<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 13, 2000.
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.)
3938 STATE STREET, SUITE 200
SANTA BARBARA, CALIFORNIA 93105
(Address of principal executive offices) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 563-3644
360 SOUTH HOPE AVENUE, SUITE C300
SANTA BARBARA, CALIFORNIA 93105
(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 16, 2000, the registrant had 18,326,169 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>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of July 13, 2000
and December 30, 1999.................................................3
Condensed Consolidated Statements of Income for the twelve
and twenty-eight weeks ended July 13, 2000 and July 15, 1999 .........4
Condensed Consolidated Statements of Cash Flows for the
twenty-eight weeks ended July 13, 2000 and July 15, 1999 .............5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signature.....................................................................13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATON
Item 1. Condensed Consolidated Financial Statements
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
July 13, December 30,
2000 1999
-------- ------------
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 3,008 $ 3,371
Short-term investments ................................................. 841 1,065
Accounts receivable, net of allowance for doubtful accounts
of $461,000 in 2000 and $338,000 in 1999 ............................. 1,748 1,794
Current portion of notes receivable .................................... 684 700
Current portion of related party notes receivable ...................... 30 2,006
Inventories ............................................................ 1,441 1,476
Current deferred tax assets ............................................ 1,300 1,300
Prepaid expenses ....................................................... 773 617
Other current assets ................................................... 489 594
-------- --------
Total current assets .......................................... 10,314 12,923
Property and equipment, net ............................................ 40,104 38,015
Property under capital leases, net ..................................... 4,027 4,477
Investments in affiliated companies .................................... 1,536 2,637
Notes receivable, net .................................................. 1,051 1,035
Related party notes receivable, net .................................... 100 100
Costs in excess of net assets of businesses acquired, net of accumulated
amortization of $1,183,000 in 2000 and $764,000 in 1999 .............. 30,108 30,217
Deferred tax assets .................................................... 555 555
Other assets ........................................................... 1,968 2,047
-------- --------
$ 89,763 $ 92,006
======== ========
LIABILITIES AND SHARHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ............................... $ 1,253 $ 1,252
Current portion of capital lease obligations ......................... 927 960
Accounts payable and accrued expenses ................................ 6,137 7,125
Accrued salaries, wages and employee benefits ........................ 4,159 3,698
Other current liabilities ............................................ 5,061 5,946
-------- --------
Total current liabilities ...................................... 17,537 18,981
Long-term debt, less current installments ............................ 5,229 5,030
Capital lease obligations, less current portion ...................... 4,200 4,708
Other long-term liabilities .......................................... 4,608 5,345
Shareholders' equity:
Common stock, $.08 par value, authorized 50,000,000 shares;
20,736,330 shares issued and 18,351,269 and 18,590,878 outstanding
in 2000 and 1999, respectively ..................................... 1,659 1,659
Additional paid in capital ............................................ 73,617 73,617
Less cost of treasury stock, 2,385,061 and 2,145,452 shares in
2000 and 1999, respectively ......................................... (3,925) (3,671)
Accumulated deficit ................................................... (13,162) (13,663)
-------- --------
Total shareholders' equity ....................................... 58,189 57,942
-------- --------
$ 89,763 $ 92,006
======== ========
</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)
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Twenty-eight Twenty-eight
Ended Ended Weeks Ended Weeks Ended
July 13, July 15, July 13, July 15,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations $ 30,200 $ 21,567 $ 71,199 $ 51,216
Franchised restaurants ................ 983 631 2,190 1,576
Other ................................. 66 109 178 254
-------- -------- -------- --------
Total revenues ...................... 31,249 22,307 73,567 53,046
-------- -------- -------- --------
Restaurant operating costs:
Food and packaging .................... 9,824 7,150 23,010 17,057
Payroll and other employee benefits ... 10,263 7,452 23,740 17,445
Occupancy and other operating costs ... 7,294 4,803 16,842 11,249
-------- -------- -------- --------
Total restaurant operating costs .... 27,381 19,405 63,592 45,751
-------- -------- -------- --------
Advertising ........................... 869 614 2,183 1,583
Pre-opening expenses .................. 74 150 151 321
