<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 October 5, 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)
REGISTRANT'S 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 November 13, 2000, the registrant had 17,034,238 shares
outstanding of its Common Stock, $.08 par value.
<PAGE> 2
SANTA BARBARA RESTAURANT GROUP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of October 5, 2000
and December 30, 1999............................................ 3
Condensed Consolidated Statements of Operations for the twelve
and forty weeks ended October 5, 2000 and October 7, 1999 ....... 4
Condensed Consolidated Statements of Cash Flows for the
forty weeks ended October 5, 2000 and October 7, 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................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 13
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signature................................................................ 14
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SANTA BARBARA RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 5, December 30,
2000 1999
---------- ------------
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 1,287 $ 2,339
Short-term investments.......................................... 675 640
Accounts receivable, net of allowance for doubtful accounts
of $368,000 in 2000 and $130,000 in 1999...................... 1,128 1,333
Current portion of notes receivable............................. 139 115
Current portion of related party notes receivable............... 30 2,006
Inventories..................................................... 682 982
Current deferred tax assets..................................... 1,300 1,816
Prepaid expenses................................................ 697 563
Net assets of discontinued operations (note 7).................. 8,500 13,458
Other current assets............................................ 208 291
-------- --------
Total current assets................................... 14,646 23,543
Property and equipment, net..................................... 29,604 25,672
Property under capital leases, net.............................. 531 571
Investments in affiliated companies............................. 1,201 2,637
Notes receivable, net........................................... 377 324
Related party notes receivable, net............................. 70 100
Costs in excess of net assets of businesses
acquired, net of accumulated amortization of
$827,000 in 2000 and $344,000 in 1999......................... 19,996 20,083
Deferred tax assets............................................. 1,481 555
Other assets.................................................... 1,752 1,877
-------- --------
$ 69,658 $ 75,362
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.......................... $ 1,200 $ 1,204
Current portion of capital lease obligations.................... 70 89
Accounts payable and accrued expenses........................... 3,088 3,498
Accrued salaries, wages and employee benefits................... 1,872 1,418
Income taxes payable............................................ 23 --
Other current liabilities....................................... 1,987 3,545
-------- --------
Total current liabilities................................. 8,240 9,754
Long-term debt, less current installments....................... 4,517 4,500
Capital lease obligations, less current portion................. 446 514
Other long-term liabilities..................................... 1,987 2,652
Shareholders' equity:
Common stock, $.08 par value, authorized 50,000,000
shares; 20,736,330 shares issued and 17,302,692 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, 3,433,638 and 2,145,452
shares in 2000 and 1999, respectively ........................ (5,024) (3,671)
Accumulated deficit............................................. (15,784) (13,663)
-------- --------
Total shareholders' equity.................................... 54,468 57,942
-------- --------
$ 69,658 $ 75,362
======== ========
</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 OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Forty Weeks Forty Weeks
Ended Ended Ended Ended
October 5, October 7, October 5, October 7,
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations ............... $ 19,052 $ 17,698 $ 62,787 $ 39,406
Franchised restaurants ............................... 545 689 1,944 1,481
Other ................................................ 66 109 244 362
-------- -------- -------- --------
Total revenues ..................................... 19,663 18,496 64,975 41,249
-------- -------- -------- --------
Restaurant operating costs:
Food and packaging ................................... 6,282 6,008 20,609 13,882
Payroll and other employee benefits .................. 5,658 5,219 18,428 11,637
Occupancy and other operating costs .................. 4,548 4,110 14,597 9,187
-------- -------- -------- --------
Total restaurant operating costs ................... 16,488 15,337 53,634 34,706
Advertising .......................................... 688 756 2,202 1,544
Pre-opening expenses ................................. 116 13 267 334
General and administrative ........................... 1,837 1,588 5,750 3,533
-------- -------- -------- --------
Total .............................................. 2,641 2,357 8,219 5,411
-------- -------- -------- --------
Operating income ................................... 534 802 3,122 1,132
Interest expense ....................................... (146) (99) (485) (99)
