UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number 001-13559
Restaurant Teams International, Inc.
(Name of small business issuer in its charter)
Texas 75-2337102
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1705 E. Whaley, Longview, Texas 75605
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (903) 758-2811
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant=s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer=s revenues for the most recent fiscal year: $3,705,013.
Part III, Items 9 through 12, of Form 10KSB will be incorporated by reference to
the Issuer's definitive proxy statement for its annual meeting of shareholders
to be held in May 1999.
The aggregate market value of common stock held by non-affiliates of the
registrant based on the sale trade price of the common stock as reported on the
OTC-BB on April 1, 1999 was $15,730,489. For purposes of this computation, all
officers, directors, and 10% beneficial owners of registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant. Number of shares outstanding of each of the Issuer=s classes of
common stock, as of April 1, 1999: 7,936,966 shares of common stock, par value
$.01.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
History
Fresh'n Lite, Inc. (the "Company") is a Texas corporation. The Company
originally was incorporated as a Delaware corporation on May 9, 1990, under the
name "Bosko's, Inc." On November 9, 1992, the Bosko=s, Inc. name was changed to
'Fresh'n Lite, Inc."
In October 1995, the Delaware corporation merged into its wholly-owned
subsidiary, F'NL, Inc., a Texas corporation. F'NL, Inc. was the surviving
corporation in the merger. F=NL, Inc. then changed its name to "Fresh'n Lite,
Inc." The purpose of the merger was to convert the Delaware corporation into a
Texas corporation.
On September 15, 1998 the Company changed its name to Restaurant Teams
International, Inc. in order to more properly reflect management's desire to
position the Company as a restaurant holding company.
The Company was formed in connection with the creation of a restaurant
in Marshall, Texas, which was named "Bosko's 3 N 1 D-Lite." In the past, the
Company has operated restaurants in the Texas cities of Marshall, Tyler,
Longview, Nacogdoches and Texarkana. Each of these restaurants has been closed
or sold as the Company has developed its restaurant concept and as the Company
has focused on middle class urban markets in the Dallas/Fort Worth metropolitan
area.
Company Business
The Company currently operates three full-service restaurants located
in the Texas cities of Addison, The Colony and Richardson under the name "Street
Talk Cafe."
The Company's restaurants offer a variety of food items, including a
wide selection of sandwiches, salads, pizzas, steaks, seafood, Tex-Mex and other
food items and desserts that appeal to health-conscious customers. The Company
believes that its restaurants' offerings do not sacrifice taste and represent a
health-conscious alternative to traditional restaurant fare.
The majority of the Company=s food items are prepared to order using
fresh meats, cheeses, and vegetables. While the restaurants offer full-service
casual dining, the menus are designed to permit quick food preparation. The
restaurants offer take-out service.
The key strategic elements of the Street Talk Cafe concept are:
o Providing guests a broad menu with 50% of the "tie breakers" of each
segment in low fat, yet good tasting versions to enhance frequency;
o Pricing menu offerings at levels comparable to other casual dining
restaurants while providing more wholesome and nutritious selections;
o Selecting, training and motivating cast members to enhance customer dining
experiences by delivering a level of service that is a product unto itself;
o Reinforcing perceived value through unique concept elements to provide
guests with a superior "total dining" experience in a fun and entertaining
atmosphere.
Menu
The menu features a wide variety of entrees including sandwiches,
salads, pizzas, steaks, seafood, Tex-Mex and special dinner items and desserts
that have nonfat or low-fat content. Alcoholic beverages are served as a
complement to meals and average approximately 10% of restaurant revenues.
2
<PAGE>
The Company targets urban white-collar markets and focuses on
increasing customer value by providing more wholesome and nutritional offerings
than other casual dining restaurants at comparable prices in a relaxed and
entertaining atmosphere.
The Company's strategy is to continually deliver broad menu appeal by
offering patrons selections from all dining segments in low-fat, nutritious yet
good tasting versions. In addition, the Company's efforts to assure the broad
appeal of its menu, combined with its emphasis on affordability and food
quality, promotes frequent return visits by restaurant guests.
To accomplish these objectives, the Company identifies the "tie"
breaking and "forerunner" products in each restaurant segment. Management feels
these "best sellers" are the single most important reason guests select a casual
dining restaurant. The Company offers about 50% of its selections in low-fat
versions.
Dinner entrees presently range in price from $6.95 to $12.95. An
assortment of sandwiches, baked potatoes, salads, burgers, soups and pizza round
out the menu and are priced between $3.25 and $8.50. The concept uses the same
menu for lunch and supper. Nutritional information is printed on its healthy
offerings and menus are changed quarterly to encourage frequency.
Ambiance/Design
The design elements of Street Talk Cafe convey the "street" and
"outdoor" ambiance associated with the name. Guests walk into the restaurant on
brick streets and wait to be seated in a Trolley Car area complete with
authentic benches.
Guests can dine in a variety of rooms that reflect the type of shops,
stores and surroundings normally associated with a "street experience." This
makes dining at Street Talk Cafe a true event and helps the concept deliver
greater value by offering an interesting and entertaining environment.
The restaurant's design is sufficiently flexible to accommodate a
variety of available sites and development opportunities, such as malls,
end-caps of strip shopping centers and free standing buildings, including
conversions. The physical plant is designed to serve a high volume of guests in
a relatively limited period of time. Restaurants typically average approximately
4,500 square feet.
Competition
Street Talk Cafe operates in the casual dining segment of the
foodservice industry. This segment is estimated to be $36 billion per year with
another $10 billion estimated in the Bar and Grill segment. Brinker
International operates more brands in the casual dining segment than any other
company with a total of seven different concepts.
Casual operators agree that continued expansion of core concepts and a
more aggressive pursuit of acquisitions are the two prevailing trends that will
characterize the casual-theme segment in the near term.
Despite the category's matured status, wide spread labor shortages and
competitive saturation in dozens of suburban markets, leading casual-theme
operators are confident there is plenty of room for domestic expansion.
Operators are looking to the fact that Baby Boomers are growing older and
wealthier as their Echo Boom offspring grow "hipper".
Fragmentation is happening in the casual segment. Casual Diners have
historically tried to be all things to all people by carrying Tex-Mex, steaks,
ribs, and a bar. Today, if people want steak, they will go to operators in the
steak house niche like Outback or Lone Star. If they want Mexican, they will go
to El Chico or Rio Bravo.
3
<PAGE>
Suppliers
The Company=s primary supplier of goods is Consolidated Companies, Inc.
("Conco"). On February 17, 1995, Conco entered into a five-year primary
distribution agreement with the Company (the "Primary Distribution Agreement"),
pursuant to which Conco has agreed to provide 90% of the products that are
required by the Company and that Conco can provide. The Company currently
purchases approximately 90% of its inventory from Conco. The Company purchases
items from Conco, as-needed, on a net-30 day basis. The Company is current in
its account with Conco. The Company also has accounts with other suppliers to
ensure product availability in the event that Conco is unable to meet the
Company=s needs in the future. In connection with entering into the Primary
Distribution Agreement, Conco purchased 133,332 shares of the Company=s common
stock, par value $.01 per share (the "Common Stock"), in March, 1995, for
$199,999.
In May and June of 1998 the Company issued in a private placement to
three Investors, tranches of debentures raising $3,000,000 in gross proceeds
($2,670,000 in net proceeds). The Company intends to use the proceeds of the
issuance to pursue the Company=s business strategy. See AC Liquidity and Capital
Resources" and "Litigation".
