-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7VNC53T6O/nWera5oDK6ogAKCwaaaPP4nNOlSHw7btCyKIceZ8H8oDdA9CFqLV+ 2EZNALx23AGB7wLm1bc5/w== 0000912057-00-014019.txt : 20000329 0000912057-00-014019.hdr.sgml : 20000329 ACCESSION NUMBER: 0000912057-00-014019 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991229 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NE RESTAURANT CO INC CENTRAL INDEX KEY: 0001061588 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-62775 FILM NUMBER: 581068 BUSINESS ADDRESS: STREET 1: 80A TURNPIKE ROAD CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5088709200 MAIL ADDRESS: STREET 1: 80 A TURNPIKE RD CITY: WESTBOROUGH STATE: MA ZIP: 01581 10-K405 1 FORM 10-K405 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 333-62775 NE RESTAURANT COMPANY INC. (Exact name of registrant as specified in its charter) Delaware 06-1311266 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 Clock Tower Place, Suite 200, Maynard, MA 01754 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 897-1400 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None ____________________________ _________________________________________ ____________________________ _________________________________________ Securities registered pursuant to Section 12(g) of the Act: None -------------- Title of class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. |X| Documents Incorporated By Reference None CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. All statements other than statements of historical facts included in this Annual Report on Form 10-K, including, without limitation, statements set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate" or "believe" or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements will prove to have been correct, it can give no assurance that such expectations will prove to have been correct. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Factors that could cause or contribute to such differences include those discussed in the risk factors set forth in Item 7 below (the "Risk Factors") as well as those discussed elsewhere herein. PART I ITEM 1. BUSINESS Overview The Company is an operator of full-service, casual dining restaurants in the northeastern United States. The Company's wholly owned subsidiary, Bertucci's Restaurant Corp. ("Bertucci's") owns and operates a restaurant concept under the name Bertucci's Brick Oven Pizzeria(R). The Company also develops and operates two distinct restaurant franchises, Chili's Grill & Bar(R) ("Chili's") and On The Border Mexican Cafe(R) ("On The Border"), under franchise agreements with Brinker International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"). In July 1998, the Company completed its acquisition of Bertucci's' parent entity, Bertucci's, Inc., a publicly-owned restaurant company for a purchase price, net of cash received, of approximately $89.4 million (the "Acquisition"). As of December 29, 1999, Bertucci's owned and operated 79 full-service, casual dining, Italian-style restaurants under the name Bertucci's Brick Oven Pizzeria(R) located primarily in New England and Mid-Atlantic United States and one Sal and Vinnie's Sicilian Steakhouse(TM) ("Sal and Vinnie's") located in Massachusetts. Bertucci's opened 17 Bertucci's restaurants in 1994, nine in 1995, four in 1996, four in 1997 and six in 1998, and one Sal and Vinnie's restaurant in 1997. During 1999, the Company closed the Bertucci's test kitchen restaurant in Wakefield, Massachusetts and also closed ten underperforming Bertucci's restaurants. Subsequent to December 29, 1999 and prior to January 31, 2000, the Company closed seven additional Bertucci's restaurants, thereby completing the planned closings identified shortly after the Acquisition. The Company is the world's largest Chili's franchisee and as of December 29, 1999, the Company operated 38 Chili's and five On The Border restaurants in five New England states. The Company was founded in 1991 as a Massachusetts corporation, serving first as a general partner to a Massachusetts limited partnership and then as the successor entity to such partnership and two other limited partnerships, and was re-incorporated in Delaware on October 20, 1994. The Company was formed to acquire 15 Chili's restaurants from a prior franchisee. From 1991 until December 29, 1999, the Company has grown through the addition of 23 new Chili's and 5 On The Border restaurants in the New England Market. The Company opened three Chili's restaurants in 1994, seven in 1995, four in 1996, two in 1997, two in 1998, and five in 1999, and opened one On The Border restaurant in 1996, three in 1998, and one in 1999. The Company has increased the average sales per restaurant of its Chili's restaurants from approximately $1.8 million in fiscal 1991, the final year of ownership by the prior franchisee, to $2.8 million in fiscal 1999. As a result of the Acquisition, the Company offers its targeted customer base three distinct yet complementary casual dining menus: Italian at Bertucci's, "American/southwestern" at Chili's and "Tex-Mex" at On The Border. Concepts The Company's restaurants are full-service restaurants, featuring a variety of high quality foods at moderate prices accompanied by quick, efficient and friendly table service. The Company's restaurants are all casual dining concepts which are intended to fill a market niche between the fine-dining and fast-food segments of the restaurant industry. These restaurants are designed to appeal to a broad customer base of adults and families with children. Bertucci's. Bertucci's restaurants feature Italian-style entrees made from original recipes, including gourmet pizza and specialty pasta dishes. Bertucci's endeavors to differentiate itself from other restaurants by offering a variety of freshly prepared foods using high-quality ingredients and brick-oven baking techniques. Bertucci's also seeks to distinguish itself with its contemporary European-style, open-kitchen design. The first Bertucci's was opened in Somerville, Massachusetts in 1981. As a proprietary concept, Bertucci's provides the Company with significant flexibility. Chili's. Chili's restaurants feature a variety of "All-American" foods with a southwestern emphasis. The Chili's concept was initiated in 1975 with the opening of the first Chili's restaurant in Dallas, Texas. As of December 29, 1999, the Chili's restaurant system consisted of 656 restaurants in 47 states, of which 454 were Franchisor-owned and 202 were franchised. The Company holds the exclusive rights to operate up to an aggregate of 55 Chili's restaurants (including the 38 it operated as of December 29, 1999) in all six New England states and in Westchester County, New York. On The Border. On The Border restaurants feature a Tex-Mex menu served in a distinctive dining atmosphere reminiscent of a Mexican cantina. The On The Border concept was initiated in 1982 with the opening of the first On The Border restaurant in Dallas, Texas. As of December 29, 1999, the On The Border restaurant system in the United States consisted of 103 restaurants in 29 states, of which 77 were Franchisor-owned and 26 were franchised. The Company holds the exclusive rights to operate up to an aggregate of 21 On The Border restaurants (including the five it operated as of December 29, 1999) in all six New England states and in Westchester County and upstate New York. Restaurant Overview and Menu The Company's restaurants are full-service, casual dining restaurants, featuring high quality food at moderate prices accompanied by quick, efficient and friendly table service designed to minimize guest waiting time and facilitate table turnover. All of the Company's restaurants open at December 29, 1999 (excluding Sal & Vinnie's) are open for lunch and dinner seven days a week. To encourage patronage by families with children, the Company's restaurants feature lower-priced children's menus in addition to the standard menus. Bertucci's. Bertucci's restaurants offer a distinctive menu and a contemporary European-style design that offers a unique dining experience at a reasonable price. Bertucci's signature product, gourmet pizza, is offered with a wide variety of cheese, vegetable and meat toppings and is prepared in brick ovens. Management believes that Bertucci's original recipes and brick-oven baking techniques combine to produce a superior pizza that is difficult to duplicate. In addition to pizzas, Bertucci's menu features a variety of pasta items, appetizers, soups, salads, calzones and desserts that are prepared fresh daily according to Bertucci's original recipes. Natural, fresh ingredients are a cornerstone of the Bertucci's concept. In an effort to ensure the uniform high-quality and freshness of its menu offerings, Bertucci's prepares all of its own dough and sauces. Wine and beer are available at all Bertucci's locations and full bar service is available at some Bertucci's restaurants. Price points generally range from $5.79 to $6.99 for lunch entrees and from $6.59 to $11.99 for dinner entrees. Most items on the menu may be purchased for take-out service or delivery, which together, during Bertucci's fiscal 1999, accounted for approximately 26% of net sales. Chili's Grill and Bar. Chili's restaurants feature a casual dining atmosphere and a menu of "All-American" food items with a southwestern emphasis, including a variety of hamburger, fajita, chicken, steak, seafood and vegetarian entrees, as well as a number of sandwich, barbecue, salad, appetizer and dessert selections, prepared fresh daily according to recipes specified by Chili's. The Company has its own executive chef who has worked with senior management to develop certain innovative and regional menu items to supplement the basic Chili's menu, including a "boneless buffalo wings" appetizer, a "fish & chips" entree and a New England clam chowder, each of which have proven popular with the Company's guests. Each Chili's restaurant also has a fully licensed bar serving beer, wine and cocktails. Price points for entrees generally range from $5.49 to $13.99. Page 3 of 59 On The Border. On The Border restaurants also feature a casual yet distinctive dining atmosphere, focusing on the cuisine of the border region between Texas and Mexico. The On The Border menu offers an assortment of authentic fajita, chicken, steak, shrimp, barbecued ribs, enchilada, burrito and other Tex-Mex specialties, prepared fresh daily according to recipes specified by On The Border. There is a luncheon menu as well as a full dinner menu. Each On The Border restaurant also has a full-service bar which specializes in Tex-Mex alcoholic beverages, including a variety of popular margaritas. Price points generally range from $5.99 to $7.49 for lunch entrees and from $7.49 to $14.99 for dinner entrees. In addition to the Bertucci's concept, as a result of the Acquisition, the Company also acquired one Sal and Vinnie's. The Sal and Vinnie's concept features steak, chicken and fish entrees seasoned with Italian spices, as well as a variety of Italian pasta dishes. Restaurant Design Bertucci's. Bertucci's restaurants are free-standing or in-line buildings averaging approximately 6,200 square feet in size with a seating capacity of approximately 170 people. Each of Bertucci's restaurants features a contemporary European-style, open-kitchen design centered around brick ovens. Ingredients are displayed and food is prepared on polished granite counters located in front of the brick ovens, in plain view of diners. Bertucci's restaurants historically have been built in varying sizes and designs, with no two interior decors exactly alike. Management believes that unit economics would benefit from a standardized design which the Company expects to implement for restaurants to be opened in the future. Bertucci's has recently begun to build smaller restaurants. Management believes that further decreasing building size to a range of 4,800 to 5,400 square feet with seating for approximately 150 guests would increase efficiency of Bertucci's dine-in business and its take-out and delivery business. The