Other income, net (a) .................................. 1,231 172 683 564
Income from continuing operations before
income tax expense ............................... 1,619 875 3,320 1,597
Income tax expense ..................................... 324 247 664 449
-------- -------- -------- --------
Income from continuing operations ................. 1,295 628 2,656 1,148
Discontinued operations (note 7):
Income (loss) from discontinued operations
less applicable income tax expense (benefit)
of ($54), $58, ($269), and ($329) ............... (215) 149 (1,074) 847
Loss on disposal of JB's, including provision of
$651 for operating losses during phase-out period
(less applicable income tax benefit of $926) .... (3,703) -- (3,703) --
-------- -------- -------- --------
Net income (loss).................................. $ (2,623) $ 777 $ (2,121) $ 1,995
======== ======== ======== ========
Basic earnings (loss) per share:
Income from continuing operations ................... 0.08 0.03 0.15 0.07
Income (loss) from discontinued operations .......... (0.23) 0.01 (0.26) 0.05
-------- -------- -------- --------
Net income (loss) ................................... $ (0.15) $ 0.04 $ (0.11) $ 0.12
======== ======== ======== ========
Basic weighted average shares outstanding ........... 17,273 19,950 18,040 17,138
======== ======== ======== ========
Diluted earnings (loss) per share:
Income from continuing operations ................... 0.07 0.03 0.15 0.07
Income (loss) from discontinued operations .......... (0.22) 0.01 (0.26) 0.05
-------- -------- -------- --------
Net income (loss).................................... $ (0.15) $ 0.04 $ (0.11) $ 0.12
======== ======== ======== ========
Diluted weighted average shares outstanding ......... 17,373 20,055 18,140 17,284
======== ======== ======== ========
</TABLE>
(a) Includes gains on the sale of Checkers Drive-In Restaurants, Inc. Common
Stock of $1.2 million and 1.3 million for the twelve and forty week periods
ended October 5, 2000, respectively.
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>
Forty Forty
Weeks Ended Weeks Ended
October 5, October 7,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $(2,121) $ 1,995
Adjustments to reconcile net income (loss) to
net cash flows provided by operating activities:
Depreciation and amortization ............................... 3,191 2,064
Loss on investments in affiliated companies ................. 1,456 --
Loss (income) from discontinued operations .................. 1,074 (847)
Loss on disposal of discontinued operations ................. 3,703 --
Loss on disposal of property and equipment .................. 27 --
Changes in operating assets and liabilities:
Accounts receivable ....................................... 143 (40)
Inventories, prepaids and other current assets ............ (1,673) 601
Accounts payable and accrued expenses ..................... (896) 1,204
Accrued salaries, wages and employee benefits ............. 254 364
Other current liabilities ................................. (13) (1,284)
------- -------
Net cash provided by continuing operations ............... 5,145 4,057
Net cash provided by (used in) discontinuing operations ... (239) 2,032
------- -------
Net cash provided by operating activities ................. 4,906 6,089
------- -------
Cash flows from investing activities:
Purchases of short-term investments ............................. (35) (489)
Cash released on sale of discontinued operations, net ........... (810) --
Cash received from acquisition, net ............................. -- 792
Issuance of notes receivable and related party notes receivable . (152) (2,100)
Collection of notes receivable and related party notes receivable 2,031 97
Net change in other assets ...................................... 1,287 (34)
Proceeds from sale of property and equipment .................... 13 --
Purchases of property and equipment ............................. (6,722) (1,178)
------- -------
Net cash used in continuing operations .................... (4,388) (2,912)
Net cash provided by (used in) discontinued operations .... 776 (2,880)
------- -------
Net cash used in investing activities ..................... (3,612) (5,792)
------- -------
Cash flows from financing activities:
Payment of capital lease obligations ............................ (55) --
Payment of long-term debt ....................................... (900) (320)
Proceeds from long-term borrowing ............................... 950 --
Purchase of treasury stock ...................................... (1,353) (1,176)
Inter-company obligation to discontinued operation .............. (747) (2,038)
Net change in other long-term liabilities ....................... (514) (134)
------- -------
Net cash used in continuing operations .................... (2,619) (3,668)
Net cash provided by (used in) discontinued operations .... (759) 446
------- -------
Net cash used by financing activities ..................... (3,378) (3,222)
------- -------
Net decrease in cash and cash equivalents ......................... (2,084) (2,925)
Cash and cash equivalents at beginning of period(a) ............... 3,371 7,043
------- -------
Cash and cash equivalents at end of period(b) ..................... $ 1,287 $ 4,118
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................... $ 373 $ 100
Income taxes ................................................ $ 2 $ 171
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>
---------------
(a) Includes $1,032 and $1,212 of cash from discontinued operations for the
periods ended October 5, 2000 and October 7, 1999, respectively.