General and administrative ............ 2,451 1,346 6,028 3,960
-------- -------- -------- --------
Total ............................... 3,394 2,110 8,362 5,864
-------- -------- -------- --------
Operating income ...................... 474 792 1,613 1,431
Interest expense ...................... (236) (99) (536) (233)
Other income (expense), net ........... 482 342 (451) 494
-------- -------- -------- --------
Income before income tax expense ...... 720 1,035 626 1,692
Income tax expense .................... 152 284 125 474
-------- -------- -------- --------
Net income ............................ $ 568 $ 751 $ 501 $ 1,218
======== ======== ======== ========
Basic net income per share .............. $ .03 $ .05 $ .03 $ .08
======== ======== ======== ========
Diluted net income per share ............ $ .03 $ .05 $ .03 $ .08
======== ======== ======== ========
Basic weighted average shares outstanding 18,362 16,182 18,424 15,733
======== ======== ======== ========
Diluted weighted average shares
outstanding ........................... 18,462 16,294 18,524 15,899
======== ======== ======== ========
</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)
(unaudited)
<TABLE>
<CAPTION>
Twenty-eight Twenty-eight
Weeks Ended Weeks Ended
July 13, July 15,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 501 $ 1,218
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization ........................ 3,355 2,165
Loss on investments in affiliated companies .......... 1,121 --
Loss on disposal of property and equipment ........... 43 --
Changes in operating assets and liabilities:
Accounts receivable .................................. 46 (92)
Inventories, prepaids and other current assets ....... (16) 156
Accounts payable and accrued expenses ................ (988) (699)
Accrued salaries, wages and employee benefits ........ 461 (122)
Other current liabilities ............................ (885) (400)
------- -------
Net cash provided by operating activities .............. 3,638 2,226
------- -------
Cash flows from investing activities:
Proceeds from maturity of short-term investments .......... 245 --
Purchases of short-term investments ....................... (21) (482)
Cash received from acquisition, net ....................... -- 794
Issuance of notes receivable and
related party notes receivable .......................... (70) (1,947)
Collection of notes receivable and
related party notes receivable .......................... 2,046 132
Net change in other assets ................................ (235) 249
Proceeds from sale of property and equipment .............. 13 --
Purchases of property and equipment ....................... (4,647) (2,281)
------- -------
Net cash used in investing activities .................. (2,669) (3,535)
------- -------
Cash flows from financing activities:
Payment of capital lease obligations ...................... (541) (487)
Payment of long-term debt ................................. (300) (27)
Proceeds from long-term borrowing ......................... 500 --
Purchase of treasury stock ................................ (254) --
Net change in other long-term liabilities ................. (737) (648)
------- -------
Net cash used in financing activities .................. (1,332) (1,162)
------- -------
Net decrease in cash and cash equivalents ................... (363) (2,471)
Cash and cash equivalents at beginning of period ............ 3,371 7,043
------- -------
Cash and cash equivalents at end of period .................. $ 3,008 $ 4,572
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 553 $ 233
Income taxes .......................................... $ 2 $ 40
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. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY
Santa Barbara Restaurant Group, Inc., a Delaware corporation, and subsidiaries
(the "Company") is engaged in the food service industry. Information relating to
periods ending prior to July 15, 1999 included in this report relates to the
historical operations of the Company and, except as otherwise indicated, does
not reflect the operations of La Salsa, Inc. ("La Salsa") which the company
acquired on July 15, 1999 in a purchase business combination. As of July 13,
2000, the Company operated 52 JB's restaurants, 24 Timber Lodge Steakhouse
restaurants, 47 La Salsa restaurants, six Galaxy Diner restaurants and five
Green Burrito restaurants. The Company also has 35 Green Burrito stand-alone
franchise restaurants, 214 dual-concept franchise restaurants, 47 franchised La
Salsa restaurants and 30 franchised JB's restaurants for a total of 460
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 as of and for the year ended December 30, 1999.
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 prior year amounts in the accompanying
condensed consolidated financial statements have been reclassified to conform
with the fiscal 2000 presentation.
3. ACQUISITION OF LA SALSA, INC.
The following table presents selected unaudited pro forma results of operations
for the Company, assuming the La Salsa acquisition had occurred on January 1,
1999. The unaudited pro forma results of operations do not reflect certain cost
savings that management believes may be realized following the acquisition. The
pro forma results of operations are not indicative of the results of operations
of the combined companies that would have occurred had the acquisition occurred
on January 1, 1999, nor are they indicative of future operating results.