Company expects to introduce service bars in new restaurants instead of full bar areas to further increase utilization of space. Finally, the Company expects to introduce a more cost-efficient, standardized interior decor. Chili's. The Company's Chili's restaurants are prototypically free-standing buildings that average approximately 5,800 square feet in size and have a seating capacity of approximately 190 people. The Chili's decor includes booth and table seating with table-tops inlaid with decorative ceramic tiles, beamed ceilings, tiled or brick floors, and wood paneled and brick walls. The walls are decorated with a variety of nostalgic American artifacts, with a significant number of items evoking images of the American southwest. Live cactus and other greenery are placed in clay pots or hanging baskets throughout the restaurant. Of the 23 new Chili's restaurants that the Company has opened since 1991, 18 have been built pursuant to a prototype designed and developed by the Company. Management believes that its prototype, which, among other things, sets apart the bar area to one side of the restaurant, provides an efficient use of space. In addition, the overall design provides management a broader view of the entire restaurant, allowing greater supervision of customer service. Since the Company's implementation of its prototype, the Franchisor has begun to introduce a similar prototype. On The Border. The Company's On The Border restaurants are free-standing buildings averaging approximately 7,800 square feet in size with a seating capacity of approximately 305 people. The On The Border decor includes booth and table seating, stucco walls, some with frescoes depicting images of the Mexican "vaquero" cowboy, wrought iron and glass light fixtures and an array of Mexican handicrafts, many of which emphasize the "vaquero" theme. Each restaurant has a large stone fireplace with a gas-fired flame, an authentic handmade tortilla machine producing fresh product within the guests' view and a four-season patio which incorporates outdoor dining as the weather permits. Franchise and Development Agreements The Company operates its Chili's and On The Border restaurants under individual franchise agreements that are part of broader exclusive development agreements (the "Area Development Agreements") with the Franchisor. These agreements grant the Company the exclusive right to develop up to 55 Chili's and 21 On The Border restaurants (inclusive of the 38 Chili's and five On The Border restaurants that the Company operated as of December 29, 1999) in New England, Westchester County and additionally, in the case of On The Border, upstate New York markets. The Area Development Agreements require the Company to develop a minimum of three Chili's and three to five On The Border restaurants each Page 4 of 59 year in accordance with a specified schedule during the term of the agreement in order to maintain its exclusive development rights. If the Company opens fewer restaurants than required by the development schedule in any development territory, the Franchisor has the right to terminate the Company's development rights in the territory where the deficiency occurs. In addition, a breach under an Area Development Agreement could constitute a default under the Company's borrowing arrangements, permitting the applicable lender to declare all amounts borrowed thereunder immediately due and payable. The Area Development Agreements expire in 2000 in the case of Chili's and 2004 in the case of On The Border, but are each renewable at the Company's option at the scheduled expiration date. Under the Area Development Agreements, the Company is responsible for all costs and expenses incurred in locating, acquiring, and developing restaurant sites, although the Franchisor must approve each proposed restaurant site and the related real estate purchase contract or lease agreement. The franchise agreements convey the right to use the Franchisor's trade names, trademarks, and service marks with respect to specific restaurant units. The Franchisor also provides general construction specifications, designs, color schemes, signs and equipment, recipes for food and beverage products, marketing concepts, and materials. Generally, each new franchise agreement requires an initial $40,000 franchise fee that is, typically, in addition to a $10,000 nonrefundable development fee per proposed restaurant, paid under the Area Development Agreements. The franchise agreements also require payment to Brinker of a royalty fee of 4.0% of annual net sales. In addition, pursuant to its franchise agreements, the Company contributes 0.5% of monthly net sales from each of its Chili's or On The Border restaurant to Brinker for advertising and marketing to benefit all restaurants in the Chili's or On The Border system, respectively. The Company is also required to spend at least 2.0% of annual net sales on local advertising. Furthermore, according to the franchise agreements, the Franchisor may require the Company to pay an additional amount of advertising. The Franchisor requested that the Company pay an additional 0.375% of net sales for supplemental advertising for the period from September 1999 through August 2000. Restaurant Development Expansion. The Company expects to continue its steady growth strategy through the opening of new restaurants over the next several years. The Company expects to finance the development of its Chili's and On The Border restaurants through borrowings under the its senior bank facility (the "Senior Bank Facility") and loans from FFCA Acquisition Corporation (the "FFCA Loans") and similar lenders. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Notes 5, 6 and 7 to the Consolidated Financial Statements. Management has designed a new Bertucci's restaurant prototypical kitchen and take-out area in preparation for restaurant expansion of the Bertucci's concept beginning in fiscal year 2000. As a market area becomes more fully developed, each restaurant normally benefits from increased customer recognition, greater advertising capabilities, and economies of scale with respect to food costs, advertising and promotion, and certain other expenses. Markets which have reached this minimum level of penetration are characterized as "efficient" and typically are more profitable than emerging markets. The Company attempts to balance its new restaurant development by expanding into new territory and by increasing the level of market penetration in territories that are not yet "efficient." Site Selection and Construction. Management's site selection strategy for new restaurants focuses on high-density, high-traffic, high-visibility, free-standing sites which are, for the most part, positioned within existing markets to take advantage of certain operational efficiencies. Management seeks out sites with a mixture of retail, office, residential and entertainment concentration which promote both lunch and dinner business. Management devotes significant time and resources to identify and analyze potential sites, as it believes that site selection is crucial to its success. Management also believes that multiple locations focused in defined geographic areas will result in increased market penetration, brand recognition and permit advertising, management, purchasing and administrative efficiencies. The typical time period required to select a site and build and open a Company restaurant is approximately 18 months. Page 5 of 59 Quality Control Bertucci's. Each Bertucci's restaurant typically has a general manager and two to three assistant managers who are responsible for assuring compliance with Bertucci's operating procedures and for the training and supervision of restaurant employees. The general managers report to regional managers who oversee six to 10 Bertucci's restaurants. The Company believes that through improved centralized training, a consistent and independent shopper's program, and other support for regional managers, the quality control operations of Bertucci's can be further enhanced. Chili's and On The Border. The Company's general and assistant managers are responsible for assuring compliance with the Company's operating procedures. Both the Company and the Franchisor have uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises, and employee conduct. Compliance with these standards and specifications is monitored by periodic on-site visits and inspections by area supervisors and directors of operations and by representatives of the Franchisor. Each restaurant typically has a general manager and three to four assistant managers who together train and supervise employees and are, in turn, supported by Quality Assurance Managers and Regional Directors of Operations. The Company's operational structure encourages all employees to assume a proprietary role in ensuring that such standards and specifications are consistently adhered to. Management Incentive Programs Management has developed a profit-based reward system for its restaurant level managers such that their bonus levels are directly tied to an individual restaurant's profitability. The Company believes this incentive program has contributed significantly to the entrepreneurial spirit of its restaurants and, ultimately, to overall guest satisfaction and Company profitability. Training The Company places significant emphasis on the proper training of its employees. To maintain its high service and quality standards, the Company has developed its own training programs that are coordinated through the Company's training department. Each level of Company training is designed to increase product quality, operational safety, overall productivity and guest satisfaction and to foster the concept of "continuous improvement." The Company requires new non-management employees to undergo extensive training administered by restaurant-level managers to improve the confidence, productivity, proficiency level and customer relations skills of such employees. The Company also requires all of its general and restaurant managers to complete a comprehensive management training program developed by the Company. This program instructs management trainees in detailed, concept-specific food preparation standards and procedures as well as administrative and human resource functions. This training is largely conducted at specified restaurants which are designated as "training restaurants" and also incorporates training manuals and other written guides. At the end of the process, trainee skills are tested by a variety of means including a full-day written examination. Initial instruction is typically followed up by periodic supplemental training. When the Company opens a new restaurant, management positions are typically staffed with personnel who have had previous experience in a management position at another restaurant. In addition, a highly experienced opening team assists in opening the restaurant. Prior to opening, all staff personnel undergo a week of intensive training conducted by the restaurant opening team. The training includes drills in which test meals and beverages are served. Page 6 of 59 Advertising and Marketing The Company's overall marketing objective is to grow the brand equity of each of its restaurant concepts by building revenues and increasing profitability across all three major brands. Management utilizes strategies that create customer trial of new products/events so as to increase the share of visits and average guest check for each of the brands, yet maintain the unique dining experience and brand personality associated with each individual concept. the Company recognizes the need to build brand awareness in order to increase market share. Its advertising plan is designed to increase brand awareness, trial and share of visits from its target market by providing media coverage in markets where each brand has sufficient penetration to support media at competitive levels. In those markets where the Company has its highest penetration, television and radio advertising is provided. In its secondary markets, the Company utilizes