(b) Includes $0 and $810 of cash from discontinued operations for the periods
ended October 5, 2000 and October 7, 1999, respectively.
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 October 5,
2000, the Company operated 24 Timber Lodge Steakhouse restaurants, 46 La Salsa
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 one franchised Timber Lodge
Steakhouse for a total of 372 restaurants. For all periods presented herein, the
Company has accounted for its JB's Family Restaurants, Inc. ("JB's") subsidiary
which, as of October 5, 2000 operated and franchised a total of 79 JB's
restaurants and six Galaxy Diner restaurants, as a discontinued operation in its
Condensed Consolidated Financial Statements in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). See
Note 7.
2. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America, 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, including its treatment of JB's as a
discontinued operation in accordance with APB 30.
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.
Forty weeks
ended
October 7, 1999
---------------
(Amounts in
thousands except
share and per
share amounts)
Total revenues................................... $59,843
Net income....................................... $ 966
EPS - basic...................................... $ .05
EPS - diluted.................................... $ .05
Weighted average shares outstanding - basic...... 20,316
Weighted average shares outstanding - diluted.... 20,462
4. SEGMENT AND RELATED INFORMATION
The Company currently operates two reportable segments: Steakhouse and Quick
Serve Mexican. The Family Dining segment historically was comprised of the
Company's JB's and Galaxy Diner restaurants and has been reclassified as a
discontinued operation in the Condensed Consolidated Financial Statements;
therefore, its operating results are excluded from this section. See Note 7.
6
<PAGE> 7
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, net assets of discontinued operations,
investments in affiliated companies, corporate notes receivable, and deferred
income taxes for all periods presented. The corporate component of segment
profit (loss) before income taxes 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 income taxes for the forty
weeks ended October 7, 1999 also includes $630,000 of costs incurred related to
an attempted acquisition.
<TABLE>
<CAPTION>
Quick Serve
Steakhouse Mexican Corporate Total
---------- ------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Twelve Weeks Ended October 5, 2000
Revenues ........................... $ 10,024 $ 9,639 $ -- $ 19,663
Interest income .................... 5 58 33 96
Interest expense ................... (10) (136) -- (146)
Depreciation and amortization ...... 498 491 -- 989
Pre-opening expenses ............... 107 9 -- 116
Segment profit before tax .......... $ 78 $ 369 $ 1,172 $ 1,619
Twelve Weeks Ended October 7, 1999
Revenues ........................... $ 9,045 $ 9,451 $ -- $ 18,496
Interest income .................... 7 56 147 210
Interest expense ................... -- (99) -- (99)
Depreciation and amortization ...... 444 473 -- 917
Pre-opening expenses ............... 10 3 -- 13
Segment profit before tax .......... $ 232 $ 571 $ 72 $ 875
Forty Weeks Ended October 5, 2000
Revenues ........................... $ 33,466 $ 31,509 $ -- $ 64,975
Interest income .................... 49 218 314 611
Interest expense ................... (35) (450) -- (485)
Depreciation and amortization ...... 1,627 1,564 -- 3,191
Pre-opening expenses ............... 258 9 -- 267
Segment profit (loss) before tax ... 1,009 1,924 387 3,320
Total assets as of October 5, 2000 . $ 31,201 $ 24,317 $ 14,140 $ 69,658
Forty Weeks Ended October 7, 1999
Revenues ........................... $ 29,548 $ 11,701 $ -- $ 41,249
Interest income .................... 47 141 415 603
Interest expense ................... -- (99) -- (99)
Depreciation and amortization ...... 1,466 598 -- 2,064
Pre-opening expenses ............... 331 3 -- 334
Segment profit (loss) before tax ... 979 920 (302) 1,597
Total assets as of December 30, 1999 $ 30,234 $ 27,776 $ 17,352 $ 75,362
</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.