<TABLE>
<CAPTION>
Twenty-eight weeks
ended
July 15, 1999
-------------------
(Amounts in
thousands, except
share and per share
amounts)
<S> <C>
Total revenues ................................. $71,639
Net income ..................................... $ 1,036
EPS - basic .................................... $ .05
EPS - diluted .................................. $ .05
Weighted average shares outstanding - basic .... 20,645
Weighted average shares outstanding - diluted .. 20,757
</TABLE>
4. SEGMENT AND RELATED INFORMATION
The Company has three reportable segments in fiscal 2000: 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 La Salsa and Green Burrito restaurants which are
positioned in the "fast food" segment of the restaurant industry. The Company
evaluates the performance of its operating segments based on income (loss)
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, short-term investments, investments in affiliated companies,
corporate notes receivable, and deferred income taxes for all periods presented.
The corporate component of segment profit (loss) before tax includes corporate
general and administrative expenses, interest income and our equity income
(loss) generated from our investments in affiliated companies for all periods
presented. In 1999, the corporate component of segment profit (loss) before tax
for the twenty-eight weeks ended July 15, 1999 also includes $630,000 of costs
incurred related to an attempted acquisition.
6
<PAGE> 7
<TABLE>
<CAPTION>
Quick
Family Serve
Dining Steakhouse Mexican Corporate Total
-------- ---------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Twelve Weeks Ended July 13, 2000
--------------------------------
Revenues ............................. $ 11,798 $ 9,740 $ 9,711 $ -- $ 31,249
Interest income ...................... 45 23 13 171 252
Interest expense ..................... (84) (11) (141) -- (236)
Depreciation and amortization ........ 482 494 449 -- 1,425
Pre-opening expenses ................. -- 74 -- -- 74
Segment profit (loss) before tax ..... $ (477) $ 190 $ 855 $ 152 $ 720
Twelve Weeks Ended July 15, 1999
--------------------------------
Revenues ............................. $ 12,779 $ 8,596 $ 932 $ -- $ 22,307
Interest income ...................... 36 7 1 185 229
Interest expense ..................... (99) -- -- -- (99)
Depreciation and amortization ........ 49 427 444 -- 920
Pre-opening expenses ................. -- 150 -- -- 150
Segment profit before tax ............ $ 429 $ 287 $ 140 $ 179 $ 1,035
Twenty-eight Weeks Ended July 13, 2000
--------------------------------------
Revenues ............................. $ 28,255 $ 23,442 $ 21,870 $ -- $ 73,567
Interest income ...................... 97 39 32 260 428
Interest expense ..................... (197) (25) (314) -- (536)
Depreciation and amortization ........ 1,133 1,129 1,093 -- 3,355
Pre-opening expenses ................. -- 151 -- -- 151
Segment profit (loss) before tax ..... (886) 920 1,602 (1,010) 626
Total assets as of July 13, 2000 ..... $ 28,805 $ 29,643 $ 25,556 $ 5,759 $ 89,763
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 and amortization ........ 1,015 1,022 128 -- 2,165
Pre-opening expenses ................. -- 321 -- -- 321
Segment profit (loss) before tax ..... 1,205 716 306 (535) 1,692
Total assets as of December 30, 1999 . $ 30,666 $ 29,186 $ 24,690 $ 7,464 $ 92,006
</TABLE>
5. RELATED PARTY NOTES RECEIVABLE
The Company acquired $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 provided for the payment of monthly interest, and the principal
balance was due on April 30, 2000.
On May 5, 2000, Checkers paid in full the then outstanding principal and
interest balance of $253,000.
The Company and Checkers share certain officers and directors. Additionally, CKE
Restaurants, Inc. ("CKE") and Fidelity National Financial, Inc., related parties
of the Company, maintain an equity interest in Checkers.
Additionally, in 1999, the Company issued promissory notes to certain executives
in the total amount of $153,000, of which $130,000 remains outstanding at July
13, 2000.