PENDING ACQUISITION
On March 12, 1999 the Company entered into definitive documents to
acquire the Fatburger hamburger chain. The Company is to close the acquisition
in May 1999. Fatburger, founded in 1952, currently operates 13 company owned
Fatburger restaurants in the Los Angeles, California market and franchisees 22
restaurants in Southern California and Las Vegas, Nevada under the Fatburger
brand. Three additional franchised restaurants are under construction with two
units expected to open in June 1999 and the third to open in August 1999.
Currently, there are commitments and deposits for another 24 franchised units.
History
The Fatburger brand, which first appeared in 1952, is a well-known
trademark that has come to represent the classic Los Angeles hamburger stand.
The original restaurant on Western Avenue and the well-known La Cienga unit are
still operating. Many LA hamburger fans have had a Fatburger experience to
relate, and for many out-of-town visitors, a stop at Fatburger is a necessary
part of their itinerary. In becoming synonymous with the LA lifestyle, Fatburger
has become a frequent dining spot for athletes and celebrities as well.
Today the chain is experiencing resurgence with same-store sales at
Company owned units up 20% during the last year and franchise division sales up
30% for the year.
Concept & Strategy
Fatburger is in the quick service, cooked to order hamburger business.
Critical to the overall taste and quality of the finished product is Fatburger's
absolute commitment to a "cook to order" method that ensures every burger is
served hot off the grill Fatburger operates in two distinct industry niches:
themed restaurants and hamburger. Fatburger offers an experience between
traditional fast feeders and casual dining concepts.
While 45% of sales come from the varied forms of Fatburger hamburgers,
the core items are supported by other menu items that are consistent with the
taste and quality standards of the concept. French fries and hand-breaded onion
rings make up 18% of sales; beverages, including hand scooped, real ice cream
milkshakes and fresh lemonade are 17%. Additional items include fresh all beef
hot dogs, marinated chicken breast sandwich and ground turkey burgers. Guest
check averages for Fatburger are $6.25.
Over the past 47 years, this "high quality" quick service niche of the
hamburger segment has made Fatburger one of the favorite restaurants in LA.
Fatburger's unique blend of entertainment, value and product quality delineates
the concept from other operators in the hamburger segment and provides a more
memorable dining experience than other operators in the segment. Fatburger was
voted best hamburger in Las Vegas and has won that distinction in several polls
taken in the LA area.
4
<PAGE>
Ambiance/Design
The ambiance of the restaurant helps Fatburger achieve its motto as
"The Last Great Hamburger Stand." The design, decor and atmosphere of the
restaurants include distinctive rhythm and blues jukebox and a high quality
sound system that contribute to an upbeat, but sophisticated environment, tying
Fatburger back to the community juke joints and great burger joints of the past.
Restaurant Operations
Fatburger requires its hourly team members to participate in a formal
training program carried out at the individual restaurants, with the on-the-job
training program varying from three days to two weeks. Managers are trained at
one of the Company's specified training restaurants by that restaurant's general
manager and then certified upon completion of an eight to twelve week program
that encompasses all aspects of quality control and customer relations. Managers
at restaurants prepare daily reports of cash, deposits, sales, operating costs
and profits. In addition, they submit weekly payroll reports and profit and loss
statements and perform weekly inventories of all food, beverage and supply
items. Monthly profit and loss statements are provided to field management for
analysis and comparison to Company budgets. Fatburger's objective is to maintain
quality and consistency in its restaurants through the careful supervision of
personnel and the establishment of standards relating to food handling and
preparation, facility maintenance, and employee conduct. Fatburger maintains an
electronic POS system that links each store to a centralized system. Individual
restaurants are polled daily for sales, cash control and operational data.
A typical Fatburger operates with a staff of 12-26, including a
restaurant manager, four shift leaders, and 7-21 hourly employees who are
predominately full time. Training is ongoing and a great deal of emphasis is
placed on team-oriented behavior and interaction with guests. All new management
personnel go through a five to eight week training program conducted at one of
two designated training stores.
Restaurants are open from 10:30 to midnight most days of the week, with
later hours on weekends. Hours are set by management based on local conditions.
In some circumstances, Fatburger restaurants are open for 24-hour service.
Fatburger restaurants range in size from 950-2000 square feet. This
small format and flexibility permits a broader range of site selection options
and helps reduce the cost of opening new units. Fatburger has opened six
restaurants in the last 48 months. For the four in-line or end cap units, the
total cost to open a new unit averaged approximately $385,000, including all
leasehold improvements, equipment, and beginning inventory as well as all
expenses for design, site selection, lease negotiation, construction supervision
and permitting.
For the two newly constructed, freestanding units with drive-thrus, the
average cost was approximately $675,000. Management expects future restaurants
will cost approximately $450,000 to open based on design modifications,
management experience, and emphasis on smaller units and buying economies.
Franchising
Under the franchise-licensing program that has been in place since
September 1995, Fatburger offers single unit and multi-unit franchises
throughout the United States. Under a single unit agreement, a franchisee must
pay a deposit of $30,000 that is applied towards their franchise fee.
Multi-unit franchise agreements and development awards are the primary
form of franchise awards and are used exclusively when entering new markets.
5
<PAGE>
They must pay a $10,000 deposit for each restaurant they plan to develop. The
balance of the franchise fee must be paid upon lease execution for each
location.
Development agreements conferring exclusive territory rights for a
specified period of time require a $10,000 non-refundable development fee for
each unit, as well as the $30,000 franchise fee per unit. If the pre-approved
development schedule is not adhered to the exclusive rights may be forfeited.
Ongoing royalty fees are 5% of gross sales. The initial term of the
agreements is 15 years with 2 successive 10-year renewal options. Royalty fees
are paid semi-monthly.
The Company provides initial training and ongoing field support
services to its franchisees in an effort to help maximize business and financial
management, maintain quality control and customer service excellence, and to
promote an active partnership between the Company and franchisees.
The Company administers a marketing fund for the purposes of promoting
and building brand identity, advertising and promotion, building community
relations, and supporting the growth and development of the Fatburger system as
a whole.
Terminated Acquisition
In October 1998 the Registrant signed an asset Purchase Agreement to
acquire all of the properties and assets comprising the Old San Francisco
Restaurant chain ("OSF"). The OSF acquisition was for all cash at closing, and
Registrant was unable to obtain financing for the purchase price on terms
acceptable to it. Registrant therefore declined to pursue its agreement to
purchase OSF, and the agreement was terminated without penalty on February 1,
1999. Registrant instead concentrated its efforts on pursuit of the Fatburger
transaction.
Employees
Registrant employed 74 persons as of April 1, 1999, including 9
executive and office personnel and 65 restaurant operational managers and staff.
6
<PAGE>
Item 2: DESCRIPTION OF PROPERTY
Restaurant Locations
The following table provides information with respect to each of the
Company's restaurant properties. The Dallas, Irving, The Colony, and Richardson
buildings are owned, with a lease on the land. The Company=s current plan is to
secure a 20-year lease with an option to purchase on any land to be used for an
additional restaurant.
<TABLE>
Square Feet Lease Expiration Date
<S> <C> <C>
Location
Dallas, Texas............................4,500 sq. ft. February 21, 2015
Irving (Valley Ranch), Texas.............4,700 sq. ft. November 15, 2016
The Colony, Texas........................4,700 sq. ft. October 15, 2017
Richardson, Texas .......................4,700 sq. ft. December 15, 2017
Addison, Texas ..........................4,500 sq. ft. November 30, 2006
</TABLE>
The Company no longer operates restaurants in the Dallas and Irving
locations, which were closed after year-end.
Headquarters Location
The Company owns a building located at 1705 Whaley, Longview, Texas.