7
<PAGE> 8
On May 5, 2000, Checkers paid in full the then outstanding principal and
interest balance on the senior debt.
Additionally, in 1999, the Company issued promissory notes to certain executives
in the total amount of $153,000, of which $100,000 remains outstanding at
October 5, 2000.
6. CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Twelve Twelve Forty Forty
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 5, October 7, October 5, October 7,
2000 1999 2000 1999
----------- ----------- ----------- ----------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator
Net income from continuing operations .. $ 1,295 $ 628 $ 2,656 $ 1,148
======== ======== ======== ========
Denominator
Weighted average shares outstanding .... 17,373 20,050 18,140 17,264
Escrowed restricted shares ............. (100) (100) (100) (126)
-------- -------- -------- --------
Basic weighted average shares
outstanding .......................... 17,273 19,950 18,040 17,138
======== ======== ======== ========
Basic earnings per share from
continuing operations ................ $ 0.08 $ 0.03 $ 0.15 $ 0.07
======== ======== ======== ========
Diluted Earnings Per Share:
Numerator
Net income from continuing operations .. $ 1,295 $ 628 $ 2,656 $ 1,148
======== ======== ======== ========
Denominator
Basic weighted average shares
outstanding .......................... 17,273 19,950 18,040 17,138
Incremental common shares attributable to:
Escrowed restricted shares ............. 100 100 100 126
Exercise of outstanding options ........ -- 5 -- 20
-------- -------- -------- --------
100 105 100 146
Diluted weighted average shares
outstanding ............................ 17,373 20,055 18,140 17,284
======== ======== ======== ========
Diluted earnings per share from
continuing operations .................. $ 0.07 $ 0.03 $ 0.15 $ 0.07
======== ======== ======== ========
</TABLE>
For the periods ended October 5, 2000 and October 7, 1999, 7.0 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.
8
<PAGE> 9
7. DISCONTINUED OPERATIONS
The Company has been pursuing the sale of its JB's subsidiary throughout fiscal
2000. On August 15, 2000, the buyer secured a financing commitment for the
transaction which prompted the Company to initiate treatment of JB's as a
discontinued operation during the third quarter of fiscal 2000. Subsequently, on
November 13, 2000, the Company completed the sale of 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 Company received cash
proceeds of $8.0 million and a note for $1.3 million from the buyer. In
addition, the buyer assumed JB's debt obligations of approximately $5.0 million
and other liabilities of approximately $5.5 million. The Company recognized a
$3.7 million loss net of taxes, on the disposal of JB's. The discontinued
operations of JB's generated revenues of $11.2 million and $39.5 million for the
twelve and forty week periods ended October 5, 2000, respectively, and losses
from operations (net of taxes), of $215,000 and $1.1 million, for the twelve and
forty week periods ended October 5, 2000, respectively.
8. SUBSEQUENT EVENT
On October 12, 2000, the Company sold its two Timber Lodge Steakhouse
restaurants in Utah to Famous Dave's of America, Inc. for total consideration of
approximately $1.7 million, which represents their approximate net book value.