7
<PAGE> 8
6. CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Twelve Twelve Twenty-eight Twenty-eight
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 13, 2000 July 15, 1999 July 13, 2000 July 15, 1999
------------- ------------- ------------- -------------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator
Net income .................... $ 568 $ 751 $ 501 $ 1,218
======== ======== ======== ========
Denominator
Weighted average shares
outstanding ................. 18,462 16,282 18,524 15,872
Escrowed restricted shares .... (100) (100) (100) (139)
-------- -------- -------- --------
Basic weighted average shares
outstanding ................. 18,362 16,182 18,424 15,733
======== ======== ======== ========
Basic earnings per share: $ .03 $ .05 $ .03 $ .08
======== ======== ======== ========
Diluted Earnings Per Share:
Numerator
Net income .................... $ 568 $ 751 $ 501 $ 1,218
======== ======== ======== ========
Denominator
Basic weighted average shares
outstanding ................. 18,362 16,182 18,424 15,733
Incremental common shares
attributable to exercise of:
Escrowed restricted shares 100 100 100 139
outstanding options ......... -- 12 -- 27
-------- -------- -------- --------
100 112 100 166
Diluted weighted average shares
outstanding ................... 18,462 16,294 18,524 15,899
======== ======== ======== ========
Diluted earnings per share ...... $ .03 $ .05 $ .03 $ .08
======== ======== ======== ========
</TABLE>
For the periods ended July 13, 2000 and July 15, 1999, 6.7 million and 6.3
million shares, respectively, relating to the possible exercise of outstanding
stock options and warrants were not included in the computation of diluted
earnings per share as their effect would have been anti-dilutive.
7. SALE OF JB'S FAMILY RESTAURANTS, INC.
On March 14, 2000, the Company entered into a definitive Stock Purchase
Agreement (the "Agreement") to sell its JB's Family Restaurants, Inc.
subsidiary, the owner and operator of JB's and Galaxy Diner restaurants and
franchisor of JB's restaurants. The transaction, which is subject to certain
conditions including the buyer's receipt of acceptable financing, is scheduled
to close by the end of the fourth quarter of fiscal 2000. However, there can be
no assurance that the transaction will close in a timely manner, if at all. The
Company is retaining certain liabilities related to the JB's subsidiary.
The sale price is expected to be less than the carrying value of JB's as of the
date of the closing, and as such the transaction, if consummated, may result in
a loss. The Company has entered into the Agreement because it wants to focus its
business on its steakhouse segment and quick-service Mexican segment, which has
grown due to the acquisition of La Salsa. If JB's is not sold pursuant to the
Agreement, the net assets of JB's would be recoverable from operations based
upon current cash forecasts.
8
<PAGE> 9
Additionally, the family dining segment has not been considered a discontinued
operation at this time because certain conditions to close, as delineated in the
Agreement, have yet to occur.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On July 15, 1999, the Company completed the acquisition of La Salsa, Inc. in a
business combination accounted for as a purchase. 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 52 Company-operated and 45 franchised restaurants (as of July 15, 1999)
associated with the acquisition are the principal reasons for the significant
differences when comparing results of operations for the twelve and twenty-eight
week periods ended July 13, 2000 with the results of operations for the twelve
and twenty-eight week periods ended July 15, 1999. The comparability of future
periods will also be affected by the aforementioned transaction 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 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 following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's unaudited
condensed consolidated statements of income for the twelve and twenty-eight week
periods ended July 13, 2000 and July 15, 1999. The twelve-week periods ended
July 13, 2000 and July 15, 1999 are referred to throughout this document as the
second quarter of fiscal 2000 and 1999, respectively.