more cost-effective localized marketing vehicles including newspaper inserts, radio and direct mail. Pursuant to its franchise agreements with the Franchisor, the Company contributes 0.5% of net sales from each Chili's and On The Border restaurant to the Franchisor for advertising and marketing to benefit all of the Franchisor's restaurants. The Franchisor uses these funds to develop advertising and sales promotion materials and concepts. The Company is also required to spend a minimum of 2.0% of net sales from each restaurant on local advertising. The Company's advertising expenditures generally have exceeded the levels required under its agreements. In addition, according to the franchise agreements, the Franchisor may require the Company to pay an additional amount of advertising. The Franchisor requested that the Company pay an additional 0.375% of net sales for supplemental advertising for the period from September 1999 through August 2000. Purchasing The Company negotiates directly with suppliers of food and beverage products and other restaurant supplies to ensure consistent quality and freshness of products and to obtain competitive prices. Although the Company believes that essential restaurant supplies and products are available on short notice from several sources, the Company uses one full-service distributor for the substantial portion of restaurant supplies and product requirements, with such distributor charging the Company fixed mark-ups over prevailing wholesale prices. The Company has a five-year contract with its full-service distributor which is terminable by either party upon 60 days' prior notice. The Company also has arrangements with several smaller and regional distributors for the balance of its purchases. These distribution arrangements have allowed the Company to benefit from economies of scale and resulting lower commodity costs. Smaller day-to-day purchasing decisions are made at the individual restaurant level. The Company has not experienced any significant delays in receiving food and beverage inventories or restaurant supplies. Information Systems and Restaurant Reporting The Company's information systems provide detailed monthly financial statements for each restaurant, weekly restaurant inventories, menu mix, cash management and payroll analysis, as well as daily operating statistics such as sales, labor, guest check and average table turns. The varying levels of systems data are consolidated and processed by the Company at its headquarters daily, weekly or monthly as management deems appropriate. In addition, the Company has an in-house payroll system which the Company believes is more efficient for restaurant managers than third-party payroll systems. Components of the Company's information systems, particularly its point-of-sale systems, have been adopted by the Franchisor. Trademarks, Servicemarks and Other Intellectual Property As a franchisee of Brinker, the Company has contractual rights to use certain Franchisor-owned trademarks, servicemarks and other intellectual property relating to the Chili's and On The Border concepts. Bertucci's has registered the names "Bertucci's," "Bertucci's Brick Oven Pizzeria" and "Sal and Vinnie's Sicilian Steakhouse" as service marks and trademarks with the United States Patent and Trademark Office. As a result of the Acquisition, the Company assumed ownership of these marks. Management is aware of names similar to that of Bertucci's Page 7 of 59 used by third parties in certain limited geographical areas. Such third-party use may prevent the Company from licensing the use of the Bertucci's mark for restaurants in such areas. Except for these areas, management is not aware of any infringing uses that could materially affect the Bertucci's business. Bertucci's has filed applications with the United States Patent and Trademark Office to register "Dine Out. Of the Ordinary." and "Menucci" as service marks and trademarks. Management intends to protect the Bertucci's service marks and trademarks by appropriate legal action whenever necessary. Competition The Company's business and the restaurant industry in general are highly competitive and are often affected by changes in consumer tastes and dining preferences, by local and national economic conditions and by population and traffic patterns. The Company competes directly or indirectly with all restaurants, from national and regional chains to local establishments, as well as with other foodservice providers. Many of its competitors are significantly larger than the Company and have substantially greater resources. Employees At December 29, 1999, the Company had approximately 2,521 full-time employees (of whom approximately 103 are based at the Company's executive office) and approximately 6,029 part-time employees. None of the Company's employees are covered by a collective bargaining agreement. The Company believes its relations with its employees are good. Management believes that the Company's continued success will depend to a large degree on its ability to attract and retain good management employees. While the Company will continually have to address the high level of employee attrition normal in the food-service industry, the Company has taken steps to attract and keep qualified management personnel through the implementation of a variety of employee benefit plans, including a management incentive plan, a 401(k) plan, and a non-qualified stock option plan for its key employees. Government Regulations Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which include health, safety, fire and alcoholic beverage control agencies in the state or municipality in which the restaurant is located. Difficulties or failures in obtaining required licenses or approvals could delay or prevent the opening of a new restaurant in a particular area. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses or permits must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage, and dispensing of alcoholic beverages. The Company is also subject to various other federal, state and local laws relating to the development and operation of restaurants, including those concerning preparation and sale of food, relationships with employees (including minimum wage requirements, overtime and working conditions and citizenship requirements), land use, zoning and building codes, as well as other health, sanitation, safety and environmental matters. Page 8 of 59 Environmental Compliance In connection with the sale of Bertucci's headquarters located in Wakefield, Massachusetts, initial environmental testing disclosed isolated deposits of several volatile organic compounds. Further testing confirmed the limitation and location of the deposit. Bertucci's expended approximately $30,000 in environmental investigation and remediation costs. Bertucci's environmental engineer expects that the Wakefield project will be cleared from Massachusetts Department of Environmental Protection reporting requirements by the end of fiscal year 2000. The sale of the Bertucci's headquarters was consummated in November 1999. ITEM 2. PROPERTIES The Company's executive office is located in Maynard, Massachusetts. The office is occupied under the terms of a lease covering approximately 39,000 square feet that is scheduled to expire in 2007 and has two five-year options to renew. One of the Company's previous offices in Westborough, Massachusetts is currently being marketed for sub-lease. The Company sold the 60,000 square foot Wakefield, Massachusetts office building (previously the Bertucci's headquarters) in November 1999. Restaurant Locations The table below identifies the location of the restaurants operated by the Company during fiscal 1999.
------------------------------------------------------------------------------------------------ On The Chili's Border Bertucci's Openings On The Openings Bertucci's Closings in Bertucci's Chili's in fiscal Chili's Border in fiscal State 12/30/98 fiscal 1999 12/29/99 12/30/98 1999 12/29/99 12/30/98 1999 ------------- ------------ ----------- ----------- ---------- ---------- ----------- ---------- Connecticut 9 - 9 9 2 11 2 - Georgia 6 (6) - - - - - - Illinois 7 - 7 - - - - - Maine - - - 1 - 1 - - Maryland 5 - 5 - - - - - Massachusetts 35 (1) 34 14 1 15 2 1 New Hampshire 3 - 3 5 2 7 - - New York 3 (1) 2 - - - - - New Jersey 5 - 5 - - - - - Pennsylvania 6 - 6 - - - - - Rhode Island 2 - 2 4 - 4 - - Virginia 7 (3) 4 - - - - - Washington D.C. 2 - 2 - - - - - ------------- ------------ ----------- ----------- ---------- ---------- ----------- ---------- Total 90 (11) 79 33 5 38 4 1 -------------------------------------- --------------------------------- ----------------------- --------------------- ---------- On The Grand Border Sal & Total State 12/29/99 Vinnie's 12/29/99 ---------- ---------- ---------- Connecticut 2 - 22 Georgia - - - Illinois - - 7(a) Maine - - 1 Maryland - - 5 Massachusetts 3 1 53(b) New Hampshire - - 10 New York - - 2 New Jersey - - 5 Pennsylvania - - 6 Rhode Island - - 6 Virginia - - 4 Washington D.C. - - 2 ---------- ---------- ---------- Total 5 1 123 ---------- ---------- ----------
(a) The seven restaurants in Illinois were closed as of January 31, 2000. (b) The test kitchen located at the Bertucci's corporate office in Wakefield, Massachusetts was closed in June 1999 prior to the sale of the building. Of the 123 restaurants operated by the Company at December 29, 1999, the Company owned the land for 12 restaurants and leased the land for all other restaurants. The leases for most of the existing restaurants are for terms of 15 years and provide for additional option terms and, in the case of a limited number of leases, a specified annual rental plus additional rents based on sales volumes exceeding specified levels. Leases for future restaurants will likely include similar rent provisions. Bertucci's restaurant lease terms range from two years to 40 years. The majority of such leases provide for an option to renew for additional terms ranging from five years to 20 years. All of Bertucci's leases provide for a specified annual rental and most leases call for additional rent based on sales volumes exceeding specified levels. Page 9 of 59 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings from time to time incidental to the conduct of its business. In the opinion of management, any ultimate liability arising out of such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. Management is not aware of any litigation to which the Company is a party that is likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information As of March 15, 2000, there was no established public trading market for any class of common equity security of the Company. Record Holders As of March 15, 2000, there were approximately 78 holders of Common Stock of the Company, $.01 par value per share. As of March 15, 2000, the Company did not have any other class of common equity security issued and outstanding. Dividends In August 1997, the Company made a dividend and return of capital payout to shareholders of $8.31 per share from additional paid-in capital, with the excess payout being charged to retained earnings. In addition, the Company repurchased 716,429 shares of common stock at $11.63 per share. The Company's repurchase of shares of common stock was recorded as treasury stock, at cost, and resulted in a reduction of Stockholders' (Deficit) Equity. Other than the aforementioned dividend, the Company has not paid any other dividends to date. Furthermore, the Company does not foresee declaring or paying any cash dividends in the immediate future. Moreover, certain of the Company's borrowing arrangements prohibit the payment of cash dividends without the lender's approval. Recent Sales of Unregistered Securities None. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The data for fiscal years ended 1995 through 1999 are derived from audited financial statements of the Company. Selected consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-K. Historical results are not necessarily indicative of results to be expected in the future. The Acquisition of Bertucci's in 1998 affects the comparability of results on a year-to-year basis. Page 10 of 59