The Company utilizes approximately 5,000 sq. ft. of the building for its
administrative operations. The Company leases the remainder (approximately
15,000 sq. ft.) to another company. The Company purchased the headquarters land
and building in December 1997 from a company that is partially owned by Messrs.
Stanley L. Swanson "Mr. Stan Swanson") and Curtis A. Swanson ("Mr. Curtis
Swanson"), who are both directors and officers of the Company.
Item 3. LEGAL PROCEEDINGS
Restaurant Teams International, Inc. vs. Dominion Capital Fund,
Ltd. et. al, Civil Action no. 6:98-CV-679 in the U.S. District Court, Eastern
District of Texas, Tyler Division. Registrant filed suit on November 6, 1998
against three investment funds and their principals alleging fraud and violation
of federal and state securities laws in connection with a $3 million investment
in Registrant's convertible debentures. The debentures had a conversion rate
based on 80% of the market price of Registrant common stock, which Registrant
alleges was manipulated downward by illegal short selling in order to obtain a
larger number of conversion shares. Defendants have counterclaimed alleging
default of the debentures, breach of contract, securities fraud and common law
fraud. The case is in the early stage of discovery.
Thomas Kernaghan & Co. Limited and Mark Valentine v. Restaurant Teams
International, Inc. et.al. Cause No. 98-CV-16128 in the General Court of
Ontario, Canada. Two of the defendants in the Dominion Capital case filed suit
in Canada in December 1998 charging defendant with defamation and libel in press
releases made at the time the Dominion Capital case was filed, claiming damages
in excess of $3 million. The Registrant is defending the case through Toronto
counsel.
Sovereign Partners Limited Partnership. et.al v. Restaurant Teams
International, Inc. Cause No. 99-CIV-564 (RJW), U.S. District Court for the
Southern District of New York. Certain defendants in the Dominion Capital case
filed by Registrant have filed suit against Registrant and others in the
Southern District of New York alleging defamation and libel based on the same
facts contained in the Toronto case.
7
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on December 16 to approve an
amendment to the Registrant's Articles of Incorporation to authorize a class of
preferred stock. No other matter was submitted at the meeting, and the proposal
was approved by a vote of 4,356,282 shares for, 5,811 shares against and 0
shares abstained.
8
<PAGE>
PART II
Item 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock began trading on the OTC Bulletin Board
under the symbol "FLTT" on May 9, 1997. Such symbol was changed to RTIN in
September 1998. The following table sets forth for the quarters indicated the
high and low bid prices of the Company=s Common Stock as reported by the
National Quotation Bureau, Inc. The prices reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
High Low
1997
First Quarter..................................... N/A N/A
Second Quarter.................................... $ 3.000 $ 2.500
Third Quarter..................................... 3.750 2.500
Fourth Quarter.................................... 3.625 2.125
1998 High Low
First Quarter .................................... $ 3.000 $ 1.649
Second Quarter ................................... 4.469 1.656
Third Quarter..................................... 4.00 1.875
Fourth Quarter.................................... 5.00 1.375
As of December 15, 1998, the Company estimates that there were
approximately 568 beneficial owners of the Company=s Common Stock, and
approximately 280 holders of record. The Company has never declared a dividend
on its Common Stock.
Item 6: MANAGEMENT'S DISCUSSION AND ANALYSIS ON PLAN OF OPERATION
Forward-Looking Statements
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of Section 27A of The Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), which can be identified by the use of
forward-looking terminology such as may, believe, expect, intend, anticipate,
estimate or continue or the negative thereof or other variations thereon or
comparable terminology. All statements other than statements of historical fact
included in this Form 10-KSB, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such statements,
including certain risks and uncertainties that could cause actual results to
differ materially from the Company's expectations (Cautionary Statements) are
disclosed in this Form 10-KSB. Important factors that could cause actual results
to differ materially from those in the forward-looking statements herein
include, but are not limited to, the newness of the Company, the need for
additional capital and additional financing, the Company's limited restaurant
base, lack of geographic diversification, the risks associated with expansion, a
lack of marketing experience and activities, risks of franchising,
seasonability, the choice of site locations, development and construction
delays, need for additional personnel, increases in operating and food costs and
availability of supplies, significant industry competition, government
regulation, insurance claims and the ability of the Company to meet its stated
business goals. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
The following discussion of the results of operations and financial
condition should be the Financial Statements and related Notes thereto included
herein.
9
<PAGE>
Overview
The Company was organized in June 1990 as Bosko's, Inc. under the laws of the
State of Delaware. In November 1992 the Company changed its name to Fresh'n
Lite, Inc., and in November 1995 the Company merged into a Texas corporation
also bearing the name Fresh'n Lite, Inc. On September 15, 1998 the Company
changed its name to Restaurant Teams International, Inc. to more accurately
reflect the direction management is taking with respect to positioning the
Company as a multi-concept holding company. The Company currently owns and
operates three Street Talk Cafe restaurants in Richardson, Addison, and The
Colony, Texas.
Results of Operations
Comparison of Year Ended December 31, 1997 and December 31, 1998.
Revenues. Operating revenues for fiscal year ended December 31, 1997
were $3,106,144, with an operating income of $179,020.
Operating revenues for fiscal year ended December 31, 1998 were
$3,705,013, a 19.3% increase from 1997, with an operating loss of $89,126. The
19.3% increase in revenues over 1997 is attributed to the opening of the
Richardson Texas facility and the remodel of The Colony, Texas facility.
Costs and Expenses. Costs and expenses for the fiscal year ended
December 31, 1998 increased by $867,015 or 22.9% to $3,794,139 as compared to
$2,927,124 for the corresponding period ended December 31, 1997. This was
primarily due to opening of higher volume restaurants in the Dallas market area.
General and Administrative Costs in 1998 increased by 318% to $905,079 as
compared to $284,304 in 1997. This increase was primarily due to the development
of infrastructure in anticipation of the future growth and acquisitions.
Additionally the Company realized increased professional fees associated with
the proposed acquisition of the OSF chain, (see "PENDING ACQUISITIONS) and
acquisition costs which were expensed in 1998. Interest expense in 1998
increased by $1,561,238 to $1,560,699 over a gain of $539 in 1997, which was
attributed to the reclassification of capitalized leases into operating leases.
The increase in interest expense is almost exclusively attributed to the
issuance by the company of the A & B convertible debentures dated May 29, 1998
and June 30, 1998 respectively. (see "EXPLANATION OF DEBENTURES" below)
Net Income. The Company had a net loss for the fiscal year ended
December 31, 1998 of $1,320,303 compared to net income of $119,386 for fiscal
year ended December 31, 1997, representing less than$.21> and $.02 per share,
respectively. The net loss in 1998 was primarily due to the costs associated
with the issuance of the debentures in May and June of 1998. See "EXPLANATION OF
DEBENTURES" - below and "Litigation" - Item 3.
Comparison of Year Ended December 31, 1996 and December 31, 1997.
Revenues. Operating revenues for fiscal year ended December 31, 1996
were $2,602,533, with a gross profit of $1,862,111 (71.5%), and operating income
of $282,327, before adding royalty revenues of $34,744, which increased
operating income to $317,101.
Operating revenues for fiscal year ended December 31, 1997 were
$3,106,144, a 19.4% increase from 1996, an operating income of $166,862 which
included a one time charge of $169,075 for the accelerated amortization of start
up costs associated with the closing of the Nacogdoches, Texarkana, and
Longview, Texas facilities. Prior to this charge, operating income was $335,937.
The Company discontinued its franchise operation in early 1996, therefore no
royalty revenues or franchise fees are reflected in the 1997 numbers. The 19.4%
increase in revenues over 1996 is attributed to the opening of the Irving
(Valley Ranch), and The Colony, Texas facilities.
