UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the thirteen weeks ended September 28, 1997
Commission File Number 33-86166
------------------ --------
RED HOT CONCEPTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1887105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6701 Democracy Boulevard
Suite 300
Bethesda, Maryland 20817
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (301) 493-4553
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and 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 October 16, 1997, 10,262,347 shares of common stock par value, $.01 per
share were outstanding.
<PAGE>
RED HOT CONCEPTS, INC. AND SUBSIDIARY
FORM 10-QSB
QUARTERLY REPORT
For the Period Ended September 28, 1997
INDEX
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 28, 1997
[Unaudited] 3-4
Condensed Consolidated Statements of Operation for the thirteen
week periods June 30, 1997 to September 28, 1997 and July 1, 1996
to September 29, 1996 and for the thirty-nine week periods December
30, 1996 to September 28, 1997 and January 1, 1996 to September 29,
1996 [Unaudited] 5
Condensed Consolidated Statement of Stockholders' Equity [Deficit]
for the thirty-nine week period December 30, 1996 to September 28,
1997 6
Condensed Consolidated Statements of Cash Flows for the thirty-nine
week periods December 30, 1996 to September 28, 1997 and January 1,
1996 to September 29, 1996 [Unaudited] 7
Notes to Condensed Consolidated Financial Statements 8-9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
Part II: OTHER INFORMATION 16
SIGNATURES 17
o o o o o o o o o o
<PAGE>
RED HOT CONCEPTS, INC. AND SUBSIDIARIES (RHC)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 28, 1997 [UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 28, 1997 December 29, 1996
[Audited]
Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 175,577 $ 534,145
Restricted Cash 462,107 490,718
Due From Related Parties 0 29,785
Accounts Receivable and Other Receivables 13,650 34,545
Inventories 158,881 201,755
Prepaid Expenses and Accrued Income 177,722 224,630
---------- ----------
Total Current Assets 987,937 1,515,578
---------- ----------
Furniture and Equipment - Net 4,404,458 4,302,773
---------- ----------
Other Assets:
Development and License Agreements - Net 652,675 670,281
Store Development and Unit Pre-opening Costs 779,663 662,000
Deferred Lease Guarantee 472,322 472,322
Loan to Officers 51,547 134,183
---------- ----------
Total Other Assets 1,956,207 1,938,786
---------- ----------
Total Assets $7,348,602 7,757,137
---------- ----------
</TABLE>
3
<PAGE>
RED HOT CONCEPTS, INC. AND SUBSIDIARIES (RHC)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 28, 1997 [UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 28, 1997 December 29, 1996
[Audited]
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 2,554,744 $ 3,553,078
Current Portion of long-term Debt 1,251,906 937,051
Accrued Interest Payable - Related Parties 0 125,065
----------- -----------
Total Current Liabilities 3,806,650 4,615,194
----------- -----------
Long Term Liabilities:
Notes Payable 1,495,807 717,180
Obligations under Capital Leases 411,037 0
Due to Related Parties 407,534 1,195,302
----------- -----------
Total Long Term Liabilities 2,314,378 1,912,482
----------- -----------
Minority Interest (23,997) 3,123
----------- -----------
Stockholders' Equity:
Preferred Stock, $1.00 Par Value,
100,000 Shares Authorized,
0 Issued and Outstanding 0 0
Preferred Stock, $2.00 Par Value,
725,000 Shares Authorized,
725,000 Shares Issued and Outstanding 1,450,000 0
Common Stock, $.01 Par Value,
19,175,000 Shares Authorized,
10,262,347 Shares Issued and Outstanding 102,623 92,623
Additional Paid-in Capital 8,874,040 8,884,040
Retained Earnings (9,228,070) (7,693,155)
Cumulative Foreign Currency Translation Adjustment 52,978 (57,170)
----------- -----------
Total Stockholders' Equity
1,251,571 1,226,338
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,348,602 $ 7,757,137
----------- -----------
</TABLE>
4
<PAGE>
RED HOT CONCEPTS, INC. AND SUBSIDIARIES (RHC)
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Thirteen Weeks For the Thirty-Nine Weeks
June 30, 1997 July 1, 1996 to December 30, January 1, 1996
to September September 29, 1996 to to September
28, 1997 1996 September 28, 29, 1996
1997
<S> <C> <C> <C> <C>
Revenues 2,912,534 2,500,136 8,667,596 6,233,954
Cost of Revenues
Cost of Revenues 898,517 885,244 2,663,676 2,119,110
Restaurant Expenses 1,428,630 1,275,069 3,778,515 3,140,258
----------- ----------- ----------- -----------
Total Cost of Revenues 2,327,147 2,160,313 6,442,191 5,259,368