Fiscal Year Ended December 29, December 30, December 31, December 31, December 31, 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Income Statement Data (in thousands) NET SALES $ 267,665 $ 160,805 $ 81,364 $ 70,094 $ 60,300 COST AND EXPENSES: Cost of sales 73,860 44,377 23,384 21,203 18,095 Operating expenses 141,889 84,540 40,932 34,268 30,101 General and administrative expenses 14,609 8,204 4,207 3,679 3,449 Deferred rent, depreciation and amortization 17,863 10,921 3,911 3,679 3,201 Taxes other than income 13,653 7,490 3,829 3,207 2,871 ------------ ------------ ------------ ------------ ------------ Total costs of sales and expenses 261,873 155,532 76,263 66,037 57,717 ------------ ------------ ------------ ------------ ------------ Operating income (loss) 5,792 5,273 5,101 4,057 2,583 ------------ ------------ ------------ ------------ ------------ Interest expense, net 14,007 8,004 1,918 1,053 463 ------------ ------------ ------------ ------------ ------------ (Loss) income before income tax (benefit) expense and change in accounting principle (8,215) (2,731) 3,183 3,005 2,120 (Benefit) provision for income taxes (2,357) (902) 1,083 1,047 699 Income before change in accounting principle (5,858) (1,829) 2,100 1,958 1,421 Change in accounting principle, net of tax (678) ------------ ------------ ------------ ------------ ------------ Net (loss) income $ (6,536) $ (1,829) $ 2,100 $ 1,958 $ 1,421 ============ ============ ============ ============ ============ Basic and diluted (loss) earnings per share before change in accounting principle $ (1.97) $ (0.89) $ 1.22 $ 0.98 $ 0.71 Change in accounting principle per share $ (0.22) $ - $ - $ - $ - Basic and diluted (loss) earnings per share $ (2.19) $ (0.89) $ 1.22 $ 0.98 $ 0.71 Other Financial Data: EBITDA (in thousands) (a) $ 23,655 $ 16,194 $ 9,012 $ 7,737 $ 5,784 EBITDA margin (b) 8.8% 10.1% 11.1% 11.0% 9.6% Comparable restaurant sales - (c) 2.1% 1.6% 2.7% -0.4% -1.6%
(a) "EBITDA" is defined as income from operations before deferred rent, depreciation, amortization and preopening costs. EBITDA is not a measure of performance defined by Generally Accepted Accounting Principles ("GAAP"). EBITDA should not be considered in isolation or as a substitute for net income or the statement of cash flows which have been prepared in accordance with GAAP. The Company believes EBITDA provides useful information regarding the Company's ability to service its debt and the Company understands that such information is considered by certain investors to be an additional basis for evaluating a company's ability to pay interest and repay debt. The EBITDA measures presented herein may not be comparable to similarly titled measures of other companies. (b) EBITDA margin represents EBITDA divided by net sales. (c) The Company defines comparable restaurant sales as net sales from restaurants that have been open for at least one full fiscal year. The comparable sales in 1999 and 1998 relate to the combined company (Bertucci's, Chili's, On The Border and, for 1999 only, Sal & Vinnie's) while the 1997, 1996 and 1995 comparable sales relate to Chili's only (On The Border did not have a comparable restaurant as defined until Fiscal Year 1998). Page 11 of 59 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Item 1. Business," "Item 6. Selected Financial Data," the Company's Consolidated Financial Statements and Notes thereto and the information described under the caption "Risk Factors" below. General The Company is an operator of full-service, casual dining restaurants in the northeastern United States. The Company's wholly owned subsidiary, Bertucci's Restaurant Corp. owns and operates a restaurant concept under the name Bertucci's Brick Oven Pizzeria(R). The Company also develops and operates two distinct restaurant franchises, Chili's Grill & Bar(R) and On The Border Mexican Cafe(R), under franchise agreements with Brinker International, Inc., a publicly-owned company. In July 1998, the Company completed its acquisition of Bertucci's' parent entity, Bertucci's, Inc., a publicly-owned restaurant company for a purchase price, net of cash received, of approximately $89.4 million (the "Acquisition"). As of December 29, 1999, Bertucci's owned and operated 79 full-service, casual dining, Italian-style restaurants under the name Bertucci's Brick Oven Pizzeria(R) located primarily in New England and Mid-Atlantic United States and one Sal and Vinnie's Sicilian Steakhouse(TM) ("Sal and Vinnie's") located in Massachusetts. Bertucci's opened 17 Bertucci's restaurants in 1994, nine in 1995, four in 1996, four in 1997 and six in 1998, and one Sal and Vinnie's restaurant in 1997. During 1999, the Company closed the Bertucci's test kitchen restaurant in Wakefield, Massachusetts and also closed ten underperforming Bertucci's restaurants. Subsequent to December 29, 1999 and prior to January 31, 2000, the Company closed seven additional Bertucci's restaurants, thereby completing the planned closings identified shortly after the Acquisition. The Company has entered into franchise and development agreements with Brinker to operate the 43 Chili's and On The Border restaurants ("Brinker Concept Restaurants") and to exclusively develop additional restaurants in New England and Westchester County and additionally, in the case of On The Border, upstate New York. The Company acquired the Bertucci's and Sal and Vinnie's concepts pursuant to the terms of an Agreement and Plan of Merger dated as of May 13, 1998, whereby the Company (through a wholly-owned subsidiary) acquired on July 21, 1998 all of the issued and outstanding shares of common stock of Bertucci's, Inc. for an aggregate purchase price of approximately $89.4 million. The Company financed the Acquisition primarily through the issuance of $100 million of 10 3/4% senior notes due 2008 (the "Senior Notes"). These Senior Notes were exchanged for Senior Notes with the same terms pursuant to a registered exchange offer that was completed in November 1998. The Company's results of operations for fiscal 1998 and fiscal 1999 include the operations of Bertucci's from and after July 21, 1998, approximately 17 months. See Notes 2 and 7 to the Consolidated Financial Statements. The Acquisition included 90 Bertucci's restaurants and one Sal & Vinnie's restaurant. The Company closed its Bertucci's test kitchen in Wakefield, Massachusetts in 1999, sold the former Bertucci's headquarters located in Wakefield, Massachusetts in 1999 and closed seventeen other underperforming Bertucci's restaurants as of January 31, 2000. The assets related to these locations, which are primarily property and equipment, had been assigned a value of approximately $6.6 million based on estimated sale proceeds. The gross sale proceeds, net of fees, from the Bertucci's headquarters and several underperforming restaurants was $4.8 million. During fiscal year 1999, the seventeen underperforming restaurant locations and the test kitchen location had combined net sales of approximately $14.7 million and a combined approximate $1.5 million loss from operations (not including approximately $0.1 million of direct general and administrative expenses). The results of operations for the test kitchen and the other seventeen restaurants during the period from date of the Acquisition to December 29, 1999 have been included in the consolidated income statement. For all the Company's restaurants, net sales consist of food, beverage and alcohol sales. Cost of sales consists of food, beverage and alcohol costs as well as supplies used in carry-out and delivery sales. Total operating expenses consist of five primary categories: (i) labor expenses; (ii) restaurant operations; (iii) facility costs; (iv) office expenses; and (v) non-controllable expenses, which include such items as company advertising expenses, Brinker's royalty and advertising fees, rent and insurance. General and administrative expenses include costs associated with those departments of the Company that assist in restaurant operations and management of the business, including accounting, management information systems, training, executive management, purchasing and construction. Page 12 of 59 Results of Operations The following table sets forth the percentage-relationship to net sales, unless otherwise indicated, of certain items included in the Company's income statement, as well as certain operating data, for the periods indicated:
Income Statement Data: For Fiscal Year Ended December 29, December 30, December 31, 1999 1998 1997 ------------ ------------ ------------ NET SALES 100.0% 100.0% 100.0% COST AND EXPENSES: Cost of sales 27.6 27.6 28.7 Operating expenses 53.0 52.6 50.3 General and administrative expenses 5.5 5.1 5.2 Depreciation and amortization 6.7 6.8 4.8 Taxes other than income 5.1 4.7 4.7 ------------ ------------ ------------ Total costs of sales and expenses 97.9 96.8 93.7 ------------ ------------ ------------ Operating income 2.1 3.2 6.3 ------------ ------------ ------------ Interest expense, net 5.2 5.0 2.4 (Loss) income before income tax (benefit) provision and change in accounting principle (3.1) (1.8) 3.9 ------------ ------------ ------------ (Benefit) provision for income taxes (0.9) (0.6) 1.3 Change in accounting principle, net of tax (0.3) -- -- ------------ ------------ ------------ Net (loss) income (2.5) (2.4) 5.2 ============ ============ ============
Year Ended December 29, 1999 Compared to Year Ended December 30, 1998 Net Sales. Net sales increased $106.9 million, or 66.5%, to $267.7 million in fiscal 1999, from $160.8 million in fiscal 1998. Most of the increase was attributable to the inclusion of Bertucci's for twelve months of 1999 but approximately five months during 1998 as the result of the Acquisition. An additional component of the increase was from the Company's opening of six new Bertucci's, eight new Chili's and four new On The Border restaurants during 1998 and 1999. The remainder of the increase was a result of increased comparable restaurant sales in 1999 versus the same period 1998. Comparable restaurant sales for locations opened prior to 1998 increased 2.1% from fiscal 1998 to fiscal 1999. Average sales per restaurant increased 5.9% to almost $2.1 million in fiscal 1999, from just under $2.0 million the previous year. Cost of Sales. Cost of sales increased by $29.5 million, or 66.4%, to $73.9 million in fiscal 1999 from $44.4 million in fiscal 1998. Expressed as a percentage of net sales, cost of sales remained flat at 27.6% in both fiscal 1999 and fiscal 1998. This statistic is comprised of two significant changes in the Company's business. The inclusion of Bertucci's results in 1998 helped to decrease the Company's overall cost of sales. However, the increase in cheese costs during the Summer of 1999 impacted the cost of sales at Bertucci's by approximately 2% of net sales. Operating Expenses. Operating expenses increased by $57.3 million, or 67.8%, to $141.9 million in fiscal 1999 from $84.5 million in fiscal 1998. Expressed as a percentage of net sales, operating expenses increased to 53.0% in fiscal 1999 from 52.6% in fiscal 1998. The dollar increase was primarily attributable to the inclusion of Bertucci's for twelve months in 1999 but for approximately five months in 1998 as a result of the Acquisition. The percentage increase was primarily attributable to increased hourly labor costs driven by a tight labor market and mandated Federal and state minimum wage increases, as well as to increased labor costs arising from increased staffing of restaurant-level management implemented to strengthen restaurant operations. General and Administrative Expenses. General and administrative expenses increased $6.4 million, or 78.1%, to $14.6 million in fiscal 1999 from $8.2 million in fiscal 1998. Expressed as a percentage of net sales, general and administrative expenses increased to 5.5% in 1999 from 5.1% in fiscal 1998. The dollar increase was primarily due to the Acquisition as well as new rental payments for the Company's headquarters. The