10
<PAGE>
Costs and Expenses. Costs and expenses for the fiscal year ended
December 31, 1997 increased by $594,388 or 25.5% to $2,926,758 as compared to
$2,332,370 for the corresponding period ended December 31, 1996. This was
primarily due to opening of higher volume restaurants in the Dallas market area.
Net Income. The Company had a net income for the fiscal year ended
December 31, 1997 of $119,386 compared to net income of $234,937 for fiscal year
ended December 31, 1996, representing $.02 and $.04 per share, respectively.
Liquidity and Capital Resources
Historically, the Company has required capital to fund the operations
and capital expenditure requirements of its Company-owned restaurants.
From January 4, 1995 through December 12, 1997, the Company received
gross proceeds from an intrastate offering of $2,219,500. Approximately $287,600
of the proceeds was used to cover offering-related costs, including underwriting
discounts and commissions. The net proceeds were used primarily for the
acquisition of the Company's corporate offices. The remaining proceeds were used
to develop additional restaurants and for general corporate purposes.
The Company met fiscal 1997 capital requirements with cash generated by
operations, the proceeds from the intra-state offering and borrowing on notes
payable. In fiscal 1997 the Company's operations generated approximately
$644,352 in cash, as compared to $551,804 in fiscal 1996 and $461,811 in fiscal
1995. The Company's restaurant operations are labor intensive and do not have
significant receivables or inventory. The Company receives trade credit based
upon negotiated terms in purchasing food and supplies and ordinarily operates
with a relatively small level of working capital.
The Company's principal capital requirements are the funding of
acquisitions. During fiscal 1997, the Company constructed and opened one unit in
the Colony, Texas, and began construction of a second unit in Richardson, Texas,
and a third facility in Addison, Texas, and purchased its corporate offices
facility. The total capital outlay for the year was.
The Company is currently operating out of cash flow from operations.
The Company completed two private placements of A Debentures and B Debentures on
May 29, 1998 and June 29, 1998, respectively, providing net proceeds to the
Company of $2,670,000. The proceeds were used to fund the Company's expansion
strategy of opening additional Street Talk Cafe restaurants in the Dallas market
area. The Company is currently seeking a recision of said debentures through a
lawsuit filed in Federal court on November 9, 1998. See Item 3 - Legal
Proceedings.
Explanation of Debentures
On May 29, 1998, the Company entered into an agreement to issue two
tranches of convertible debentures to accredited investors with a total face
amount of $3,000,000. The Company received net proceeds of $2,670,000 after
paying certain costs of the purchasers. The debentures bear interest at 6%,
mature on May 29, 2000, and are convertible into shares of common stock of the
Company. Conversion is at the option of the holders, and the number of shares of
common stock to be received upon conversion is based upon the lesser of (a) the
closing bid price on the day immediately preceding the agreement ($4.00), or (b)
the average closing bid price for the Company's stock for the five-trading-day
period immediately preceding the date of conversion, multiplied by a discount
ranging from 17.5% to 25%, which is considered a beneficial conversion feature
(BCF). In accordance with generally accepted accounting principles, the Company
valued the BCF by multiplying the difference between the fair value of the
Company's stock as of the transaction date and the conversion price most
beneficial to the investor, by the number of shares to be received upon
11
<PAGE>
conversion by the investor under the most beneficial terms. This resulted in a
decrease in the carrying value of the Convertible Debentures and a corresponding
increase in stockholder's equity of $1,000,000. The related discount recorded
upon the issuance of the Convertible Debenture was accreted into interest
expense over a sixty-one day period, beginning on the issuance date and ending
on the first date at which the most beneficial conversion to the investor could
be realized. This resulted in additional interest expense of $1,000,000 and a
corresponding increase in the carrying value of the Convertible Debentures of
$1,000,000 in 1998. The Company has the option of paying accrued interest upon
conversion and at maturity in cash or through the issuance of an equal dollar
value of additional shares. If the entire principal amount has not been
converted by the maturity date, the Company will automatically convert the
remaining principal using the same conversion formula described above. The
Company has the right to redeem the debentures for the cash value of the shares
that would be received upon conversion as of the redemption date, multiplied by
the closing bid price on the last trading day immediately preceding the
redemption date.
If an event of default, as defined by the agreement, occurs, the
holder may consider the Convertible Debentures to be immediately due and payable
in cash, at an amount equal to the number of shares issuable upon conversion,
including related discounts as described above, multiplied by the closing bid
price of the day immediately preceding the notice of default. An event of
default could result in the Company paying amounts to the holders in excess of
the amounts recorded on the balance sheet.
In connection with the issuance of these debentures, the Company
issued to the investors and the placement agent warrants to purchase up to an
aggregate of 150,000 and 50,000 shares, respectively, of the Company's stock
with an exercise price equal to 110% of the average closing bid price for the
five trading days immediately preceding the agreement date or $4.40. These
warrants have a five-year life. The warrants were valued on the date of issuance
at $2.00 per warrant which resulted in a decrease in the carrying value of the
Convertible Debentures and a corresponding increase in stockholder's equity of
$400,000. The resulting discount upon the issuance of Convertible Debentures
will be accreted into interest expense over the life of the debentures, adjusted
for conversions to common stock.
During the year, the investors made two conversions of principal
totaling $675,000, plus accrued interest. The Company issued 408,388 shares of
common stock in connection with the conversions. No additional conversions have
been made.
Year 2000 Disclosure
The Company uses current versions of widely used, publicly available
software for its accounting, data processing, and point of sale computer
requirements. The providers of the software utilized by the Company have stated
that there will be no failures in the programs used by the Company resulting
from the year 2000. The Company does not utilize any customized software. The
Company has not yet determined the impact, if any, that year 2000 issued may
have on its vendors. However, the Company believes there are adequate
alternative vendors that can supply products and services to the Company if
necessary. Finally, the Company=s business is not highly dependent upon
electronic data processing. In conclusion, the Company does not believe it is at
a material risk from year 2000 issues.
Item 7. FINANCIAL STATEMENTS
12
<PAGE>
Restaurant Teams International, Inc.
Financial Statements
As of December 31, 1998 and
Years Ended December 31, 1998 and 1997
with Report of Independent Auditors
13
<PAGE>
Restaurant Teams International, Inc.
Financial Statements
As of December 31, 1998 and
Years Ended December 31, 1998 and 1997
Contents
Report of Independent Auditors ..............................................1
Financial Statements
Balance Sheet ...............................................................3
Statements of Operations ....................................................5
Statements of Stockholders' Equity ..........................................6
Statements of Cash Flows ....................................................7
Notes to Financial Statements ...............................................9
14
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Restaurant Teams International, Inc.
We have audited the accompanying balance sheet of Restaurant Teams
International, Inc. (formerly Fresh'n Lite, Inc.) as of December 31, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Restaurant Teams International,
Inc. as of December 31, 1998 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
San Antonio, Texas
April 9, 1999
1
<PAGE>
Independent Auditors' Report
Board of Directors,
Restaurant Teams International, Inc.
Longview, Texas
We have audited the statement of operations, changes in shareholders' equity and
cash flows of Restaurant Teams International, Inc. for the year ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Restaurant Teams
International, Inc. (formerly Fresh`n Lite, Inc.) and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
Certified Public Accountants
Tyler, Texas
March 3, 1998, except for Note 11 as to
which the date is August 12, 1998
2
<PAGE>
Restaurant Teams International, Inc.