----------- ----------- ----------- -----------
Gross Profit 585,388 339,823 2,225,406 974,586
----------- ----------- ----------- -----------
Fixed Restaurant Expense 302,383 454,944 1,562,348 1,071,666
General and Administrative Expenses 136,235 884,641 1,508,814 1,925,150
Depreciation and Amortization 154,276 252,238 443,987 489,257
----------- ----------- ----------- -----------
Operating Income (Loss) (7,506) (1,252,000) (1,289,743) (2,511,487)
Minority Interest in Net Loss of Subsidiaries 3,543 0 23,997 0
Other Income (Expense):
Interest Expense (80,381) (24,250) (272,073) (62,589)
Interest Income 0 4,507 2,904 10,560
----------- ----------- ----------- -----------
Net Income (Loss) (84,344) (1,271,743) (1,534,916) (2,563,516)
----------- ----------- ----------- -----------
Net Income (Loss) Per Share $ (0.01) $ (0.15) $ (0.15) $ (0.42)
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding 10,262,347 8,685,424 10,262,347 6,129,994
----------- ----------- ----------- -----------
</TABLE>
5
<PAGE>
RED HOT CONCEPTS INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Cumulative
Common Stock Stock Foreign
Number Additional Number Currency Total
of Paid-in of Accumulated Translation Shareholders'
Shares Amount Capital Shares Amount Deficit Adjustments Equity
<S> <C> <C> <C> <C> <C> <C>
Balance - December 30, 1996 9,262,347 92,623 $8,884,040 $(7,693,155) $(57,170) $1,226,338
Foreign Currency Translation
Adjustment 110,148 110,148
Converted Debt to Preferred
Shares 750,000 750,000
Net Loss for the period
January 1, 1997 to
September 28, 1997 (1,534,916) (1,544,916)
Issuance of Shares 1,000,000 10,000 (10,000) 10,000
Cancelled Shares (750,000) (750,000)
Issuance of New Shares 725,000 1,450,000 1,450,000
----------- -------- ---------- --------- ---------- ----------- ---------- ----------
Balance - September 28, 1997 10,262,347 $102,623 $8,874,040 725,000 $1,450,000 $(9,228,070) $52,978 $1,251,571
----------- -------- ---------- --------- ---------- ----------- ---------- ----------
</TABLE>
Foreign Currency Translation
The functional currency for the Company's United Kingdom subsidiary and
Australian subsidiary is the British pound sterling and Australian dollar,
respectively. The translation from British pound sterling and Australian dollars
in to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains or
losses resulting from such translation are included in stockholders' equity.
Equity transactions denominated in British pound sterling and Australian dollars
have been translated into U.S. dollars using the effective rate of exchange at
date of issuance.
6
<PAGE>
RED HOT CONCEPTS INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Thirty-Nine For the Thirty-Nine
Weeks December 30, Weeks January 1,
1996 to September 1996 to September
28, 1997 29, 1996
<S> <C> <C>
Operating Activities:
Net Cash - Operating Activities (985,139) (1,527,941)
---------- ----------
Investing Activities:
Purchase of Furniture, Fixtures and Leasehold Improvements 69,402 (3,484,470)
Store Development and Unit Preopening Costs (304,094) (714,665)
Development and License Agreement 0 (40,000)
Loan to Officer - Net 82,636 (80,149)
---------- ----------
Net Cash - Investing Activities (152,056) (4,319,284)
---------- ----------
Financing Activities:
Preferred Shares 0 903,693
Proceeds from Loan 889,579 1,008,046
Repayment of Debt (110,952) (72,558)
Proceeds from Sale of Common Stock 0 2,541,748
Deferred Opening Costs 0 --
---------- ----------
Net Cash - Financing Activities 778,627 4,380,929
---------- ----------
Effect of Exchange Rate Changes on Cash 0 9,971
---------- ----------
Net [Decrease]/Increase in Cash and Cash Equivalents (358,568) (1,456,325)
Cash and Cash Equivalents - Beginning of Periods 534,145 1,764,969
---------- ----------
Cash and Cash Equivalents - End of Periods 175,577 308,644
---------- ----------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest Paid
Taxes Paid
Supplemental Disclosures of Non-Cash Financing and Investing Activities:
Total offering costs during the period January 1, 1997 to September
28, 1997 0 158,252
Fixed Assets acquired under Capital Leases 411,037 19,716
Converted Debt to Preferred Shares 1,450,000 0
</TABLE>
7
<PAGE>
RED HOT CONCEPTS INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- --------------------------------------------------------------------------------
[A] Significant Accounting Policies
Significant accounting policies of RED HOT CONCEPTS, INC. and subsidiary
(the "Company") are set forth in the Company's Form 10-KSB for the year
ended December 29, 1996, as filed with the Securities and Exchange
Commission.