percentage increase was primarily Page 13 of 59 attributable to increased general and administrative staffing, particularly increases in payroll, training and recruitment costs related to hiring additional restaurant managers to better staff the Company's restaurants. Deferred Rent, Depreciation, Amortization and Preopening Expenses. Deferred rent, depreciation, amortization and preopening expenses increased by $7.0 million, or 63.6%, to $17.9 million in fiscal 1999 from $10.9 million in fiscal 1998. Expressed as a percentage of net sales, deferred rent, depreciation, amortization and preopening expenses decreased to 6.7% in fiscal 1999 from 6.8% in fiscal 1998. The dollar increase was due to the combination of the incremental seven months of Bertucci's results in 1999 versus 1998 as a result of the Acquisition, opening six additional Brinker concept restaurants, opening six Bertucci's restaurants, the write-down of approximately $0.4 million associated with the Westborough executive offices, approximately $1.4 million of preopening expenses and amortization of approximately $2.3 million of the $34 million goodwill associated with the Acquisition. Taxes Other Than Income Taxes. Taxes, other than income taxes, increased $6.2 million, or 82.3%, to $13.7 million in fiscal 1999 from $7.5 million in fiscal 1998. Taxes, other than income taxes increased as a percentage of net sales from 4.7% in fiscal 1998 to 5.1% in fiscal 1999. The primary reason for the increase was due to increased payroll taxes. Interest Expense. Interest expense increased $6.0 million, or 75.0%, to $14.0 million in fiscal 1999 from $8.0 million in fiscal 1998. This increase was attributable to the sale of the Senior Notes in July 1998 and to the FFCA Loans entered into since August 1998. Interest was approximately $10.8 million on the Senior Notes, $3.0 million on the FFCA Loans and $0.2 million on borrowings from the Company's line of credit during fiscal 1999. Income Tax Expense. In fiscal 1999, the Company realized an income tax benefit of 30.3% of loss before income tax expense, compared to an income tax benefit of 33.0% of loss before income tax expense in fiscal 1998. The primary unfavorable variance was due to the non-deductibility of goodwill associated with the Acquisition. Change in Accounting Principle. The Company has adopted the American Institute of Certified Public Accountants' Statement of Position 98-5 (SOP 98-5) as of the first day of fiscal 1999. Upon adoption, the Company incurred a pre-tax cumulative effect of a change in accounting principle of approximately $1.1 million. Net of income taxes, the expense was approximately $0.7 million. This charge was primarily for the write-off of unamortized preopening costs which were previously amortized over the 12-month period subsequent to a restaurant opening. Effective with the first day of fiscal 1999, the Company expenses all preopening costs as incurred. The costs are included in Deferred Rent, Deprecation, Amortization and Preopening expenses in the accompanying Statement of Operations. Year Ended December 30, 1998 Compared to Year Ended December 31, 1997 Net Sales. Net sales increased $79.4 million, or 97.6%, to $160.8 million in fiscal 1998, from $81.4 million in fiscal 1997. Most of the increase ($67.0 million) was attributable to the Acquisition. The remaining increase was a result of five new Brinker concept restaurant openings and increased Brinker concept sales compared to the same period in fiscal 1997. Comparable restaurant sales for Brinker locations opened prior to 1997 increased 5.2% from fiscal 1997 to fiscal 1998. Menu price increases averaged about 1.5% during the periods under comparison. Average sales per Brinker concept restaurant increased 6.2% to $2.78 million, from $2.61 million the previous year. Comparable restaurant sales for Bertucci's decreased by 0.1% from fiscal 1997 to fiscal 1998. The Company attributes the decrease primarily to a reduction of planned advertising in the last two quarters of 1998. Menu price increases in Bertucci's restaurants averaged approximately 2.0% during fiscal 1998. Average sales per Bertucci's restaurant decreased 1.1% to $1.69 million in fiscal 1998, from $1.71 million in fiscal 1997. Cost of Sales. Cost of sales increased by $21.0 million, or 89.8%, to $44.4 million in fiscal 1998 from $23.4 million in fiscal 1997. Expressed as a percentage of net sales, cost of sales decreased to 27.6% in fiscal 1998 from 28.7% in fiscal 1997. This decrease was primarily attributable to the addition of Bertucci's sales, following the Acquisition, and to improved margins from the Brinker concept restaurants. Cost of sales of the Bertucci's restaurants as a percentage of net sales were 25.2% of net sales in fiscal 1998. The Brinker concept restaurants' cost of sales as a percentage of net sales decreased to 28.5% in fiscal 1998 from 28.7% in fiscal 1997. This percentage decrease was primarily due to a new broadline food supplier for the Brinker concept restaurants, a more efficient, automated ordering system implemented during the fourth quarter of 1997, which resulted in overall decreased product costs for the Brinker concept restaurants. Page 14 of 59 Cost of sales of the Bertucci's restaurants increased to 25.2% of net sales in fiscal 1998 from 24.5% of net sales in fiscal 1997 . Higher commodity prices of cheese during the last three quarters of 1998 and a change of the Bertucci's broadline supplier in July 1998 were the main factors for the increase. Operating Expenses. Operating expenses increased by $43.6 million, or 106.5%, to $84.5 million in fiscal 1998 from $40.9 million in fiscal 1997. Expressed as a percentage of net sales, operating expenses increased to 52.6% in fiscal 1998 from 50.3% in fiscal 1997. The dollar increase was primarily attributable to the Acquisition. The percentage increase was primarily attributable to increased hourly labor costs driven by a tight labor market and mandated Federal and state minimum wage increases, as well as to increased labor costs arising from increased staffing of restaurant-level management implemented to strengthen restaurant operations. General and Administrative Expenses. General and administrative expenses increased $4.0 million, or 95.0%, to $8.2 million in fiscal 1998 from $4.2 million in fiscal 1997. Expressed as a percentage of net sales, general and administrative expenses decreased to 5.1% in 1998 from 5.2% in fiscal 1997. The dollar increase was primarily due to the Acquisition. The percentage decrease was primarily attributable to general and administrative staffing efficiencies achieved as a result of the addition of sales from the Bertucci's restaurants and reductions in Bertucci's management following the Acquisition. These efficiencies were partially offset by increases in payroll, training and recruitment costs related to hiring additional restaurant managers to better staff the Bertucci's restaurants. Deferred Rent, Depreciation and Amortization. Deferred rent, depreciation and amortization expenses increased by $7.0 million, or 179.2%, to $10.9 million in fiscal 1998 from $3.9 million in fiscal 1997. Expressed as a percentage of net sales, deferred rent, depreciation and amortization increased to 6.8% in fiscal 1998 from 4.8% in fiscal 1997. The increase was due to the Acquisition, opening five additional Brinker concept restaurants, opening two Bertucci's restaurants and amortization of approximately $1.0 million of the $34 million goodwill associated with the Acquisition. Taxes Other Than Income Taxes. Taxes, other than income taxes, increased $3.7 million, or 95.6%, to $7.5 million in fiscal 1998 from $3.8 million in fiscal 1997. Taxes, other than income taxes remained flat as a percentage of net sales at 4.7% in both fiscal 1997 and fiscal 1998. Interest Expense. Interest expense increased $6.1 million, or 317.4%, to $8.0 million in fiscal 1998 from $1.9 million in fiscal 1997. This increase was attributable to the sale of the Senior Notes in July 1998 and to the FFCA Loans entered into since August 1997. Interest was approximately $4.9 million on the Senior Notes, $2.3 million on the FFCA Loans and $0.8 million from the Company's line of credit during fiscal 1998. Income Tax Expense. In fiscal 1998, the Company's realized an income tax benefit of 33.0% of loss before income tax expense, compared to an income tax expense of 34.0% of income before income tax expense in fiscal 1997. Liquidity and Capital Resources The Company has met its capital expenditures and working capital needs through a combination of operating cash flow, borrowings under the FFCA Loans, bank borrowings, the sale of the Senior Notes and the sale of Common Stock. Fiscal Year Ended December 29, 1999. Net cash flows from operating activities were $6.5 million for fiscal 1999 as compared to $17.2 million for fiscal 1998. Approximately $5.0 million of the $10.7 million difference was a result of additional interest incurred on the Senior Notes in 1999 versus 1998. Net loss from operations for this period was $6.5 million and the non-cash reconciling item of deferred rent, depreciation, amortization and pre-tax change in accounting principle increased cash flows by $17.6 million. Accrued expenses decreased by $4.5 million mostly as a result of a reduction of accrued payroll, restaurant closing reserves, occupancy expenses and other liabilities which were partially offset by an increase in unredeemed gift certificates. The Company also used cash from operations to increase working capital needs for newly developed restaurant locations and for the Bertucci's restaurants acquired during fiscal 1998. Increases in deferred taxes and accounts payable were partially offset by a net decrease in other working capital accounts, a decrease in inventories and an increase in prepaid expenses. Net cash used in investing activities for fiscal 1999 was $14.4 million. Approximately $19.2 million was used for developing, building and opening new restaurants, paying franchise fees and for capital additions at existing restaurants. The sale of assets (primarily the former Bertucci's headquarters Page 15 of 59 located in Wakefield, Massachusetts) accounted for approximately $4.8 million of additional cash to the Company in 1999. Net cash provided by financing activities was $10.1 million for fiscal 1999. During this period, $11.3 million was borrowed from FFCA Acquisition Corporation ("FFCA") for new restaurant mortgages (Note 7 of the consolidated financial statements), $1.0 million was used for repaying principle on FFCA mortgages and approximately $0.2 was used for capital lease payments and return of capital. Fiscal Year Ended December 30, 1998. Net cash flows from operating activities were $17.2 million for fiscal 1998 as compared to $8.5 million for fiscal 1997. This increase was primarily due to a decrease in working capital needs for newly developed restaurant locations and for the Bertucci's restaurants acquired during fiscal 1998. Net loss from operations for this period was $1.8 million and the non-cash reconciling item of deferred rent, depreciation and amortization increased cash flows by $10.9 million. Accrued expenses increased by $8.9 million. The increase was due to a combination of increases in payroll and benefits accruals, accrued taxes, accrued interest and other working capital. Net cash used in investing activities for fiscal 1998 was $111.0 million. Approximately $89.4 million was used for the Acquisition and the remainder was used for developing, building and opening new restaurants and capital additions at existing restaurants. Net cash provided by financing activities was $99.0 million for fiscal 1998. During this period, $5.7 million was borrowed from FFCA for new restaurant mortgages, $7.9 million was used for financing costs, $27.0 million was used to pay principle on the Senior Bank Facility, approximately $29.0 million was raised through equity financing and $100 million was raised in the issuance of the Senior Notes. Fiscal Year Ended December 31, 1997. Net cash provided from operating activities was $8.5 million for fiscal 1997. Net