Balance Sheet
December 31, 1998
Assets
Current assets:
Cash and cash equivalents $1,606,245
Inventories 43,035
Prepaid expenses 7,415
Federal income tax receivable 38,030
----------
Total current assets 1,694,725
Property and equipment:
Land 135,000
Buildings 4,094,554
Furniture, fixtures, and restaurant equipment 807,945
Vehicles 130,691
Leasehold improvements 30,113
----------
5,198,303
Less accumulated depreciation 350,505
----------
4,847,798
Deferred income taxes 223,155
Assets held for sale, net of accumulated depreciation 1,073,240
Notes receivable from related parties 1,087,243
Debenture issuance costs 194,798
Other assets 50,526
----------
Total assets $9,171,485
==========
3
<PAGE>
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 89,835
Accrued interest payable 121,911
Income taxes payable 10,000
Other accrued liabilities 195,110
Current portion of long-term debt 121,862
-----------
Total current liabilities 538,718
Long-term debt, net of current portion 2,043,961
Deferred income taxes 269,945
Deferred liabilities 63,141
Deferred gain on sale of assets 193,502
Commitments and contingencies
Convertible debentures (less discount of $222,302) 2,102,698
Stockholders' equity:
Preferred stock, par value of $.01, 10,000,000 shares
authorized, -0- issued and outstanding --
Common stock, par value of $.01, 50,000,000 authorized
shares; 6,833,328 shares issued and 6,552,888 outstanding 68,334
Additional paid-in capital 5,718,252
Treasury stock, 280,440 shares at cost (761,150)
Retained earnings (deficit) (1,065,916)
-----------
Total stockholders' equity 3,959,520
-----------
Total liabilities and stockholders' equity $ 9,171,485
===========
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
Restaurant Teams International, Inc.
Statements of Operations
Year Ended December 31
1998 1997
--------------------------
<S> <C> <C>
Revenues $ 3,705,013 $ 3,106,144
Cost and expenses:
Cost of sales 968,382 890,944
Restaurant labor and benefits 971,727 744,910
Other restaurant operating expenses 690,527 584,546
General and administrative expenses 905,079 284,304
Depreciation and amortization 258,424 422,420
--------------------------
Total cost and expenses 3,794,139 2,927,124
--------------------------
Income from operations (89,126) 179,020
Nonoperating income (expense):
Interest, net (1,560,699) 539
Gain (loss) on disposal of property and equipment
208,282 (173)
--------------------------
(1,352,417) 366
--------------------------
(Loss) income before income taxes (1,441,543) 179,386
Income tax expense (benefit):
Federal:
Current (46,830)
Deferred (74,410)
--------------------------
(121,240) 60,000
--------------------------
--------------------------
Net (loss) income $(1,320,303) $ 119,386
==========================
Net (loss) income per common share $ (.21) $ .02
==========================
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
Restaurant Teams International, Inc.
Statements of Stockholders' Equity
Additional Retained Total
Common Paid-In Earnings Treasury Stockholders'
Stock Capital (Deficit) Stock Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 $ 54,911 $ 1,768,610 $ 135,001 $ (1,250) $ 1,957,272
Sale of common stock 6,674 1,509,889 - - 1,516,563
Net income - - 119,386 - 119,386
-------------------------------------------------------------------------------------
Balances at
December 31, 1997 61,585 3,278,499 254,387 (1,250) 3,593,221
Sale of common stock 2,215 260,347 - - 262,562
Issuance of common stock
for compensation
450 95,175 - - 95,625
Value assigned to
beneficial conversion
rights and warrants - 1,400,000 - - 1,400,000
Stock issued upon
conversions of
debentures 4,084 684,231 - - 688,315
Treasury stock purchased
- - - (809,900) (809,900)
Issuance of treasury
stock for property and
equipment - - - 50,000 50,000
Net (loss) - - (1,320,303) - (1,320,303)
-------------------------------------------------------------------------------------
Balances at
December 31, 1998 $ 68,334 $ 5,718,252 $ (1,065,916) $ (761,150) $ 3,959,520
=====================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
Restaurant Teams International, Inc.
Statements of Cash Flows
Year Ended December 31
1998 1997
------------------------------------------------
<S> <C> <C>
Operating Activities
Net (loss) income $ (1,320,303) $ 119,386
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 253,111 233,881
Amortization of discount and issuance costs on
convertible debentures 1,312,900 -
Amortization 5,313 188,539
(Gain) on sales and retirements of property and
equipment (208,282) -
Provision (benefit) for deferred income taxes
(74,410) 51,200
Issuance of common stock for compensation
95,265 -
Change in net capital lease - (19,750)
Changes in operating assets and liabilities:
(Increase) decrease in inventories (16,464) 618
(Increase) in prepaid expenses (7,415) -
(Increase) in other assets (23,188) -
(Increase) in prepaid federal income tax
receivable (38,030) -
(Decrease) increase in accounts payable (11,133) 53,957
Increase in accrued interest payable 135,226 -
(Decrease) increase in other accrued liabilities
(145,525) 45,824
Increase in deferred liabilities 63,141 -
Increase in federal and state taxes, net 1,200 8,800
------------------------------------------------
Net cash provided by operating activities 21,406 682,455
Investing Activities
Purchase of property, equipment, and leasehold
improvements (1,503,299) (2,288,392)
(Increase) in notes receivable from related parties,
net (922,700) (133,198)
Proceeds from sale of property, equipment, and
leasehold improvements 1,450,000 -
------------------------------------------------
Net cash (used in) investing activities (975,999) (2,421,590)
</TABLE>
See accompanying notes
7
<PAGE>
<TABLE>
<CAPTION>
Restaurant Teams International, Inc.
Statements of Cash Flows (continued)
Year Ended December 31
1998 1997
------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of common stock, net
$ 262,562 $ 1,168,500
Principal payments on long-term debt (1,356,928) (877,871)
Proceeds from issuance of convertible debentures
1,600,000 -
Issuance costs of convertible debentures (330,000) -
Payments to purchase treasury stock (809,900) -
Proceeds from issuance of warrants and beneficial
conversion 1,400,000 -
Principal payments on capital leases (171,679) -
Proceeds from issuance of long-term debt 1,946,050 1,451,239
------------------------------------------------
Net cash provided by financing activities 2,540,105 1,741,868
------------------------------------------------
Net increase in cash and cash equivalents 1,585,872 2,733
Cash and cash equivalents at beginning of year 20,373 17,640
------------------------------------------------
------------------------------------------------
Cash and cash equivalents at end of year $ 1,606,245 $ 20,373
================================================
Noncash transactions:
Conversion of debentures plus accrued interest to
common stock $ 688,315 $ -
Issuance of treasury stock for property and
equipment 50,000 -
Supplementary cash flow information:
Interest paid 112,573 126,659
</TABLE>
See accompanying notes.
8
<PAGE>
Restaurant Teams International, Inc.
Notes to Financial Statements
December 31, 1998 and 1997
1. Organization and Significant Accounting Policies
Organization and Description of Business
Fresh'n Lite, Inc. (the Company) (a Texas Corporation since October 1995) was
incorporated as Bosko's, Inc. in May 1990 as a Delaware Corporation. In December
1992 the corporate title was changed to Fresh'n Lite, Inc. in order to make its
restaurants' names more reflective of its products. In 1995, the Company merged
from a Delaware Corporation into F'NL, Inc., a Texas Corporation. Immediately,
the Company changed its name to Fresh'n Lite, Inc. In 1998, the Company changed
its name to Restaurant Teams International, Inc. to reflect the Company's desire
to become a multiconcept restaurant holding company.