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Twenty-Eight Twenty-Eight
Ended Ended Weeks Ended Weeks Ended
July 13, 2000(1) July 15, 1999 July 13, 2000(1) July 15, 1999
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations 96.6% 96.7% 96.8% 96.6%
Franchised restaurants and other ..... 3.4 3.3 3.2 3.4
----- ----- ----- -----
Total revenues .................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Restaurant operating costs: (2)
Food and packaging ................... 32.5 33.1 32.3 33.3
Payroll and other employee benefits .. 34.0 34.6 33.3 34.0
Occupancy and other operating costs .. 24.2 22.3 23.7 22.0
----- ----- ----- -----
90.7 90.0 89.3 89.3
Advertising (2) ........................ 2.9 2.8 3.1 3.1
Pre-opening expenses (2) ............... 0.2 0.7 0.2 0.6
General and administrative ............. 7.8 6.0 8.2 7.5
----- ----- ----- -----
Operating income ....................... 1.5 3.6 2.2 2.7
Interest expense ....................... (0.8) (0.4) (0.7) (0.4)
Other income (expense), net ............ 1.5 1.5 (0.6) 0.9
Income before income taxes ............. 2.3 4.7 0.9 3.2
Income tax expense ..................... 0.5 1.3 0.2 0.9
----- ----- ----- -----
Net income ............................. 1.8% 3.4% 0.7% 2.3%
----- ----- ----- -----
</TABLE>
--------------------
(1) Includes the operating results of La Salsa for the entire fiscal 2000 period
presented.
(2) As a percentage of revenues from Company-operated restaurants.
9
<PAGE> 10
Revenues from Company-operated restaurants increased $8.6 million to $30.2
million for the second quarter of fiscal 2000 as compared with revenues of $21.6
million during the second quarter of fiscal 1999. Revenues from Company-operated
restaurants increased $20 million to $71.2 million for the twenty-eight weeks
ended July 13, 2000 as compared with revenues of $51.2 million during the
twenty-eight weeks ended July 15, 1999. The increase in revenues for both
periods is primarily attributable to the addition of La Salsa on July 15, 1999.
La Salsa generated $8.5 million and $19.2 million in revenues, respectively,
during the second quarter and twenty-eight weeks ended July 13, 2000.
Revenues from franchised restaurants increased $352,000 to $983,000 for the
second quarter of fiscal 2000 as compared with revenues of $631,000 during the
second quarter of fiscal 1999. The increase in revenues from franchised
restaurants is principally due to the addition of royalties earned by the La
Salsa franchise system ($303,000). Revenues from franchised restaurants
increased $614,000 to $2.2 million for the twenty-eight weeks ended July 13,
2000 as compared with revenues of $1.6 million during the twenty-eight weeks
ended July 15, 1999. The increase in revenues from franchised restaurants for
the twenty-eight weeks ended July 13, 2000 as compared to the twenty-eight weeks
ended July 15, 1999 is principally due to the addition of royalties earned by
the La Salsa franchise system ($672,000).
Food and packaging costs as a percentage of revenue from Company-operated
restaurants decreased to 32.5% for the second quarter of fiscal 2000 as compared
with 33.1% during the second quarter of fiscal 1999. For the twenty-eight weeks
ended July 13, 2000, food and packaging costs as a percentage of revenue from
Company-operated restaurants decreased to 32.3% as compared with 33.3% for the
twenty-eight weeks ended July 15, 1999. The decrease in food and packaging costs
as a percentage of revenue from Company-operated restaurants for both the second
quarter of fiscal 2000 and the twenty-eight weeks ended July 13, 2000, as
compared with the prior year, is primarily due to the addition of La Salsa on
July 15, 1999, which operates with lower food and packaging costs as compared to
Timber Lodge.
Payroll and other employee benefits decreased as a percentage of revenue from
Company-operated restaurants to 34.0% for the second quarter of fiscal 2000 as
compared with 34.6% for the second quarter of fiscal 1999. For the twenty-eight
weeks ended July 13, 2000, payroll and other employee benefits decreased as a
percentage of revenue from Company-operated restaurants to 33.3% as compared
with 34.0% for the twenty-eight weeks ended July 15, 1999. The decrease in
payroll and other employee benefits as a percent of revenue from
Company-operated restaurants for both the second quarter of fiscal 2000 and the
twenty-eight weeks ended July 13, 2000, as compared with the prior year, is
attributable to the addition of La Salsa in July 1999, which operates with lower
payroll and other employee benefits costs as a percentage of revenue from
Company-operated restaurants than either Timber Lodge, JB's or Green Burrito.
