Stock for each $4.00 of principal amount
of the Notes.
10
<PAGE> 1
EXHIBIT 99.3
PRO FORMA FINANCIAL INFORMATION
The consolidated balance sheet included in the registrant's Form 10-Q, filed
on August 27, 1999, included the assets and liabilities of La Salsa.
Therefore, that balance sheet provides the information that would be
contained in a pro forma balance sheet giving effect to the acquisition.
SANTA BARBARA RESTAURANT GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
TWENTY-EIGHT WEEKS ENDED JULY 15, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
SBRG LA SALSA
TWENTY- EIGHT TWENTY-SIX
WEEKS ENDED WEEKS ENDED PRO FORMA TOTAL
7/15/99 6/28/99 (C) ADJUSTMENTS PRO FORMA
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Revenues $ 53,046 $ 17,591 $ -- $ 70,637
------------ ------------ ------------ ------------
Restaurant operating costs:
Food and packaging 17,057 4,619 -- 21,676
Payroll and other employee benefits 17,445 4,067 -- 21,512
Occupancy and other operating costs 11,249 3,998 -- 15,247
------------ ------------ ------------ ------------
Total 45,751 12,684 -- 58,435
------------ ------------ ------------ ------------
Franchised restaurants -- 2,238 -- 2,238
General and administrative 5,864 2,930 128 (a) 8,922
------------ ------------ ------------ ------------
Total 5,864 5,168 128 11,160
------------ ------------ ------------ ------------
Operating income (loss) 1,431 (261) (128) 1,042
Interest expense (233) (289) -- (522)
Other income, net 494 -- -- 494
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,692 (550) (128) 1,014
Income tax expense (benefit) 474 8 (76)(b) 406
------------ ------------ ------------ ------------
Net income (loss) $ 1,218 $ (558) $ (52) $ 608
============ ============ ============ ============
Basic earnings per share $ .08 $ 0.03
Diluted earnings per share $ .08 $ 0.03
Basic weighted average shares
outstanding 15,732,645 20,682,007
Diluted weighted average shares
outstanding 15,889,096 20,793,556
</TABLE>
1
<PAGE> 2
SANTA BARBARA RESTAURANT GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
SBRG JB'S TBRL (D) PRO FORMA
YEAR ENDED 1/1/98 TO 1/1/98 TO PRO FORMA SBRG BEFORE
12/31/98 8/31/98 8/31/98 ADJUSTMENTS LA SALSA
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 35,562 $ 40,316 $ 21,588 $ -- $ 97,466
------------ ------------ ------------ ------------ ------------
Restaurant operating costs:
Food and packaging 11,292 12,698 8,037 -- 32,027
Payroll and other employee
benefits 11,480 15,108 6,516 -- 33,104
Occupancy and other operating
costs 7,225 9,218 4,966 357 21,766
------------ ------------ ------------ ------------ ------------
Total 29,997 37,024 19,519 357 86,897
------------ ------------ ------------ ------------ ------------
Franchised restaurants -- 387 -- -- 387
General and administrative 4,380 2,956 2,357 (45) 9,648
------------ ------------ ------------ ------------ ------------
Total 4,380 3,343 2,357 (45) 10,035
------------ ------------ ------------ ------------ ------------
Operating income (loss) 1,185 (51) (288) (312) 534
Interest expense (204) (398) (17) -- (619)
Other income, net 444 135 35 -- 614
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 1,425 (314) (270) (312) 529
Income tax expense (benefit) 49 (69) 35 45 60
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,376 $ (245) $ (305) $ (357) $ 469
============ ============ ============ ============ ============
Basic earnings per share $ .16
Diluted earnings per share $ .15
Basic weighted average shares
outstanding 8,529,129
Diluted weighted average shares
outstanding 9,287,068
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
LA SALSA
YEAR ENDED PRO FORMA TOTAL
12/31/98 ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues $ 27,221 $ -- $ 124,687
------------ ------------ ------------
Restaurant operating costs:
Food and packaging 6,784 -- 38,811
Payroll and other employee
benefits 5,647 -- 38,751
Occupancy and other operating
costs 5,732 -- 27,498
------------ ------------ ------------
Total 18,163 -- 105,060
------------ ------------ ------------
Franchised restaurants 4,341 -- 4,728
General and administrative 4,022 238(a) 13,908
------------ ------------ ------------
Total 8,363 238 18,636
------------ ------------ ------------
Operating income (loss) 695 (238) 991
Interest expense (266) -- (885)
Other income, net -- -- 614
------------ ------------ ------------
Income (loss) before income taxes 429 (238) 720
Income tax expense (benefit) 32 196(b) 288
------------ ------------ ------------
Net income (loss) $ 397 $ (434) $ 432
============ ============ ============
Basic earnings per share $ 0.03
Diluted earnings per share $ 0.03
Basic weighted average shares
outstanding 13,029,129
Diluted weighted average shares
outstanding 13,787,068
</TABLE>
2
<PAGE> 3
Notes to Unaudited Pro Forma Combined Condensed Financial Information
(a) Record the amortization of the excess consideration paid over the
estimated fair value of net assets acquired of $128,000 for the
twenty-eight weeks ended July 15, 1999 and $238,000 for the year ended
December 31, 1998. The excess consideration is $9,517,000 calculated
below and will be amortized over 40 years.
<TABLE>
<CAPTION>
<S> <C>
SBRG common stock (3,000,000 shares x $2.575) $ 7,725,000
Convertible subordinated promissory notes 3,863,000
500,000 warrants to purchase SBRG common stock 407,000
------------
Total consideration 11,995,000
Estimated fair value of net assets acquired (2,478,000)
------------
$ 9,517,000
============
</TABLE>
(b) Adjust income tax expense to the statutory tax rate of 40%.
(c) The historical La Salsa Statement of Operations excludes the cumulative
effect of change in accounting principle.
(d) These pro forma adjustments related to the acquisitions of Timber Lodge
Steakhouse and JB's Family Restaurants, which occurred on September 1,
1998. The nature of these adjustments was disclosed in the 8-K/A filed
with the Commission on November 13, 1998.
3