The consideration consisted of $600,000 in cash, a $600,000 seven year fully
amortized note bearing interest at 10% and 125,000 shares of Famous Dave's
common stock (NASDAQ: DAVE). As a result of the transaction, the Company was
fully released from the lease obligations of both restaurants. Famous Dave's
will operate the restaurants for up to 90 days as Timber Lodge Steakhouses and
then will convert them to one of its restaurant concepts.
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. As of October 5, 2000, the
Company has accounted for JB's as a discontinued operation in its Condensed
Consolidated Financial Statements. Accordingly, the results of JB's are excluded
from all periods presented in the following Management's Discussion and
Analysis. The following Management's Discussion and Analysis should be read in
conjunction with the unaudited condensed consolidated financial statements and
the notes thereto. The results of operations for the twelve week period ended
October 5, 2000, and October 7, 1999, both include twelve weeks of operating
results for La Salsa. The results of operations for the forty weeks ended
October 7, 1999, include twelve weeks of operations for La Salsa. 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 forty week period ended
October 5, 2000 with the results of operations for the forty week period ended
October 7, 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 operations for the twelve and forty week
periods ended October 5, 2000 and October 7, 1999. The twelve-week periods ended
October 5, 2000 and October 7, 1999 are referred to throughout this document as
the third quarter of fiscal 2000 and 1999, respectively.
9
<PAGE> 10
<TABLE>
<CAPTION>
Twelve Weeks Twelve Weeks Forty Forty
Ended Ended Weeks Ended Weeks Ended
October 5, October 7, October 5, October 7,
2000(1)(4) 1999(4) 2000(1)(4) 1999(2)(4)
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Company-operated restaurant operations 96.9% 95.7% 96.6% 95.5%
Franchised restaurants and other ..... 3.1 4.3 3.4 4.5
----- ----- ----- -----
Total revenues .................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Restaurant operating costs: (3)
Food and packaging ................... 33.0 33.9 32.8 35.2
Payroll and other employee benefits .. 29.7 29.5 29.4 29.6
Occupancy and other operating costs .. 23.8 23.3 23.3 23.3
----- ----- ----- -----
86.5 86.7 85.5 88.1
Advertising (3) ........................ 3.6 4.3 3.4 3.9
Pre-opening expenses (3) ............... 0.6 0.1 0.4 0.9
General and administrative ............. 9.3 8.6 8.9 8.6
----- ----- ----- -----
Operating income ....................... 2.7 4.3 4.8 2.7
Interest expense ....................... (0.7) (0.5) (0.7) (0.2)
Other income, net ...................... 6.2 0.9 1.0 1.4
Income from continuing operations before
income tax expense ................... 8.2 4.7 5.0 3.9
Income tax expense ..................... 1.6 1.3 1.0 1.1
----- ----- ----- -----
Income from continuing operations ...... 6.6% 3.4% 4.1% 2.8%
----- ----- ----- -----
</TABLE>
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(1) Includes the operating results of La Salsa for the entire fiscal 2000 period
presented.
(2) Includes the operating results of La Salsa for twelve weeks
(3) As a percentage of revenues from Company-operated restaurants.
(4) Excludes the results of JB's as they have been recorded as a discontinued
operation in accordance with APB 30
Revenues from Company-operated restaurants increased $1.3 million to $19.1
million for the third quarter of fiscal 2000 as compared with revenues of $17.7
million during the third quarter of fiscal 1999. This increase in revenues is
primarily attributable to same-store sales increases at Timber Lodge and La
Salsa of 2.2% and 4.5%, respectively as compared to the prior year period.
Revenues from Company-operated restaurants increased $23.4 million to $62.8
million for the forty weeks ended October 5, 2000 as compared with revenues of
$39.4 million during the forty weeks ended October 7, 1999. This increase in
revenues is primarily attributable to the addition of La Salsa on July 15, 1999,
which generated $19.2 million in revenues during the first two quarters of 2000.