[B] Basis of Reporting
The balance sheet as of September 28, 1997, the statements of operations
for the period December 30, 1996 to September 28, 1997, and for the period
January 1, 1996 to September 29, 1996, the statement of stockholders'
equity for the period January 1, 1997 to September 28, 1997, and the
statements of cash flows for the period December 30, 1996 to September 28,
1997 and for the period January 1, 1996 to September 29, 1996 have been
prepared by the Company without audit. The accompanying interim condensed
unaudited financial have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions of Form 10-QSB and Regulation SB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the management of the Company, such statements include all adjustments
[consisting only of normal recurring items] which are considered necessary
for a fair presentation of the financial position of the Company at
September 28, 1997, and the results of its operations and cash flows for
the thirty-nine weeks then ended. It is suggested that these unaudited
financial statements be read in conjunction with the financial statements
and notes contained in the Company's Form 10-KSB for the year ended
December 29, 1996.
Certain reclassifications may have been made to the 1996 financial
statements to conform to classification.
[C] Due To Related Parties
Woodland Limited Partnership is a partnership controlled by members of the
Colin Halpern family. At September 28, 1997, Woodland owns approximately
41% of the Company's outstanding stock and the voting rights of the
preferred shares..
At December 30, 1996, the total amount due to Woodland was $1,940,342,
consisting of short-term advances of $940,342, and a short-term note
payable of $1,000,000.
During 1996 funds were advanced to Red Hot Concepts on a short-term basis
and repayments were made to Woodland. The balance due to Woodland for these
advances at December 29, 1996 was $940,342 plus accrued interest payable of
$63,911. On December 29, 1996, Woodland agreed to convert these advances
into a note payable due June 30, 1998, at 8% interest per annum. As partial
consideration for the loan, the Company issued a common stock purchase
warrant entitling Woodland to purchase 300,000 shares of common stock at
$1.75 per share for a term expiring December 31, 1999. The note was
recorded at a discount, net of fair value of the stock warrant, on the 1996
financial statements at $794,820.
In June 1996, Woodland accepted a note payable of $1,000,000 at 12% per
annum to finance the opening of the Company's third U.K. restaurant. As
partial consideration for the loan, the Company issued a common stock
purchase warrant entitling Woodland to purchase 500,000 shares of the
Company's common stock at $2.50 per share for a period of 24 months
commencing on the date of the loan. The warrants will be redeemable at
$0.01 per share if the closing bid price of the Company's common stock
exceeds $10 for 10 consecutive trading days ending within five days of the
notice of redemption. On December 28, 1996, Woodland agreed to extend the
note until June 1998. In further consideration, the Company issued a common
stock purchase warrant at $1.75 per share for a term expiring December 31,
1999 on the
8
<PAGE>
note. The note value was recorded at a discount, net of the fair value of
these stock warrants, on the 1996 financial statements at $400,482.
In March, the Company agreed with Woodland Limited Partnership to convert
$750,000 of long-term debt to 750,000 shares of $1.00 per share par value
preferred shares. The coupon rate was agreed at 7% with a conversion rate
at $1.25 per share.
On September 25, 1997, Woodland agreed to exchange its $1.00 par value
preferred shares to 375,000 $2.00 par value preferred shares.
On September 25, 1997, Woodland agreed to convert the note payable of
$700,000 into 350,000 $2.00 par value preferred shares. The agreed dividend
is 8% and is cumulative. The preferred shares hold the same voting rights
as the common shares.