income from operations provided $2.1 million, the adjustment from deferred rent, depreciation and amortization provided $3.9 million and changes to working capital provided $2.5 million during this period. Net cash used from investing activities was $5.1 million for fiscal 1997. Net cash used was for developing, building and opening new restaurants and capital improvement of existing restaurants, which accounted for $4.5 million of the cash used. During fiscal 1997, net cash used in financing activities was $3.5 million. During fiscal 1997 $24.3 million in cash was provided from the financing of properties through mortgage loans, while $8.3 million was used to purchase treasury stock and a cash dividend of $12.2 million was paid out. In addition, proceeds from the loans were used to return capital of $4.4 million and financing expenses of $1.4 million. In addition, $1.4 million of repayments were made on the line of credit. The Company's capital expenditures were $19.0 million, $19.4 million and $4.5 million, for fiscal1999, 1998 and 1997, respectively. In fiscal 1999, capital expenditures for maintenance and repair of the Company's restaurants and the move to the new headquarters were approximately $7.0 million. The Company expects to open three Bertucci's restaurants and ten Brinker Concept Restaurants in Fiscal Year 2000. In August 1997, the Company paid a dividend and return of capital distribution to shareholders of approximately $16.7 million from additional paid-in capital, with the excess payout being charged to retained earnings. In addition, as part of such transaction, the Company repurchased a portion of its capital stock, for an aggregate amount of approximately $8.3 million. The Company's repurchase of shares of common stock was recorded as treasury stock, at cost, and resulted in a reduction of shareholders' equity. These payments were funded through the use of proceeds from the FFCA Loan. As of December 29, 1999, the Company had approximately $139.4 million of consolidated indebtedness, including $100.0 million of indebtedness pursuant to the Senior Notes, $39.3 million of borrowings under the FFCA Loans and $0.1 million of capital lease obligations. In addition, the Company has a Senior Bank Facility in the amount of $20.0 million. As a December 29, 1999, the Company had no amounts outstanding under this facility. Significant liquidity demands will arise from debt service on the Senior Notes, the FFCA Loans and borrowings, if any, under the Senior Bank Facility. The Senior Notes bear interest at the rate of 10 3/4% per annum, payable semi-annually on January 15 and July 15, with payments that commenced on January 15, 1999. The Senior Notes are due in full on July 15, 2008. From July 15, 2003 through July 15, 2006, the Company may, at its option, redeem any or all of the Senior Notes at face value, plus a declining premium, which begins at approximately 5%. After July 15, 2006, the Senior Notes may be redeemed at face value. In addition, anytime through July 15, 2001, the Company may redeem up to 35% of the Senior Notes, subject to restrictions, with the net proceeds of one or more equity offerings, meeting certain criteria, at a redemption price of 110.75% of their principal amount. Additionally, under certain circumstances, including a change of control or following certain asset sales, the holders of the Senior Notes may require the Company to repurchase the Senior Notes, at a redemption price of 101%. See Note 7 to the Consolidated Financial Statements. Page 16 of 59 On August 6, 1997, the Company's wholly owned limited partnership NERC Limited Partnership ("NERCLP") entered into a loan agreement with FFCA in the aggregate amount of $22,400,000, evidenced by promissory notes maturing on various dates from September 2002 through September 2017, with interest at 9.67% per annum. NERCLP mortgaged 17 restaurant properties to FFCA as collateral for these initial FFCA Loans. On or about August 28, 1997, NERCLP obtained additional financing from FFCA in the aggregate amount of $1,850,000, evidenced by promissory notes maturing on various dates from September 2007 through September 2017, with interest at 9.701% per annum. These additional FFCA Loans were collateralized by mortgages on three restaurant properties. Between July 2, 1998 and December 10, 1998, a second wholly owned limited partnership of the Company, NERC Limited Partnership II, obtained additional financing from FFCA in the aggregate amount of $5,677,000, evidenced by promissory notes maturing on various dates from January 2006 to January 2019, with interest rates ranging from 8.440% to 9.822% per annum. The 1999 FFCA Loans were collateralized by mortgages on 8 restaurant properties. For the years ended December 30, 1999 and December 30, 1998, interest related to the FFCA Loans was $2,995,000 and $2,362,000, respectively. See Note 7 to the Consolidated Financial Statements. The Senior Bank Facility consists of a revolving credit facility providing for revolving loans to the Company in an aggregate principal amount not to exceed $20.0 million and includes a $1.0 million sub-limit for the issuance of letters of credit for the account of the Company. The Senior Bank Facility expires in August 2001 and is secured by tangible and intangible assets of the Company but is not secured by a security interest in any liquor licenses held by the Company or any of its subsidiaries (or in the equity securities of any such subsidiary directly holding such licenses). The Senior Bank Facility contains certain financial covenants with which the Company was in compliance at the end of fiscal 1999. See Note 5 to the Consolidated Financial Statements. The Company believes that the cash flow generated from its operations, together with available borrowings under the Senior Bank Facility and under the FFCA Loans and similar secured indebtedness, should be sufficient to fund its debt service requirements, lease obligations, working capital needs, current expected capital expenditures and other operating expenses for the next twelve months. The Company's future operating performance and ability to service or refinance the Senior Notes, the FFCA Loans and the Senior Bank Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. Impact of Inflation Inflationary factors such as increases in labor, food or other operating costs could adversely affect the Company's operations. The Company does not believe that inflation has had a material impact on its financial position or results of operations for the periods discussed above. Management believes that through the proper leveraging of purchasing size, labor scheduling, and restaurant development analysis, inflation will not have a material adverse effect on income during the foreseeable future. There can be no assurance that inflation will not materially adversely affect the Company. Seasonality The Company's quarterly results of operations have fluctuated and are expected to continue to fluctuate depending on a variety of factors, including the timing of new restaurant openings and related pre-opening and other startup expenses, net sales contributed by new restaurants, increases or decreases in comparable restaurant sales, competition and overall economic conditions. The Company's business is also subject to seasonal influences of consumer spending, dining out patterns and weather. As is the case with many restaurant companies, the Company typically experiences lower net sales and net income during the first and fourth fiscal quarters. Because of these fluctuations in net sales and net income (loss), the results of operations of any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year or any future quarter. Page 17 of 59 Effect of Recently Issued Accounting Standards In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, although early application was encouraged. Initial application of SOP 98-5 should be as of the beginning of the fiscal year in which it is first adopted and should be reported as a cumulative effect of a change in accounting principle. The Company adopted SOP 98-5 as of the first day of fiscal 1999. Upon adoption, the Company incurred a pre-tax cumulative effect of a change in accounting principle of approximately $1.1 million. This charge was primarily for the write-off of unamortized preopening costs which were previously amortized over the 12-month period subsequent to a restaurant opening. New Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities. This statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and for hedging activities) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedging accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. The Company has not determined the timing of adoption, but does not anticipate the adoption of this new standard to have a material impact on the Company's fiscal position or results of operations. Year 2000 Disclosure Many currently installed computer systems and software products were coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields were required to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. Prior to January 1, 2000, the Company assessed the potential impact of Year 2000 issues on the processing of date-sensitive information by the Company's automated information and point-of-sale systems. While there can be no assurance that Year 2000 matters have been entirely eradicated, the Company has not experienced any material adverse affects from Year 2000 issues. Risk Factors This Report contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Report should be read as being applicable to all forward looking statements wherever they appear in this Report. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Report. Substantial Leverage; Potential Inability to Service Indebtedness. As a result of the Acquisition, the Company is highly leveraged. At the end of fiscal 1999, the Company's aggregate outstanding indebtedness was $139.4 million, the Company's shareholders' equity was $7.5 million and the Company's working capital deficit, deficiency of earnings to fixed charges and losses were $16.2 million, $8.2 million and $6.5 million, respectively. The Company's ratio of earnings to fixed charges for fiscal 1999 was 0.6 times. The Company's high degree of leverage could have important consequences to holders of Senior Notes, including but not limited to the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired in the future; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations and other purposes, including Page 18 of 59 investments in development and capital spending; (iii) the Company may be substantially more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; and (iv) the Company's substantial degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or in its business. The Company's ability to repay or to refinance its obligations with respect to its indebtedness will depend on its future financial and operating performance, which, in turn, will be subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors, many of which are beyond the Company's control. These factors could include operating difficulties, increased operating costs, product pricing pressures, the response of competitors, regulatory developments, and delays in implementing strategic projects. The Company's ability to meet its debt service and other obligations may depend in significant part on the extent to which the Company can implement successfully its business strategy. There can be no assurance that the Company will be able to implement its strategy fully or that the anticipated results of its strategy will be realized. If the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be forced to reduce or delay capital expenditures, sell assets, or seek to obtain additional equity capital, or to refinance or restructure its debt. There can be no assurance that the Company's cash flow and capital resources will be sufficient for payment of principal of, and premium, if any, and interest on, its indebtedness in the future, or that any such alternative measures would be successful or would permit the