Occupancy and other operating costs increased as a percentage of revenue from
Company-operated restaurants to 24.2% for the second quarter of fiscal 2000 as
compared with 22.3% for the second quarter of fiscal 1999. For the twenty-eight
weeks ended July 13, 2000, occupancy and other operating costs as a percentage
of revenue from Company-operated restaurants increased to 23.7% as compared with
22.0% for the twenty-eight weeks ended July 15, 1999. The increase in occupancy
and other operating costs as a percent of revenue from Company-operated
restaurants for both the second quarter of fiscal 2000 and the twenty-eight
weeks ended July 13, 2000, as compared with the prior year, is attributable to
the addition of La Salsa in July 1999, which operates with higher occupancy and
other costs as a percentage of revenue from Company-operated restaurants than
Timber Lodge. Additionally, JB's has higher equipment lease rental expense due
to the new point-of-sale system installed in the JB's restaurants in the third
and fourth quarters of FY 1999.
Advertising costs as a percent of revenue from Company-operated restaurants for
both the second quarter of fiscal 2000 and the twenty-eight weeks ended July 13,
2000, have remained constant as compared with the prior year, due to
management's objective to spend approximately three to four percent of
restaurant sales on advertising.
Pre-opening expenses decreased $76,000 to $74,000 for the second quarter of
fiscal 2000 as compared to $150,000 for the second quarter of 1999. For the
twenty-eight weeks ended July 13, 2000, pre-opening expenses decreased $170,000
to $151,000 as compared to $321,000 for the twenty-eight weeks ended July 15,
1999. The decrease is due to the reduction in the number of JB's conversions to
Timber Lodge Steakhouses from two in fiscal 1999 to only one in fiscal 2000.
General and administrative costs were $2.5 million or 7.8% of total revenues for
the second quarter of fiscal 2000 as compared with $1.3 million or 6.0% of total
revenues for the second quarter of 1999. For the twenty-eight weeks ended July
13, 2000, general and administrative costs were $6.0 million or 8.2% of total
revenues as compared to $4.0 million or 7.5% of total revenues for the
twenty-eight weeks ended July 15, 1999. The prior year general and
administrative expenses included a charge of approximately $630,000 for costs
incurred by the Company related to an attempted acquisition. The remaining
increase in general and administrative costs as a percentage of total revenues
is attributable to the addition of La Salsa, which operates with higher general
and administrative expenses as a percentage of sales than the other concepts
operated by the Company.
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Interest expense increased to 0.8% of total revenues or $236,000 for the second
quarter of 2000 as compared to 0.4% or $99,000 for the second quarter of 1999.
For the twenty-eight weeks ended July 13, 2000 interest expense increased to
$536,000 or 0.7% of total revenues as compared to $233,000 or 0.4% of total
revenues for the twenty-eight weeks ended July 15, 1999. The increase relates to
the addition of debt related to La Salsa's credit facility.
Other income (expense), net, primarily reflects interest income on invested
cash, short-term investments, notes receivable and the Company's proportionate
share of earnings or losses earned by our equity investments in Checkers and
CKE. During the second quarter of fiscal 2000, other income, net, increased
$140,000 to $482,000 as compared to $342,000 during the second quarter of fiscal
1999. The majority of the increase for the quarter related to the recognition of
the Checkers note receivable discount into income upon the note pay-off. For the
twenty-eight weeks ended July 13, 2000 other expense, net, decreased $945,000 to
an expense of $451,000 as compared to income of $494,000 for the twenty-eight
weeks ended July 15, 1999. The other expense, net in the twenty-eight weeks
ended July 13, 2000 relates to recording losses in the amount of $1.1 million in
our investments in affiliates, offset primarily by interest income earned on
invested cash and notes receivable.
YEAR 2000
The Company has addressed the potential business and operational risks
associated with the Year 2000. The Year 2000 issue involved the use of a
two-digit year field instead of a four-digit year field in computer systems. If
computer systems cannot distinguish between the year 1900 and the year 2000,
system failures or other computer errors could result. To date, the Company is
not aware of the occurrence of any significant Year 2000 problems being
reported. Some business risks associated with the Year 2000 issue may remain
throughout 2000. However, it is not anticipated that future Year 2000 issues, if
any, will have a material adverse effect on the Company.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters
of fiscal years beginning after December 15, 2000. The Company has not
determined whether the application of this accounting standard will have a
material impact on its financial position, results of operations or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB101") "Revenue Recognition in Financial Statements." This
Staff Accounting Bulletin summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB101, as amended, is effective for the fourth fiscal quarter of
the fiscal year beginning after December 15, 1999. The Company does not expect
the adoption of SAB101 to have a material impact on the Company's consolidated
results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB Opinion No.