In addition, Timber Lodge same store sales increased 4.7% during fiscal 2000 and
two new Timber Lodge restaurants have opened since October 7, 1999, generating
$2.4 million in incremental revenues for the forty week period ended October 5,
2000.
Revenues from franchised restaurants decreased $144,000 to $545,000 for the
third quarter of fiscal 2000 as compared with revenues of $689,000 during the
third quarter of fiscal 1999. The decrease in revenues from franchised
restaurants is principally due to a reduction in royalties earned from
dual-concept restaurants resulting from the Company's decision to reduce the
dual-concept royalty rate from four percent of revenues to three percent of
revenues in exchange for a reduction in services provided by the Company.
Revenues from franchised restaurants increased $463,000 to $1.9 million for the
forty weeks ended October 5, 2000 as compared with revenues of $1.5 million
during the forty weeks ended October 7, 1999. The increase in revenues from
franchised restaurants for the forty weeks ended October 5, 2000 as compared to
the forty weeks ended October 7, 1999 is principally due to the addition of
royalties earned by the La Salsa franchise system ($672,000) during the first
two quarters of fiscal 2000, partially offset by reduced royalties generated by
dual-concept restaurants during the third quarter of fiscal 2000.
Food and packaging costs as a percentage of revenue from Company-operated
restaurants decreased to 33.0% for the third quarter of fiscal 2000 as compared
with 33.9% during the third quarter of fiscal 1999. This decrease is the result
of a 310 basis point decrease in food and packaging costs at La Salsa partially
offset by a 50 basis point increase in food and packaging costs at Timber Lodge
during the third quarter of 2000 as compared to the prior year. For the forty
weeks ended October 5, 2000, food and packaging costs as a percentage of revenue
from Company-operated restaurants decreased to 32.8% as compared with 35.2% for
the forty weeks ended October 7, 1999. This decrease in food and packaging costs
as a percentage of revenue from Company-operated restaurants 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 as a percent of revenue from
Company-operated restaurants for both the third quarter of fiscal 2000 and the
forty weeks ended October 5, 2000 have remained nearly constant as compared with
the prior year.
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<PAGE> 11
Occupancy and other operating costs increased as a percentage of revenue from
Company-operated restaurants to 23.8% for the third quarter of fiscal 2000 as
compared with 23.3% for the third quarter of fiscal 1999. For the forty weeks
ended October 5, 2000, occupancy and other operating costs as a percentage of
revenue from Company-operated restaurants was comparable with the prior year.
The increase in occupancy and other operating costs as a percent of revenue from
Company-operated restaurants for the third quarter of fiscal 2000, as compared
with the prior year, is attributable to the closure of six under-performing
Company-operated La Salsa restaurants since the end of the third quarter of
fiscal 1999.
Advertising costs as a percent of revenue from Company-operated restaurants for
the third quarter of fiscal 2000 and the forty weeks ended October 5, 2000, have
decreased by 70 and 50 basis points respectively, as compared with the prior
year. The decrease is primarily due to the same-store sales increases at both
Timber Lodge and La Salsa.
Pre-opening expenses increased $103,000 to $116,000 for the third quarter of
fiscal 2000 as compared to $13,000 for the third quarter of 1999. The increase
in pre-opening expenses is attributable to the opening of a Timber Lodge
Steakhouse restaurant on October 12, 2000 in Stillwater, Minnesota. For the
forty weeks ended October 5, 2000, pre-opening expenses decreased $67,000 to
$267,000 as compared to $334,000 for the forty weeks ended October 7, 1999.