Prior to 1994, the Company's restaurants provided healthy foods and beverages in
a "fast food" deli atmosphere. During 1994, the Company expanded all restaurants
into "full service" casual dining restaurants, offering dinner menus and a wait
staff. The Company operates four casual dining restaurants, in the Dallas, Texas
area, under the name "Street Talk Cafe."
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories consist of food and beverage items and paper supplies. Inventories
are stated at the lower of cost (first-in, first-out method) or market.
9
<PAGE>
1. Organization and Significant Accounting Policies (continued)
In 1995, the Company sold common stock to the Company's largest food distributor
pursuant to a food purchase/stock purchase agreement. The agreement binds the
Company to purchase 90% of its food products from the distributor for five
years. The Company is continuing to satisfy its obligation under the food
purchase portion of the agreement.
Long-Lived Assets
Long-lived assets (including related goodwill and other intangible assets) are
reviewed on a regular basis for the existence of facts or circumstances, both
internally and externally, that may suggest impairment. If such impairment is
identified, the impairment loss will be measured by comparing the estimated
future undiscounted cash flows to the asset's carrying value.
Assets Held for Sale
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company has reclassified certain assets from "Property and
Equipment" to "Assets Held for Sale" in the accompanying financial statements.
Management identified assets totaling $1,426,831, net of accumulated
depreciation totaling $353,591, as being held for sale as of December 31, 1998.
Management is unable to provide an expected disposal date, but is actively
pursuing sale of the assets as quickly as possible while maximizing potential
sales proceeds. Depreciation on the reclassified assets was ceased at the point
that management committed to a plan to dispose of the assets.
Property and Equipment
Property and equipment are stated at cost. Major improvements which
significantly extend the useful lives of the equipment are capitalized. Property
and equipment depreciation is computed on an accelerated or straight-line
method. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful life
10
<PAGE>
1. Organization and Significant Accounting Policies (continued)
of the improvements. Maintenance and repair costs are expensed as incurred.
Estimated service lives are as
follows:
Buildings 20 years
Furniture, fixtures, and restaurant equipment 5 - 10 years
Vehicles 5 - 10 years
Leasehold improvements 10 - 15 years
Certain construction overhead costs are capitalized and included in buildings.
In 1998, the Company issued 20,833 shares as payment for restaurant equipment
with a value of $50,000.
Debenture Issuance Costs
Debenture issuance costs, which are being amortized using a method that
approximates the effective interest method over the life of the Convertible
Debentures, adjusted for conversions, are included in the balance sheet. The
Company incurred approximately $330,000 in debenture issuance costs related to
the Convertible Debentures in 1998 (see Note 4). Accumulated amortization of
debenture issuance costs was approximately $135,202 at December 31, 1998.
Revenue Recognition
Sales and related costs are recognized by the Company upon the sale of products
at restaurant locations.
Income Taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and tax basis of assets and liabilities,
and are measured using the enacted tax rates and laws which will be in effect
when the differences are expected to reverse.
11
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock (see Note 8).
Preferred Stock
In 1998 the Company's stockholders approved the creation of a class of preferred
stock. The preferred stock has a par value of $.01, and 10,000,000 shares were
authorized. The Company has not assigned any rights or preferences to the
preferred stock as of December 31, 1998.
Advertising Costs
All advertising and promotional costs are expensed when incurred. The Company
incurred approximately $97,000 and $129,000 in marketing and advertising
expenses in 1998 and 1997, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. Other Accrued Liabilities
Other accrued liabilities consist of the following at December 31, 1998:
Accrued employee compensation and related items $ 35,492
Sales taxes payable 31,360
Professional fees 52,568
Ad valorem taxes 75,690
------------------
$ 195,110
==================
12
<PAGE>
<TABLE>
<S> <C> <C>
3. Long-Term Debt
Long-term debt consists of the following at December 31, 1998:
Note payable to bank, interest at 9.5%, monthly principal and interest
payments of $3,594, remaining unpaid principal and interest due June 30,
2000, secured by certain real property $ 269,531
Note payable to bank, interest at 9.5%, monthly principal and interest
payments of $7,310, remaining unpaid principal and interest due April 9,
2001, secured by certain real property 698,338
Note payable to bank, interest at 9.5%, monthly principal and interest
payments of $7,310, remaining unpaid principal and interest due April 9,
2001, secured by certain real property 696,727
Note payable to bank, interest at 9.5%, monthly principal and interest
payments of $5,430, remaining unpaid principal and interest due October 28,
2000, secured by certain real property 463,541
Note payable to insurance company, interest at 9.44%, monthly payments of
$3,009, due April 28, 1999, unsecured 17,073
Note payable to bank, interest at 9.85%, monthly principal and interest
payments of $474, due May 9, 2002, secured by automobile
17,213
Note payable to bank, interest at 11.75%, monthly principal and interest
payments of $240, due March 15, 2000, secured by automobile
3,400
----------------------
Total long-term debt 2,165,823
Less current installments 121,862
----------------------
----------------------
Long-term debt, excluding current installments $ 2,043,961
======================
</TABLE>
13
<PAGE>
3. Long-Term Debt (continued)
Principal requirements on long-term debt for the succeeding fiscal years are:
1999 $ 121,862
2000 751,552
2001 1,290,098
2002 2,311
---------------------
$ 2,165,823
=====================
The carrying amount of long-term debt approximates the fair value. During the
year ended December 31, 1997, the Company capitalized as building and equipment
costs $124,199 in interest related to notes payable.
4. Convertible Debentures
On May 29, 1998, the Company entered into an agreement to issue two tranches of
convertible debentures (the Convertible Debentures) to accredited investors with
a total face amount of $3,000,000. The Company received net proceeds of
$2,670,000 after paying certain costs of the purchasers. The Convertible
Debentures bear interest at 6%, mature on May 29, 2000, and are convertible into
shares of common stock of the Company. Conversion is at the option of the
investors, and the number of shares of common stock to be received upon
conversion is based upon the lesser of (a) the closing bid price on the day
immediately preceding the agreement ($4.00), or (b) the average closing bid
price for the Company's stock for the five-trading-day period immediately
preceding the date of conversion, multiplied by a discount ranging from 17.5% to
25%, which is considered a Beneficial Conversion Feature (BCF). In accordance
with generally accepted accounting principles, the Company valued the BCF by
multiplying the difference between the fair value of the Company's stock as of
the transaction date and the conversion price most beneficial to the investors,
by the number of shares to be received upon conversion by the investors under
the most beneficial terms. This resulted in a decrease in the carrying value of
the Convertible Debentures and a corresponding increase in stockholder's equity
of $1,000,000. The related discount recorded upon the issuance of the
Convertible Debentures was accreted into interest expense over a sixty-one-day
period, beginning on the issuance date and ending on the first date at which the
most beneficial conversion to the investors could be realized. This resulted in
additional interest expense of $1,000,000 and a corresponding increase in the
carrying value of the
14
<PAGE>
4. Convertible Debentures (continued)
Convertible Debentures of $1,000,000 in 1998. The Company has the option of
paying accrued interest upon conversion and at maturity in cash or through the
issuance of an equal dollar value of additional shares. If the entire principal
amount has not been converted by the maturity date, the Company will
automatically convert the remaining principal using the same conversion formula
described above. The Company has the right to redeem the Convertible Debentures
for the cash value of the shares that would be received upon conversion as of
the redemption date, multiplied by the closing bid price on the last trading day
immediately preceding the redemption date.
If an event of default, as defined by the agreement, occurs, the investors may
consider the Convertible Debentures to be immediately due and payable in cash,
at an amount equal to the number of shares issuable upon conversion, including
related discounts as described above, multiplied by the closing bid price on the
day immediately preceding the notice of default. An event of default could
result in the Company paying amounts to the investors in excess of the amounts
recorded on the balance sheet.