[D] Acquisitions
On November 9, 1995 the Company, through a wholly-owned subsidiary, entered
into a Development and Franchise Agreement with Brinker International, Inc.
("Brinker") which grants the Company the exclusive right to own and operate
Chili's Restaurants in Australia and New Zealand (the "Pacific Development
Agreement"). The Pacific Development Agreement has an initial term of 10
years and is renewable at the Company's discretion for an additional 10
year period if a combined minimum of 40 Chili's Restaurants are opened
between the two countries.
Also on November 9, 1995, the Company acquired from Brinker all of the
stock of Chili's Texas Grill Pty Limited, an Australian company ("Chili's
Texas Grill"). Chili's Texas Grill operates two Chili's Restaurants near
Sydney, Australia. The purchase price for the acquisition of Chili's Texas
Grill is payable in three equal installments on November 9, 1995, 1996, and
1997. The purchase agreement also required Chili's Texas Grill to pay a
management fee to Brinker by November 30, 1995.
[E] Stock Transactions
On January 23, 1997, the Company issued 1,000,000 shares of the 1.6 million
unissued shares of stock sold under a.Reg S share offering. As of September
28, 1997, the Company had not issued the remaining 600,000 shares of stock.
The Company is in dispute with the stock subscriber regarding the price to
be paid. For financial reporting purposes, the Company has calculated the
earnings per share with the assumption that the shares had been issued.
In March, the Company agreed with Woodland Limited Partnership to convert
$750,000 of long-term debt to 750,000 shares of $1.00 per share par value
preferred shares. The coupon rate was agreed at 7% with a conversion rate
at $1.25 per share.
On September 25, 1997, Woodland agreed to exchange its $1.00 par value
preferred shares to 375,000 $2.00 par value preferred shares.
On September 25, 1997, Woodland agreed to convert the note payable of
$700,000 into 350,000 $2.00 par value preferred shares. The agreed dividend
is 8% and is cumulative. The preferred shares hold the same voting rights
as the common shares.
Stock Transactions of Subsidiary
In September 1996, Red Hot Pacific issued 53 shares of common stock to
Brinker in connection with a guaranty agreement valued at $1.00.
The above issuance reduced Red Hot ownership of Red Hot Pacific from 100%
to 95%. As a result of this stock transaction and related liability for the
guaranty agreement Red Hot reduced its additional paid-in-capital by $2,497
in consolidation.
9
<PAGE>
[F] Subsequent Event
On November 6, 1997, Melvin Lazar resigned as Director of the Company.
In October 1997, the Company reached an agreement with Brinker
International to sell to Brinker its Australian operations for $2.68
million before the payment of liabilities of the Australian operations
which are estimated to be approximately $700,000. The Company has agreed to
use the remaining proceeds to repay the Brinker short-term loan.
o o o o o o o o o o
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Result of Operations
Overview -
The Company was incorporated on June 14, 1994. The Company was in the
development stage until October 1995 when operations commenced. The Company has
spent significant time focusing its efforts on various activities including
selecting sites, hiring and training management personnel, establishing
administrative and financial policies and procedures and, undertaking other
activities necessary to operate new restaurants in the United Kingdom and
Australia. To date, the Company has five restaurants operating.
The Company was formed to develop Chili's Bar & Grill Restaurants (Chili's
Restaurants), a full service restaurant concept created by Brinker
International, ("Brinker"). The Company has the exclusive right to own and
operate Chili's Bar & Grill Restaurants in the United Kingdom, Australia and New
Zealand pursuant to development and license agreements (the "Chili's Development
Agreements") with Brinker.
The Company opened its first Chili's Restaurant at Canary Wharf on October 9,
1995 and opened additional restaurants on March 20, 1996 and May 1, 1996 in
Cambridge and central London, respectively. The Company closed the restaurant in
Central London in December 1996 because management believed it would have
required a significant investment of management time to achieve the returns
consistent with management expectations.
The Company purchased two restaurants in Australia in November 1995 (see Note
[D]). The Company opened its first restaurant in Melbourne on September 2, 1996.
The Company has one restaurant under development in Australia that fulfills its
obligation under the Development Agreement with Brinker.