Company to meet its scheduled debt service obligations. In addition, because the Company's obligations under the Senior Bank Facility bear interest at floating rates, an increase in interest rates could adversely affect, among other things, the Company's ability to meet its debt service obligations. If the Company is required to reduce or delay capital expenditures, the Company may fail to meet its obligations under its Area Development Agreements, under which the Company is required to open three new Chili's restaurants each year in accordance with a specified schedule over approximately the next three years and three to five new On The Border restaurants each year in accordance with a specified schedule over approximately the next four years. A breach under the Area Development Agreements may cause the Company to lose its exclusive right to develop Chili's and On The Border restaurants in Connecticut, New Hampshire, Maine, Massachusetts, Rhode Island, Vermont, Westchester County, and additionally, in the case of On The Border, upstate New York. A breach under the Area Development Agreements could also constitute a default under the Senior Bank Facility and the FFCA Loans, permitting the applicable lender to declare all amounts due thereunder immediately due and payable Restrictive Debt Covenants. The Indenture for the Senior Notes (the "Indenture"), the Senior Bank Facility and the FFCA Loans impose significant operating and financial restrictions on the Company (and its subsidiaries). Such restrictions will affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, pay dividends or make other distributions, make certain investments, create certain liens, sell certain assets, enter into certain transactions with affiliates, or engage in certain mergers or consolidations involving the Company. In addition, the Senior Bank Facility and the FFCA Loans contain other and more restrictive covenants and require the Company (and its subsidiaries) to maintain specified financial ratios and satisfy certain financial tests. The Company's ability to meet such financial ratios and tests may be affected by events beyond its control, and there can be no assurance that the Company will meet such tests. These restrictions could limit the ability of the Company to obtain future financing, make needed capital expenditures, withstand a future downturn in its business or the economy, or otherwise conduct necessary corporate activities. A failure by the Company to comply with the restrictions contained in the Indenture, the FFCA Loans or the Senior Bank Facility could lead to a default under the terms of the Indenture, the FFCA Loans or the Senior Bank Facility. In the event of a default, the applicable lender could elect to declare all amounts borrowed pursuant thereto, and all amounts due under other instruments (including but not limited to the Indenture, the FFCA Loans or the Senior Bank Facility, as applicable) that may contain cross-acceleration or cross-default provisions may also be declared to be, immediately due and payable, together with accrued and unpaid interest, and the lenders could terminate all commitments thereunder. In such event, there can be no assurance that the Company would be able to make such payments or borrow sufficient funds from alternative sources to make any such payment. Even if additional financing could be obtained, there can be no assurance that it would be on terms that are favorable or acceptable to the Company. In addition, the indebtedness of the Company or its subsidiaries under the FFCA Loans and Senior Bank Facility is secured by a substantial portion of the assets of the Company or its subsidiaries and, upon the occurrence of a default and the acceleration of such indebtedness, the holders of such indebtedness could seize such assets and sell them as a means to satisfy all or part of such indebtedness. The Senior Bank Facility also contains provisions that prohibit any modification of the Indenture in any manner adverse to the senior lenders and that limit the Company's ability to refinance the Senior Notes without the consent of such senior lenders. Page 19 of 59 Expected Benefits of Combined Business May Not Be Achieved. Acquisitions are subject to a number of special risks, including, without limitation, those associated with adverse short-term effects on the Company's reported operating results, diversion of management's attention, standardization of accounting systems, dependence on retaining, hiring and training key personnel and unanticipated problems or legal liabilities. Achieving the anticipated benefits of the Acquisition will depend in part upon whether the integration of the businesses of the companies can be accomplished in an efficient and effective manner, and there can be no assurance that this will occur. The combination of the two companies will necessitate, among other things, integration of management philosophies, personnel and arrangements with third party vendors, standardization of training programs, realization of economies of scale, and effective coordination of sales, marketing and financial reporting efforts. There can be no assurance that such integration will be accomplished smoothly or successfully. Failure to successfully accomplish the integration of the operations of the two companies would have a material adverse effect on the Company. Potential Inability to Manage Increased Size of Company. As a result of the Acquisition, the size of the Company's combined operations is more than double the pre-Acquisition size. The Company's future operating results will depend largely upon its ability to manage a growing business profitably such that it continues the successful operation of its existing restaurants and also successfully implements its operating strategies for the Bertucci's restaurants it acquired as a result of the Acquisition as well as any new restaurants the Company may open or acquire in the future. Any failure of the Company to manage successfully and profitably the growth of its business may have a material adverse effect on the Company. Consent of Franchisor to Acquisition Subject to Continuing Compliance with Certain Agreements. The Franchisor's consent to the Acquisition was granted subject to the terms and conditions of its franchise agreements and Area Development Agreements with the Company, including, without limitation, the development schedule and menu restrictions contained in such agreements. Under these agreements, the Company is prohibited from directly or indirectly engaging in the operation of any restaurant which utilizes or duplicates the menu, trade secrets or service marks of either Chili's or On The Border restaurants. In addition, the Company is obligated to use its "best efforts" to promote and develop the Chili's and On The Border concepts. Although it has no present intention of doing so, the Company, among other things, would be prevented from developing menu items for the Bertucci's concept in violation of such agreements. No Prior Ownership of a Restaurant Concept. Although the Company's management has significant experience in the casual dining segment of the restaurant industry, the Company has no prior experience as an owner of its own restaurant concept. There can be no assurance that the Company will be able to successfully assume the ownership, and undertake execution, of the Bertucci's concept. As the Company has not had prior experience as the owner of a restaurant concept, there may be new challenges and risks associated with such ownership that the Company cannot fully anticipate at this time and which may have a material adverse effect on the Company. Potential Inability to Manage Geographic Expansion. All of the restaurants operated by the Company prior to the Acquisition were located in New England. As a result of consummation of the Acquisition, nearly one-third of the Company's restaurants were outside of New England. As of this filing, and partially as a result of closing seventeen restaurants outside New England, approximately 20% of the Company's restaurants are currently outside of New England. The ability of the Company's management to effectively recognize and account for diverse regional conditions and to manage restaurants that are geographically remote will be critical to the success of the Company. Any inability of the Company to successfully manage its geographic expansion may have a material adverse effect on the Company. Potential Inability to Expand Successfully. Pursuant to its Area Development Agreements with the Franchisor, the Company is currently obligated to open three new Chili's restaurants each year in accordance with a specified schedule over approximately the next three years and three to five new On The Border restaurants each year in accordance with a specified schedule over approximately the next four years. Failure to adhere to the development schedules contained in each of the Area Development Agreements would constitute a breach of those agreements. In the event of such a breach, the Franchisor would be able to terminate the territorial exclusivity granted to the Company. In addition, a breach under any of the Company's Area Development Agreements could constitute a default under the Senior Bank Facility and FFCA Loans, permitting the applicable lender to declare all amounts borrowed thereunder immediately due and payable. For the past several years, the Company has satisfied these minimum development requirements, however, there can be no assurance that the Company will continue to do so. The Company reviews its expansion plans and budget on a regular basis, in light of circumstances and opportunities that may arise, and may determine to open a smaller or larger number of stores than currently planned. Page 20 of 59 The Company's future operating results will depend largely upon its ability to open and operate new or newly acquired restaurants successfully and to manage a growing business profitably. This will depend on a number of factors (some of which are beyond the control of the Company), including (i) selection and availability of suitable restaurant locations, (ii) negotiation of acceptable lease or financing terms, (iii) securing of required governmental permits and approvals, (iv) timely completion of necessary construction or remodeling of restaurants, (v) hiring and training of skilled management and personnel, (vi) successful integration of new or newly acquired restaurants into the Company's existing operations and (vii) recognition and response to regional differences in guest menu and concept preferences. The Company identifies and sources its real estate through a third-party consultant who specializes in New England and Mid-Atlantic real estate. This consultant is retained by the Company on an exclusive basis to facilitate sites in Connecticut and substantially all of Massachusetts. The consultant is paid by the Company on a contingency basis. Although the Company believes that it would be able to replace such consultant if it were required to do so, any disruption in the services of such consultant or the Company's inability to replace such consultant, when required, may have a material adverse effect on the Company. There can be no assurance that the Company's expansion plans can be achieved on a timely and profitable basis or that it will be able to achieve results similar to those achieved in existing locations in prior periods or that such expansion will not result in reduced sales at existing restaurants that have been recently opened or newly acquired restaurants. Any failure to successfully and profitably execute its expansion plans could have a material adverse effect on the Company. Changes in Food Costs and Supplies; Key Supplier. The Company's profitability is dependent on, among other things, its continuing ability to offer fresh, high quality food at moderate prices. Various factors beyond the Company's control, such as adverse weather, labor disputes or other unforeseen circumstances, may affect its food costs and supplies. While management has been able to anticipate and react to changing