In connection with the issuance of the Convertible Debentures, the Company
issued to the investors and the placement agent warrants to purchase up to an
aggregate of 150,000 and 50,000 shares, respectively, of the Company's stock
with an exercise price equal to 110% of the average closing bid price for the
five trading days immediately preceding the agreement date or $4.40. These
warrants are exercisable at any time through May 2003. The warrants were valued
on the date of issuance at $2.00 per warrant which resulted in a decrease in the
carrying value of the Convertible Debentures and a corresponding increase in
stockholder's equity of $400,000. The resulting discount upon the issuance of
Convertible Debentures will be accreted into interest expense over the life of
the debentures, adjusted for conversions to common stock.
During the year, the investors made two conversions of principal totaling
$675,000, plus accrued interest. The Company issued 408,388 shares of common
stock in connection with the conversions. As of December 31, 1998 the Company
has reserved 1,000,000 shares of common stock to be applied toward future
conversions. No additional conversions have been made. See Note 10.
Due to the nature of the above items, the fair value of the Convertible
Debentures has not been determined.
15
<PAGE>
5. Related Party Transactions
As of December 31, 1998, the Company has notes receivable from related parties
as follows:
A note for $500,000 is from a sister corporation and is related to the sale
of certain real property. The note is a fifteen-year note due August 31,
2013, bears interest at 10%, and is secured by the same real property.
A note for $468,796 is from the same sister corporation. The note is due
January 1, 2000, bears interest at 10%, and is secured by inventory,
receivables, and property and equipment of the sister corporation.
A note for $103,447 is from an entity owned by two stockholders. The note
is due January 1, 2000, bears interest at 9%, and is secured by all assets
of the entity including land, building, and equipment.
A note for $15,000 is from a stockholder. The note was due June 30, 1998,
but has not been collected. The note bears interest at 9% and is unsecured.
In the current year, the Company sold two pieces of property to a sister
corporation for a combined gain of approximately $386,000, of which
approximately $194,000 is deferred as of December 31, 1998.
The Company leases office and retail space in one of its facilities to a sister
corporation under a long-term operating lease for approximately $8,000 per
month. The Company waived all rental fees due under this agreement in 1998 and
1997.
16
<PAGE>
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax liabilities at December 31, 1998 are as follows:
Deferred tax assets:
Cash to accrual $ 101,917
Net operating loss 154,354
Deferred rent 21,468
-------------------
Total deferred tax assets 277,739
Valuation allowance for deferred tax assets (54,584)
-------------------
Net deferred tax assets 223,155
Deferred tax liabilities:
Depreciable and amortizable property (267,542)
Loan costs (2,403)
-------------------
Total deferred tax liabilities (269,945)
-------------------
Net deferred tax assets $ (46,790)
===================
The Company has a net operating loss of approximately $472,000, of which
approximately $163,000 can be carried back to the prior year, the benefit of
which has been booked as a federal income tax receivable.
The reconciliation between the expected tax at the federal U.S. corporate tax
rate and the Company's consolidated actual tax is as follows:
<TABLE>
December 31
1998 1997
---------------------------------------
<S> <C> <C>
(Loss) income before income taxes $ (1,441,543) $ 179,386
U.S. corporate tax rate 34% 34%
---------------------------------------
Expected (benefit) expense (490,125) 60,991
Effects of permanent differences on the current
and deferred provisions 358,868 -
Other (44,567) (991)
---------------------------------------
Actual expense $ (175,824) $ 60,000
=======================================
</TABLE>
17
<PAGE>
7. Operating Leases
The Company has entered into noncancelable lease agreements for the land where
its restaurants are located that expire at various dates through the year 2018.
The Company has options to renew the leases upon expiration for periods ranging
from five to ten years. Total rental expense for operating leases amounted to
approximately $234,000 and $160,000 in 1998 and 1997, respectively.
The Company also pays real estate taxes, insurance, and maintenance expenses
related to these leases. Future minimum rental commitments at December 31, 1998
under operating leases having an initial or remaining noncancelable term of one
year or more are:
1999 $ 295,704
2000 299,337
2001 299,926
2002 314,237
2003 315,902
Thereafter 3,177,929
--------------------
--------------------
Total minimum rentals $ 4,703,035
====================
8. Stock Options
The Company has authorized the granting of options covering a total of 1,200,000
shares of the Company's common stock to managers, key employees, and certain
consultants of the Company. All options granted have five-year terms and become
fully exercisable when granted.
18
<PAGE>
8. Stock Options (continued)
A summary of the Company's stock option activity and related information for the
two years ended December 31, 1998 follows:
<TABLE>
Weighted-Average
Exercise
Price
Options
------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996 103,572 $ 1.45
====================================
====================================
Exercisable at December 31, 1996 103,572 $ 1.45
====================================
Exercised - $ -
Forfeited - -
Granted 543,500 2.67
------------------------------------
Outstanding at December 31, 1997 647,072 $ 2.47
====================================
Exercisable at December 31, 1997 647,072 $ 2.47
====================================
Exercised - $ -
Forfeited - -
Granted 250,000 2.825
------------------------------------
Outstanding at December 31, 1998 897,072 $ 2.57
====================================
Exercisable at December 31, 1998 897,072 $ 2.57
====================================
</TABLE>
The weighted-average remaining contractual life of those options is 3.68 and
4.48 years in 1998 and 1997, respectively. The exercise prices of outstanding
options range from $.10-$3.00 as of December 31, 1998 and 1997. In connection
with the Company's stock options, 1,200,000 shares of common stock have been
reserved for future issuance.
19
<PAGE>
8. Stock Options (continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1995, consistent with the provisions of SFAS No. 123, the
Company's net income and income per share would have been reduced to the pro
forma amounts indicated.
1998 1997
---------------------------
Net (loss) income - as reported $ (1,320,303) $ 119,386
Net (loss) - pro forma (1,635,283) (52,884)
(Loss) income per common share - as reported (.21) .02
(Loss) per common share - pro forma (.26) (.01)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of 113.9%
and 74.9% in 1998 and 1997, respectively; risk-free interest rates of 4.57% and
5.65% in 1998 and 5.57% in 1997; and expected lives of 3.25 years. The average
fair value of options granted in 1998 and 1997 was $2.04 and $.42, respectively.
9. Reconciliation of Per Share Information
<TABLE>
December 31
1998 1997
------------------------------
<S> <C> <C>
Numerator
Net (loss) income $ (1,320,303) $ 119,386
Effect of dilutive securities:
Convertible debentures - -
------------------------------
Numerator for basic and diluted income per share $ (1,320,303) $ 119,386
==============================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
9. Reconciliation of Per Share Information (continued)
December 31
1998 1997
-------------------------------------------
<S> <C> <C>
Denominator
Denominator for basic income per share -
weighted average shares 6,218,749 5,807,700
Effect of dilutive securities:
Employee stock options - 47,500
Convertible debentures - -
Warrants - -
-------------------------------------------
Denominator for diluted income per share -
adjusted weighted average shares 6,218,749 5,855,200
===========================================
Net (Loss) Income Per Share
Basic $ (.21) $ .02
===========================================
Diluted $ (.21) $ .02
===========================================
</TABLE>
Stock options, warrants, and shares issuable upon conversion of the Convertible
Debentures totaling 2,274,263 and 533,500 for 1998 and 1997, respectively, were
not included as they were antidilutive.
10. Commitments and Contingencies
Litigation
Restaurant Teams International, Inc. vs. Dominion Capital Fund, Ltd. et al.