General and administrative costs were $1.8 million or 9.3% of total revenues for
the third quarter of fiscal 2000 as compared with $1.6 million or 8.6% of total
revenues for the third quarter of 1999. For the forty weeks ended October 5,
2000, general and administrative costs were $5.8 million or 8.9% of total
revenues as compared to $3.5 million or 8.6% of total revenues for the forty
weeks ended October 7, 1999. The 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 Company's Timber Lodge Steakhouse Restaurants.
Interest expense increased to 0.7% of total revenues or $146,000 for the third
quarter of 2000 as compared to 0.5% or $99,000 for the third quarter of 1999.
For the forty weeks ended October 5, 2000 interest expense increased to $485,000
or 0.7% of total revenues as compared to $99,000 or 0.2% of total revenues for
the forty weeks ended October 7, 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, gains on the sale of Checkers
common stock, and the Company's proportionate share of earnings or losses earned
by our equity investments in Checkers and CKE. During the third quarter of
fiscal 2000, other income, net, increased $1,059,000 to $1,231,000 as compared
to $172,000 during the third quarter of fiscal 1999. During the third quarter of
fiscal 2000, the Company sold its remaining 367,172 shares of Checkers Drive-In
Restaurants, Inc. common stock and recognized a gain of $1.2 million. For the
forty weeks ended October 5, 2000 other income, net, increased $119,000 to
$683,000 as compared to $564,000 for the forty weeks ended October 7, 1999. The
increase in other income, net, for the forty weeks ended October 5, 2000 as
compared to the prior year, is primarily attributable to a $1.3 million gain on
the sale of 399,472 shares of Checkers common stock partially offset by losses
recorded as the result of our investments in affiliates.
The discontinued operations of JB's, which the Company sold on November 13,
2000, (See Note 7), generated after tax losses of $215,000 and $1,074,000,
respectively, for the twelve and forty week periods ending October 5, 2000, as
compared to after tax income of $149,000 and $847,000, respectively, for the
comparable prior year periods. The substantial erosion of profits in this
division is primarily due to ongoing sales declines. During the third quarter of
fiscal 2000, the Company recognized a $3.7 million loss net of taxes on the
disposal of JB's.
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.
11
<PAGE> 12
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. The provisions of the statement require the
recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet and the measurement of those instruments at fair
value. The accounting for the changes in fair value of a derivative depends on
the intended use of the derivative and the resulting designation. We are
required to adopt the statement, as amended by SFAS 137 and SFAS 138, in the
first quarter of fiscal year 2001. We are currently studying the impact of this
pronouncement on our consolidated financial statements and results of
operations. At this time, we are unable to assess the impact of adopting SFAS
133, as amended.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" as amended by Staff
Accounting Bulletins No. 101 A and 101 B. These bulletins summarize certain of
the staff's views about applying generally accepted accounting principles to
revenue recognition in financial statements. The provisions of these bulletins
are effective for our company commencing with quarter beginning January 1, 2001,
with restatement of earlier quarters in fiscal 2001 required, if necessary. The
SEC has recently indicated it intends to issue further guidance with respect to
the adoption of specific issues addressed by SAB 101. Until such time as this
additional guidance is issued, the Company is unable to assess the impact, if
any, SAB 101 may have on its consolidated financial position or 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
purposes of applying Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employee ("APB 25"), the criteria for determining whether a plan
qualifies as a non-compensatory 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. We adopted FIN 44 during the quarter
ended October 5, 2000. This adoption did not have a material effect on our
consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents, excluding discontinued operations, of
approximately $1.3 million at October 5, 2000 and $2.3 million at December 30,
1999. The decrease in cash and cash equivalents is primarily due to the use of
approximately $6.7 million to fund purchases of equipment and other capital
improvements and $3.4 million utilized in financing activities, partially offset
by $4.9 million provided by operating activities and cash received from the
collection of notes receivable in the amount of $2.0 million.