On October 24, 1997, the Company was notified by NASDAQ that the Company will be
granted a temporary exception from its standards for trading on the NASDAQ Small
Cap Market. The Company must comply with certain conditions by November 30, 1997
to maintain its' listing status.
Results of Operations -
The following table sets forth expenses as a percentage of total revenue for the
thirty-nine weeks ended September 28, 1997 and for the same period ended
September 29, 1996.
<TABLE>
<CAPTION>
January 1,1996
For the Thirty-Nine Weeks Ended September 28, 1997 to September 29,
1996
Consolidated Consolidated
UK Australia USA Total Total
<S> <C> <C> <C> <C>
Revenues 100% 100% -- 100% 100%
Costs and Expenses:
Food & Beverage 30.8% 30.7% -- 30.7% 34.0%
Restaurant Labor 27.0% 32.3% -- 30.0% 33.3%
Restaurant Expense 14.8% 12.7% -- 13.6% 14.6%
Royalties/Advertising 6.0% 6.0% -- 6.0% 6.0%
Fixed Restaurants Expense 13.6% 10.8% -- 12.0% 13.7%
------- ------- ------ ------- -------
Total Costs and Expenses 92.2% 92.5% -- 92.3% 101.6%
Gross Margin (Loss) 7.8% 7.5% -- 7.7% (1.6%)
General & Administrative (0.1%) 11.5% 10.9% 17.3% 30.9%
Depreciation/Amortization 5.0% 5.2% -- 5.1% 7.8%
Operating Loss 2.9% (9.2%) (10.9) (14.7%) (40.3%)
Other Income (Expense) (2.9%) (0.7%) (1.6%) (3.1%) (0.8%)
------- ------- ------ ------- -------
Net Income/(Loss) (0.0%) (9.9%) (12.5%) (17.8%) (41.1%)
</TABLE>
11
<PAGE>
Comparison of the thirty-nine week periods December 30, 1996 to September 28,
1997 and January 1, 1996 to September 29, 1996
<TABLE>
<CAPTION>
1997 1996
(US Dollars) United Kingdom Australia Consolidated United Kingdom Australia Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue 3,804,059 4,863,538 8,667,597 2,713,107 3,520,847 6,233,954
Net
Income/(Loss) 3,474 (479,942) (476.468) (1,809,285) 55,717 (1,753,568)
</TABLE>
For the thirty-nine week period ended September 28, 1997, the Company had 195
restaurant operating weeks. In the comparable period for 1996, the total
restaurant operating weeks were 170. Average weekly sales for the thirty-nine
week period in 1997 were $44,449 as compared to $36,456 for the same period in
1996 or an improvement of 22%.
UK
Revenues
Revenues for the thirty-nine week period ended September 28, 1997 totaled $3.8
as compared to $2.7 million for the same period in 1996. The significant
increase in revenue was principally related to the improvement in same store
sales at the two operating restaurants. Same store sales for the Canary Wharf
restaurant are up approximately 63% year on year and same store sales at
Cambridge are up approximately 26%. In September 1996, the Company implemented a
market plan to increase revenues at its restaurants by changing the brand
identity to Chili's "Texas" Grill & Bar. The Company believes that the name
change, in complement with a new menu rollout, improved service and better brand
awareness increased the average weekly sales.
Cost and Expenses
Restaurant cost of food, labor, variable and fixed expenses totaled $3.5 million
for the period ended September 28, 1997. This is an increase of $.3 million from
the same period ended September 29, 1996. For the thirty-nine week period, food
costs as a percentage of revenue fell from 39% in 1996 to 30.8% for the same
period in 1997 as the Company improved purchasing power through economies of
scale and sourcing more products locally. Labor costs as a percentage of revenue
fell from 34% to 27.0% in the period ended September 28, 1997 as the Company
reduced restaurant staff after store grand openings, and implemented programs to
improve staff training and work productivity. During the thirty-nine week period
ended September 28, 1997, food costs and labor costs as a percentage of revenues
decreased to 58 % from 73% for the same period in 1996. Restaurant expense,
royalties, advertising, and fixed costs as a percentage of revenue decreased in
1997 to 34.4% from 45% in 1996 reflecting a lower cost structure for the
restaurants.