Civil Action no. 6:98-CV-679 in the U.S. District Court, Eastern District of
Texas, Tyler Division. Registrant filed suit on November 6, 1998 against three
investment funds and their principals alleging fraud and violation of federal
and state securities laws in connection with a $3 million investment in
Registrant's convertible debentures. The debentures had a conversion rate based
on 80% of the market price of Registrant common stock, which Registrant alleges
was manipulated downward by illegal short selling in order to obtain a larger
number of conversion shares. Defendants have counterclaimed alleging default of
the debentures, breach of contract, securities fraud, and common law fraud. The
case is in the early stage of discovery.
21
<PAGE>
10. Commitments and Contingencies (continued)
Thomas Kernaghan & Co. Limited and Mark Valentine v. Restaurant Teams
International, Inc. et al. Cause No. 98-CV-16128 in the General Court of
Ontario, Canada. Two of the defendants in the Dominion Capital case filed suit
in Canada in December 1998 charging defendant with defamation and libel in press
releases made at the time the Dominion Capital case was filed, claiming damages
in excess of $3 million. The Registrant is defending the case through Toronto
counsel.
Sovereign Partners Limited Partnership et al. v. Restaurant Teams International,
Inc. Cause No. 99-CIV-564 (RJW), U.S. District Court for the Southern District
of New York. Certain defendants in the Dominion Capital case filed by Registrant
have filed suit against Registrant and others in the Southern District of New
York alleging defamation and libel based on the same facts contained in the
Toronto case.
Management believes the effect of these actions will not have a material adverse
effect on the Company's financial position or results of operations; however,
the ultimate resolution of these matters cannot be presently determined.
11. Prior Period Adjustments and Restatements
Certain errors, resulting in both the understatement and overstatement of
previously reported assets, liabilities, and expenses for 1997, resulted in the
following changes to total assets, beginning retained earnings, and net income:
<TABLE>
Beginning
Retained Earnings
Total Assets Net Income
-----------------------------------------------------------
<S> <C> <C> <C>
As previously reported $ 8,145,537 $ 182,225 $ 110,862
Overstatement of capitalized land
leases (2,175,000) (5,951) 4,583
Overstatement of capitalized franchise
costs (57,333) (65,273) 7,941
Deferred taxes on above items - 24,000 (4,000)
-----------------------------------------------------------
As restated $ 5,913,204 $ 135,001 $ 119,386
===========================================================
</TABLE>
22
<PAGE>
12. Subsequent Events
Subsequent to December 31, 1998, the Company closed two of its restaurants. The
decision to close one of the restaurants was made prior to year-end, and
accordingly, the assets related to this location have been reclassified to
assets held for sale. The Company also opened a new restaurant in early 1999.
Also subsequent to year-end, the Company entered into negotiations to purchase
the stock of another restaurant company. Management believes these negotiations
will culminate in a significant acquisition in 1999.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 19, 1998, the Registrant ended its relationship with its
independent auditors, T.G. Prothro & Company, effective as of that date. There
were no disagreements with T.G. Prothro & Company on any matter of accounting
principles, practices, financial statement disclosure, or auditing scope or
procedure or any reportable event. The change was made in order to comply with
American Stock Exchange listing requirements, which the Company was then
pursuing.
The registrant's audit committee then engaged Lane, Gorman, Trubitt,
LLP, effective November 3, 1998. The registrant had not consulted Lane, Gorman,
Trubitt, LLP prior to such appointment with respect to any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure, or any disagreement with T.G. Prothro & Company.
On March 4, 1999, the Registrant ended its relationship with its
independent auditors, Lane, Gorman, Trubitt, LLP, effective as of that date.
There have been no disagreements with Lane, Gorman, Trubitt, LLP on any matter
of accounting principles, practices, financial statement disclosure, or auditing
scope or procedure or any reportable event. The change was made to maximize
economies of scale relative to acquisitions in process and anticipated.
The registrant's audit committee then engaged Ernst & Young LLP,
effective March 5, 1999. The registrant had not consulted Ernst & Young LLP
prior to such appointment with respect to any matter of accounting principles or
practices, financial statement disclosure, auditing scope or procedure, or any
disagreement with Lane, Gorman, Trubitt, LLP.
23
<PAGE>
<TABLE>
Part III. EXHIBITS
Items 9 through 12. To be set forth in Registrant's definitive proxy statement
for its annual meeting to be held in May 1999.
Item 13. Exhibits and Reports on Form 8-K.Part III. EXHIBITS
(a) Hereafter set forth as exhibits to the Form 10-KSB of Restaurant
Teams International, Inc and incorporated by reference are the following
exhibits:
- ------------------------- ------------------------------------------------------------------------------------------
No. as per
Part III of Form 1A Description of Exhibit
<S> <C>
2.1* Articles of Incorporation
2.21+ Amendment to Articles of Incorporation
2.22+ Articles of Amendment
2.3* By-Laws
3.1 Warrant Agreement filed as an exhibit to the Company=s Form 10-KSB dated February 28,
1997
6.1** Primary Distribution Agreement dated as of February 17, 1995, by and between
Consolidated Companies, Inc. on the one hand and Fresh'n Lite Inc. on the other
6.3CE** Restaurant Lease dated as of September 15, 1997 by and between USRP (Midon), LLC on the
one hand and Fresh'n Lite, Inc. on the other
6.4CE** Ground Lease dated as of February 21, 1995 by and between Peter D. Fonberg Investments
on the one hand and Fresh'n Lite, Inc. on the other
6.5CE** Ground Lease dated as of July 15, 1996 by and between MacArthur Partners, Ltd. on the
one hand and Fresh'n Lite, Inc. on the other
6.6CE** Ground Lease Agreement dated as of April 11, 1997 by and between Robert M. Farrell
Development, Ltd. on the one hand and Fresh'n Lite, Inc. on the other
6.8CE** 1997 Incentive Stock Option Plan
6.9** Franchise Agreement dated as of October 1, 1995 by and between Fresh'n Lite, Inc. on the
one hand and F=NL Investments, LLC on the other
6.10CE** Lease with Option to Purchase dated as of October 15,
1993 by and between Connor Patman and Steve and Ann M.
Raffaelli on the one hand and Fresh'n Lite, Inc. on
the other
6.11CE* Sub-Lease dated as of November 2, 1998 by and between Restaurant Teams International,
Inc. and the one hand and Zeke's Grill, Inc. on the other
27.1* Financial Data Schedule filed as an exhibit to the Form 10-KSB filed April 15, 1999
</TABLE>
* Previously filed as an exhibit to the Company=s Registration Statement on
Form 10-SB (File No. 001-13559) filed with the Securities and Exchange
Commission on November 10, 1997.
** Filed as a paper exhibit to the Company=s Form 10-SB filed October 23, 1997
and filed in electronic format as exhibits to Amendment No. 1 to Form 10-SB
filed June 25, 1998 and incorporated herein by reference.
* Filed herewith
(b) Reports on Form 8-K
24
<PAGE>
SIGNATURES
The undersigned registrant hereby amends and restates its Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998.
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, this 15th day of April, 1999.
Registrant
By: /s/ Stanley L. Swanson
----------------------------------
Stanley L. Swanson
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the Exchange Act, this amendment has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.In accordance with the Exchange Act, this amendment
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
April 15, 1999
By: /s/ Henry Leonard
Henry Leonard, Director
President and Chief Operating Officer
April 15, 1999
By: /s/ Curtis A. Swanson
Curtis A. Swanson, Director
Vice President and Chief Financial Officer
April 15, 1999
By: /s/ Edward Dmytryk
Edward Dmytryk, Director
April 15, 1999
By: /s/ Robert Lilly
Robert Lilly , Director
25