25" ("FIN 44"). This Interpretation clarifies the definition of employee for
purpose of applying Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company does not believe that the
impact of FIN 44 will have a material effect on its financial position or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $3.0 million at July
13, 2000 and $3.4 million at December 30, 1999. The decrease in cash and cash
equivalents is primarily due to the use of approximately $4.6 million to fund
purchases of equipment
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and other capital improvements and $1.6 million utilized in financing
activities, partially offset by $3.6 million provided by operating activities
and cash received from the collection of notes receivable in the amount of $2.0
million and $245,000 in proceeds from the maturity of certain short-term
investments.
Net cash provided by operating activities was $3.6 million during the
twenty-eight week period ended July 13, 2000 which included net income of
$501,000 and depreciation and amortization of $3.4 million. Additionally, the
Company had non-cash losses on investments in affiliates of $1.1 million and
experienced an increase in accrued salaries, wages and employee benefits of
$461,000, offset by a decrease in accounts payable and accrued expenses of
$988,000 and a decrease of $885,000 in other current liabilities. Investing
activities required the Company to use $4.6 million in cash to fund capital
additions offset by collections on notes receivable in the amount of $2.0
million. Financing activities required the Company to use $962,000 of cash to
reduce other long-term liabilities and $541,000 and $300,000 of cash to repay
capital lease obligations and long-term debt, respectively.
During the second quarter of 2000, the Company completed the final conversion of
one under-performing JB's restaurant to the Timber Lodge Steakhouse concept at a
total conversion cost of approximately $980,000, including pre-opening costs.
The Company also re-imaged fifteen La Salsa restaurants during fiscal 2000 at an
average cost of approximately $65,000 per restaurant. The Company plans to open
up to three new Timber Lodge Steakhouse restaurants in Minnesota and North
Dakota during fiscal 2000 which will require the use of approximately $4.9
million of cash. During the second quarter of fiscal 2000, the Company purchased
the land for one of these restaurants at a cost of $825,000. The Company also
plans to open one new La Salsa restaurant at a cost of approximately $350,000.
The Company believes it will be able to meet its working capital requirements
through its cash flows from operations. 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 financing, the sale of assets or from other sources.
In addition, much 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.
MARKET RISK
The Company holds publicly-traded common stock of certain affiliated companies.
The fair value of these securities at July 13, 2000 was $2.5 million. The
potential loss in fair value, using hypothetical 10% and 20% declines in prices,
is estimated to be approximately $250,000 and $500,000, 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 these 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.
Additionally, the Company has a term note payable and revolving note payable
which bear interest at LIBOR plus 4.0% and 3.75%, respectively. The total debt
outstanding under both agreements at July 13, 2000 is $5.9 million. A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction of approximately $59,000 in annual pre-tax earnings.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2000, the Company settled the lawsuit involving its Green Burrito
subsidiary entitled Jack E. Brown, et al. v. Santa Barbara Restaurant Group,
Inc. Pursuant to the settlement, the plaintiffs in the action will re-image
their Green Burrito restaurants as "Grill" restaurants, with a yet to be
determined new name, which emphasizes charbroiled, authentic Mexican food. The
plaintiffs will also receive specified royalty reductions and be eligible for
loans from the Company to pay up to $27,500 of the costs for re-imaging each of
their units and up to $7,500 to pay attorney fees. The Company also committed to
offering the same proposal to the operators of the 35 other free standing Green
Burrito units to incentivize them to re-image their restaurants in the same
manner. The Company also intends to appoint Robert Hall, one of the Company's
largest Green Burrito franchisees, and Ruben Rodriquez, the original founder of
the Green Burrito concept, to the Board of Directors of the Company's
subsidiary, Green Burrito Franchise Corporation, to help spearhead the changes
to the restaurants and menu.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 -- Financial Data Schedule (included in electronic filing only)
(b) Current Reports on Form 8-K:
(i) None.
SIGNATURE
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 28, 2000 By: /s/ TED ABAJIAN
-------------------------
Ted Abajian
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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