General and Administrative Expense
The total cost of general and administrative expenses for the thirty-nine weeks
ended September 28, 1997 were approximately $0 or 0% of revenues. General and
administrative costs for the same period in 1996 were $865,000 or 32% of
revenues. At December 29, 1996, the Company had made accrual provisions for
remaining staff redundancy costs, expenses associated with the closure of the
Shaftesbury restaurant, and other general expense. In the third quarter,
accruals representing approximately $300,000 were released because management
does not believe any further expenses will be incurred for these expenses. In
1996, significant costs were incurred to develop the brand, hire and train
personnel, and build the administrative infrastructure.
AUSTRALIA
Revenues
Total revenues for the thirty-nine weeks ended September 28, 1997 were $4.9
million as compared to $3.5 million for the same period in 1996. The increase in
revenues was attributed to more restaurant operating weeks (117 in 1997 versus
82 in 1996). The same store sales for the two restaurants open more than one
year were up approximately 5% from the previous year.
12
<PAGE>
Cost and Expenses
For the thirty-nine weeks ended September 28, 1997, the total cost of food,
labor, variable and fixed restaurant expense were $4.5 million as compared to
$3.1 million for the same period in 1996. The cost of food sales as a percentage
of revenue remains the same as last year at 30%. Labor costs as a percentage of
revenue increased from approximately 31% to 32% in 1997. Other restaurant
variable and fixed costs were 29.5% of revenue as compared to 27% for the same
period in 1996. Other variable and fixed costs were higher in 1997 as a result
of opening a third restaurant at the end of 1996, which increased the fixed
costs.
General and Administrative Expenses
The total cost of general and administrative expenses for the thirty-nine week
period ending September 28, 1997 was approximately $560,000 or 11.5% of revenue.
This compares to administrative expenses of approximately $304,000 in the same
period for 1996 or 8.6% of revenues. The increase in general and administrative
expenses were attributed to an increase in headcount to support new store growth
and higher office cost associated with maintaining headquarters in Sydney.
US
The Company's administrative costs were approximately $950,000 for the
thirty-nine week period ending September 28, 1997 as compared to $1,925,000 for
the same period in 1996. The costs are abnormally high as a percentage of
revenues as significant time was focused on improving the operations in the UK
and Australia.
Comparison of the thirteen week periods June 30, 1997 to September 28, 1997 and
July 1, 1996 to September 29, 1996
<TABLE>
<CAPTION>
1997 1996
(US Dollars) United Kingdom Australia Consolidated United Kingdom Australia Consolidated
<S> <C> <C> <C> <C> <C> <C>
Revenue 1,278,954 1,633,581 2,912,535 1,186,188 1,313,188 2,500,136
Net Income/(Loss) 261,979 (70,564) 191,115 (813,150) (26,617) (839,767)
</TABLE>
For the thirteen week period ended September 28, 1997, the Company had 65
restaurant operating weeks. In the comparable period for 1996, the total
restaurant operating weeks were 69. Average weekly sales for the thirteen week
period in 1997 were $44,808 as compared to $35,716 for the same period in 1996
or an improvement of 25%.
UK
Revenues
Revenues for the thirteen week period ended September 28, 1997 totaled $1.3
million as compared to $1.2 million for the same period in 1996. The significant
increase in revenue was principally related to the improvement in same store
sales at the two operating restaurants. In September 1996, the Company
implemented a market plan to increase revenues at its restaurants by changing
the brand identity to Chili's "Texas" Grill & Bar. The Company believes that the
name change, in complement with a new menu rollout, improved service and better
brand awareness increased the average weekly sales.
Cost and Expenses
Restaurant cost of food, labor, variable and fixed expenses totaled $1.1 million
for the period ended September 28, 1997. This is an decrease of $.6 million for
the period ended September 29, 1996. For the thirteen week period, food costs as
a percentage of revenue fell from 41% in 1996 to 30% for the same period in 1997
as the Company improved purchasing power through economies of scale and sourcing
more products locally. Labor costs as a percentage of revenue fell from 33% to
25% in the period ended September 28, 1997 as the Company reduced restaurant
staff after store grand openings, and implemented programs to improve staff
training and work productivity. During the thirteen week period ended September
28, 1997, food costs and labor costs as a percentage of revenues decreased to
55% from 74% for the same period in 1996. Restaurant expense, royalties,
advertising, and fixed costs as a percentage of revenue decreased in 1997 to 33%
from 47% in 1996 reflecting a lower cost structure for the restaurants.