Net cash provided by operating activities was $4.9 million during the forty week
period ended October 5, 2000 which included cash used by discontinued operations
of $239,000, and net losses of $2.1 million offset by $3.2 million of
depreciation and amortization. Additionally, the Company had non-cash losses on
investments in affiliates of $1.5 million and a $3.7 million non-cash loss on
the disposal of discontinued operations. Investing activities required the
Company to use $6.7 million in cash to fund capital additions partially offset
by collections on notes receivable in the amount of $2.0 million. Financing
activities required the Company to use $1.4 million of cash to acquire 1.2
million shares of the Company's common stock and $759,000 to fund discontinued
operations.
During fiscal 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. The Company has also completed
the construction of one new Timber Lodge Steakhouse restaurant which opened on
October 12, 2000. The Company expects to open two additional Timber Lodge
Steakhouse restaurants during the fourth quarter of fiscal 2000 utilizing
approximately $2.0 million of cash during the fourth quarter. The Company also
re-imaged seventeen La Salsa restaurants during fiscal 2000 at an average cost
of approximately $65,000 per restaurant. The Company plans to remodel additional
La Salsa restaurants during fiscal 2000 and the first quarter of fiscal 2001 The
Company also plans to open one new La Salsa restaurant at a cost of
approximately $350,000 during the fourth quarter of fiscal 2000, and is
currently negotiating leases to further expand La Salsa in 2001.
The Company believes it will be able to meet its working capital requirements
through its cash flows from operations and the cash proceeds of approximately
$8.0 million from the disposition of JB's on November 13, 2000. 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.
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<PAGE> 13
MARKET RISK
The Company holds publicly-traded common stock of another restaurant company.
The fair value of this security at October 5, 2000 was $687,000. The potential
loss in fair value, using a hypothetical 10% and 20% decline in the price, is
estimated to be approximately $69,000 and $138,000, respectively. Such a loss in
fair value would not impact the Company's financial position, results of
operations or cash flows, unless the Company liquidated the investment as this
investment has historically been accounted for under the equity method of
accounting. Accordingly, this investment 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 October 5, 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 October 2000, La Salsa Franchise, Inc. settled the arbitration and all
related actions arising from its dispute with DaNata, Inc. (a La Salsa
franchisee with eight restaurants in the state of Utah) and its principals, Neil
Breton and Paul Marsh (collectively, "DaNata,"). Pursuant to the Settlement
Agreement, DaNata paid La Salsa, Inc. all past due royalty and national
advertising fund contributions which it owed and reimbursed La Salsa, Inc. for a
significant portion of its legal fees. In addition, DaNata agreed that within
one year from the settlement, it would either sell its restaurants to new or
existing La Salsa franchisees or "buy-out" of its franchise agreements by paying
a certain predetermined amount. In the event of a "buy-out", DaNata would still
be subject to certain restrictions prohibiting it from directly competing with
La Salsa. DaNata also agreed to keep all accounts current and operate its
restaurants in accordance with La Salsa's standards and specifications.
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 SECURITY HOLDERS
The Annual Meetings of Stockholders of the Company was held on October 12, 2000.
At the meeting, the following actions were taken by the stockholders.
Results of voting for the Directors was as follows:
William P. Foley, II For: 15,588,446 Withheld: 383,978
Andrew F. Puzder For: 15,592,346 Withheld: 380,078
Frank P. Wiley For: 15,604,828 Withheld: 367,596
Burt Sugarman For: 15,605,128 Withheld: 367,296
Charles Rolles For: 15,592,638 Withheld: 379,786
A proposal for the adoption and approval of a Company Employee Stock
Purchase Plan was as follows:
For: 11,049,615
Against: 489,901
Abstain: 102,940
The appointment of KPMG LLP as the Company's independent auditors for
fiscal year 2000 was ratified and approved. The voting on the proposal was as
follows:
For: 15,731,507
Against: 144,748
Abstain: 96,169
13
<PAGE> 14
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: November 20, 2000 By: /s/ TED ABAJIAN
---------------------------------
Ted Abajian
Chief Executive Officer
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