13
<PAGE>
General and Administrative Expense
The total cost of general and administrative expenses for the thirteen weeks
ended September 28, 1997 were a credit of approximately $213,000 or (17%)% of
revenues. General and administrative costs for the same period in 1996 were
$330,000 or 28% of revenues. At December 29, 1996, the Company had made accrual
provisions for remaining staff redundancy costs, expenses associated with the
closure of the Shaftesbury restaurant, and other general expense. In the third
quarter, accruals representing approximately $300,000 were released because
management does not believe any further expenses will be incurred for these
expenses. The administrative costs to run the two restaurants were reduced
significantly in an effort to achieve overall profitability in the United
Kingdom by reducing administrative headcount from thirteen to two. In 1996,
significant costs were incurred to develop the brand, hire and train personnel,
and build the administrative infrastructure.
AUSTRALIA
Revenues
Total revenues for the thirteen week period ended September 28, 1997 were $1.6
million as compared to $1.3 million for the same period in 1996. The increase in
revenues was attributed to more restaurant operating weeks (39 in 1997 versus 30
in 1996).
Cost and Expenses
For the thirteen week period ended September 28, 1997, the total cost of food,
labor, variable and fixed restaurant expenses were $1.5 million as compared to
$1.2 million for the same period in 1996. The cost of food sales as a percentage
of revenue remains the same as last year at 31%. Labor costs as a percentage of
revenue also remained approximately the same at 33%. Other restaurant variable
and fixed costs were 29% of revenue as compared to 26% for the same period in
1996. Other variable and fixed costs were higher in 1997 as a result of opening
a third restaurant at the end of 1996, which increased the fixed costs.
General and Administrative Expenses
The total cost of general and administrative expenses for the thirteen week
period ending September 28, 1997 was approximately $101,000 or 6% of revenue.
This compares to administrative expenses of approximately $144,000 in the same
period for 1996 or 11% of revenues. The increase in general and administrative
expense were attributed to an increase in headcount to support new store growth
and higher office cost associated with maintaining headquarters in Sydney.
US
The Company's administrative costs were approximately $236,000 for the thirteen
week period ended September 28, 1997 compared to $884,000 for the same period in
1996. The costs are abnormally high as a percentage of revenues for the period
ended September 28, 1997 as significant time was focused on improving the
operations in the UK and Australia.
Liquidity and Capital Resources
On January 27, 1997, the Company and Brinker entered into a letter agreement
extending the payment of the initial license fee from November 1, 1996 until
April 30, 1998, and the Company waived its right to terminate the Development
and License Agreement effective October 31, 1996. Brinker also agreed to the
closure of one of three of the restaurants and set terms on opening a
replacement restaurant. This letter agreement also amended the development
schedule, whereas the timing of when the Company will open and operate each
restaurant was modified.
The Company's working capital as of September 28, 1997 was approximately ($2.8)
million as compared to working capital of ($3.1) million on December 29, 1996
and ($2.8) million at September 29, 1996. Total current assets were $1.0 million
on September 28, 1997 as compared to $1.8 million on September 29, 1996. Current
liabilities decreased to $3.8 million from $4.6 million at September 29, 1996.
14
<PAGE>
The following chart represents the net funds raised and/or used in operating,
financing and investment activities for both periods.
<TABLE>
<CAPTION>
December 30, 1996 January 1, 1996
To To
September 28, September 29,
1997 1996
In Thousands In Thousands
<S> <C> <C>
Net cash (used) in operating activities $(985,139) $(1,527,941)
Cash (used) in investing (152,056) (4,319,284)
Cash provided by financing 778,627 4,380,929
</TABLE>
During the thirty-nine week period ended September 28, 1997, the Company used
approximately $1.0 million for operating activities. The Company had a net loss
of approximately $1.5, which was reduced by non-cash adjustments of $154,000.
Accounts receivable decreased by approximately $723,000 and inventories
decreased by $159,000. The accounts payables, accrued liabilities, and other
payables decreased from the previous year as part of the debt was converted to
equity.
Cash used in investing activities of approximately $152,000 is primarily
attributed to leasehold improvements, furniture and fixtures for the new
restaurant in Australia.
Cash generated by financing activities for the year was approximately $778,000,
which include the proceeds from a loan from related parties and repayments on
loans of $111,000.
To finance the construction and opening of the second and third restaurants in
the U.K., the Company obtained debt financing and financing from related party.
The Company has signed a Fixed Rate Loan Agreement for 650,000 British Pounds
(approximately $1 million) with the National Westminster Bank PLC. The terms of
the loan are for seven years at an interest rate of the U.K. base rate plus
three percent. The Company currently is not in compliance with certain loan
covenant provisions. The Company has implemented sales building and cost
reduction programs that should enable it to satisfy the operating profitability
guidelines and other covenants. Based on management discussions with the bank,
management believes the bank is satisfied that the loan is fully secured. To
date, the bank has not expressed intentions to demand repayment of the loan.
The Company secured a short-term loan of $1.25 million from Brinker in February
1997. The interest rate is 8% and the monies are to be repaid either in August
1997 or January 1998 depending on certain conditions. These monies have been
used for short-term working capital purposes. The Company met the conditions by
the end of August and the repayments on the note have been extended to January
1998.
The Company has entered into a letter of intent with a British publicly traded
restaurant company, the Celebrated Group. Pursuant to the terms of the letter of
intent, the Company would exchange the shares in its UK subsidiary for shares in
the Celebrated Group, PLC. Upon completion, the Company would hold approximately
46% of the outstanding shares of Celebrated Group and an option to acquire
another six (6) million shares that would give the Company 50.5% of the
outstanding shares. Celebrated Group PLC would guarantee the obligations under
the Development and License Agreement.
In Australia, the landlord has committed to finance one restaurant that will
start construction before the end of December 1997. The Company is responsible
for financing the interior decor, furniture, equipment and pre-opening costs.
The Company will use cash flow from local operations and bank financing to pay
for its responsibilities. The Company does not have a bank commitment at this
time for future equipment leases. The Company used one guaranty provided by
Brinker to secure the Ringwood lease.
In October 1997, the Company reached an agreement with Brinker International to
sell to Brinker its Australian operations for $2.68 million before the payment
of liabilities of the Australian operations which are estimated to be
approximately $700,000. The Company has agreed to use the remaining proceeds to
repay the Brinker short-term loan.
The Company has improved short term liquidity through a number of different
steps including the reduction of administrative expenses and headcount; sales
building in the restaurants; the rescheduling of payment terms on the advances
from Woodland Limited Partnership; and securing a working capital loan from
Brinker. The Company is also analyzing the cost to construct restaurants and
incur pre-opening expenses to identify ways to eliminate cost. The Company
believes that anticipated revenues and additional capital or borrowing will be
necessary to achieve the Company's development schedule and satisfy future
15
<PAGE>
construction obligations and amounts due to Brinker. The Company does not
currently have any other commitments to secure financing and there is no
assurance that the Company will be able to secure financing in the future and
that even if the Company is able to obtain financing, such financing will be
available on terms acceptable to the Company. If the Company's plans change, or
if the assumptions or estimates prove to be inaccurate, of it the Company is
unable to raise more funds, the Company will reduce its operations to a level
consistent with its available funding.
Impact of Inflation
Inflation is not expected to have a material effect on the company's operations.
16
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any litigation or governmental
proceedings that management believes would result in judgements or
fines that would have a material adverse effect on the Company.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Other Information
Not Applicable.
Item 5. Exhibits
(a) Exhibits
None.
(b) Reports on Form 8-K
During the thirteen week period ended September 28, 1997 Form
8-K's were filed by the Company on:
(i) August 28, 1997
17
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED HOT CONCEPTS, INC.
Date: September 28, 1997 By: /s/ H. Michael Bush
H. Michael Bush, Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000932623
<NAME> RET HOT CONCEPTS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
<CASH> 175,577
<SECURITIES> 0
<RECEIVABLES> 13,650
<ALLOWANCES> 0
<INVENTORY> 158,881
<CURRENT-ASSETS> 987,937
<PP&E> 4,404,458
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,348,602
<CURRENT-LIABILITIES> 3,806,650
<BONDS> 0
0
1,450,000
<COMMON> 102,623
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,348,602
<SALES> 2,912,534
<TOTAL-REVENUES> 2,912,534
<CGS> 2,327,147
<TOTAL-COSTS> 2,327,147
<OTHER-EXPENSES> 136,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80,381)
<INCOME-PRETAX> (84,344)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,344)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