food costs and supplies to date through its purchasing practices and menu price adjustments, there can be no assurance that it will be able to do so in the future. The Company obtains approximately 75% to 80% of its supplies through a single vendor pursuant to a contract for delivery and distribution, with the vendor charging fixed mark-ups over prevailing wholesale prices. The Company has a five-year contract with this vendor which expires in May 2004 and is otherwise terminable by either party upon 60 days' prior notice. The Company believes that it would be able to replace any vendor if it were required to do so; however, any disruption in supply from vendors or the Company's inability to replace vendors, when required, may have a material adverse effect on the Company. Possible Adverse Impact of Economic, Regional and Other Business Conditions on the Company. The Company's business is sensitive to guests' spending patterns, which in turn are subject to prevailing regional and national economic conditions such as interest rates, taxation and consumer confidence. Most of the restaurants owned by the Company are located in the northeastern and Mid-Atlantic United States, with a large concentration in New England. In addition, the Company anticipates substantially all restaurants to be opened in fiscal 2000 will be in states where the Company presently has operations or in contiguous states. As a result, the Company is, and will continue to be, susceptible to changes in regional economic conditions, weather conditions, demographic and population characteristics, consumer preferences and other regional factors. Dependence Upon Key Personnel. The Company's business depends upon the efforts, abilities and expertise of its executive officers and other key employees. The Company has no long-term employment contracts with, and does not maintain "key-man" life insurance for, any of its executive officers or key employees. The loss of the services of certain of these executive officers or key employees or the inability to retain key personnel required to effect a successful integration of the Bertucci's business with the Company's business existing prior to the Acquisition would have a material adverse effect on the Company. Competition. The restaurant industry is intensely competitive with respect to, among other things, price, service, location and food quality. The Company competes with many well-established national, regional and locally-owned foodservice companies with substantially greater financial and other resources and longer operating histories than the Company, which, among other things, may better enable them to react to changes in the restaurant industry. With respect to quality and cost of food, size of food portions, decor and quality service, the Company competes with casual dining, family-style restaurants offering eat-in and take-out menus, including Applebee's International, Inc., TGI Friday's Inc., a subsidiary of Carlson Hospitality Worldwide, Ruby Tuesday Inc., and as a result of the Acquisition, also competes with Italian-style Page 21 of 59 restaurant concepts such as Uno Restaurant Corp. and Olive Garden Restaurants, a division of Darden Restaurants Inc. Many of the Company's restaurants are located in areas of high concentration of such restaurants. Among other things, the Company also competes with its competitors in attracting guests, in obtaining premium locations for restaurants (including shopping malls and strip shopping centers) and in attracting and retaining employees. Possible Adverse Impact of Government Regulation on the Company. The restaurant business is subject to extensive federal, state and local laws and regulations relating to the development and operation of restaurants, including those concerning alcoholic beverage sales, preparation and sale of food, relationships with employees (including minimum wage requirements, overtime and working conditions and citizenship requirements), land use, zoning and building codes, as well as other health, sanitation, safety and environmental matters. Compliance with such laws and regulations can impede the operations of existing Company restaurants and may delay or preclude construction and completion of new Company restaurants. The Company is subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. In addition, the Company may also in certain jurisdictions be required to comply with regulations limiting smoking in restaurants. Reliance on Information Systems. The Company relies on various information systems to manage its operations and regularly makes investments to upgrade, enhance or replace such systems. Any disruption affecting the Company's information systems could have a material adverse effect on the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS. The Company has market risk associated with interest rate risk. The Company manages its exposure through its regular financing activities. Interest rate changes would result in a change in the fair value of the Company's debt facilities due to the difference between the market interest rate and the rate at the date of issuance of the debt facilities. Furthermore, the Company has no exposure to specific risks related to derivatives or other "hedging" types of financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are listed under Part IV, Item 14 in this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 22 of 59 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers and directors of the Company at the time of this filing:
Name Age Position ---- --- -------- Benjamin R. Jacobson............. 55 Chairman of the Board of Directors, Interim President and Chief Executive Officer and Treasurer Paul V. Hoagland................. 47 Executive Vice President and Director David J. Nace.................... 53 Executive Vice President, Chief Financial Officer and Director Raymond P. Barbrick.............. 46 Vice President Richmond A. Brittingham.......... 51 Vice President Robert L. Hogan ................. 54 Vice President - Marketing Paul J. Seidman ................. 43 Vice President - Food & Beverage and Procurement Kathleen P. Federico............. 40 Vice President - Human Resources Rosario Del Nero................. 46 Vice President Stephen F. Mandel, Jr............ 44 Director James J. Morgan.................. 57 Director David A. Roosevelt............... 29 Director Thomas R. Devlin................. 52 Director James R. Parish.................. 53 Director
Benjamin R. Jacobson. Mr. Jacobson has served as Chairman of the Board of Directors of the Company since 1991 and as Interim President and Chief Executive Officer since October 1999. Since 1989, Mr. Jacobson has served as the Managing General Partner of Jacobson Partners, which specializes in direct equity investments. Mr. Jacobson is a director of Childtime, Inc. and a number of privately-held corporations. Paul V. Hoagland. Mr. Hoagland has been employed in the restaurant industry for 19 years and is currently Executive Vice President, Chief Administrative Officer and Director. He has served as the Company's Executive Vice President since 1992, its Chief Financial Officer from 1992 through 1999 and a director since the Company's inception in 1991. Mr. Hoagland is also responsible for all administrative and new restaurant development functions within the Company. Prior to joining the Company, Mr. Hoagland was employed by Burger King Corporation from 1981 to 1990, where he held various positions over time, including Vice President of Operations, Vice President of Finance for Europe, and Regional Controller for New England. From 1974 to 1981, Mr. Hoagland was employed by I.T.T. Continental Baking Company first as a financial manager and then as controller. David J. Nace. Mr. Nace has over 25 years experience in multi-unit retailing concepts. In March 2000, he became the Company's Executive Vice President, Chief Financial Officer and Director. From December 1999 until March 2000, he served as the Company's Interim Chief Financial Officer. Prior to this and from September 1998 until July 1999, he was Executive Vice President, Chief Financial Officer and Treasurer of Little Switzerland, Inc., a retailer of luxury gifts and jewelry in the eastern Caribbean. From October 1993 until January of 1998, Mr. Nace served as Executive Vice President, Chief Financial Officer and Treasurer of Gart Sports Company, a retailer of sporting goods and apparel. From June 1981 until October 1993, he was Vice President and Controller for Child World, Inc. Raymond P. Barbrick. Mr. Barbrick has been employed in the restaurant industry for 30 years and currently serves as Vice President of the Company and President of Bertucci's. He served as the Company's Vice President of Operations for the Brinker Concept Restaurants from January 1998 until October 1999. Prior to that, he served as Senior Director of Operations, from 1992 through 1997, with responsibility for all of the Company's Chili's restaurants in Connecticut and western Massachusetts. Prior to joining the Company, Mr. Barbrick was employed by Back Bay Restaurant Group, where he held the position of director of regional operations from 1989 to 1992. Page 23 of 59 Richmond A. Brittingham. Mr. Brittingham has been employed in the restaurant industry for 31 years and currently serves as Vice President of the Company and President of the Brinker Concept Restaurants. He served as the Company's Regional Director for the South Region from 1992 until 1999. In such capacity, he was responsible for the operational performance of all the Company's Chili's restaurants in southeastern Massachusetts and Rhode Island. Prior to joining the Company, Mr. Brittingham served as director of operations for Legal Sea Foods Company. Robert L. Hogan. Mr. Hogan has been employed in the restaurant industry for 26 years and has served as the Company's Vice President - Marketing since April 1999. He is responsible for the marketing efforts of all three major brands, as well as strategic planning and new concept development for the Bertucci's brand. Prior to joining the Company, Mr. Hogan served as Vice President of Marketing for Ralston-Purina's Jack in the Box chain, The Black-eyed Pea casual dining chain, Saga Corporation's Straw Hat Pizza Restaurants and Senior Vice President for Farrell's Ice Cream Parlor Restaurants. He also was President of his own three-restaurant company, Pizza & Pipes, a pizza/entertainment concept located in California. Paul J. Seidman. Mr. Seidman has been employed in the restaurant industry for 25 years and has served as the company's Vice President of Food & Beverage and Procurement since January of 1998. Mr. Seidman's responsibilities include all food and beverage specifications, purchasing, and cost control as well as leading the menu and product development team. Mr. Seidman has held numerous positions in the industry, most recently as Vice President of Food & Beverage and Corporate Executive Chef for the Bayport Restaurant Group. Kathleen P. Federico. Ms. Federico has been in the restaurant industry for 16 years and has served as the Vice President of Human Resources since joining the Company in October of 1998. Her responsibilities include Training and Development, Compensation, Benefits, Recruiting and Employee Relations. Prior to joining the Company, Ms. Federico was Vice President of Human Resources for Sodexho Marriott Services. She also served as a Director of Human Resources at Au Bon Pain and Friendly Ice Cream Corporation. Rosario Del Nero. Mr. Del Nero has been employed in the restaurant industry for 17 years. He has served as Corporate Executive Chef for Bertucci's since 1992 and was promoted to Vice President of the Company in January 2000. His responsibilities include product and ingredient development, recipe design and documentation, training and quality enhancement. His vast and detailed knowledge of language, food and cuisine, especially those of the Mediterranean, provide for a foundation of authenticity. Mr. Del Nero's previous industry experience, both in the United States and abroad, includes positions as independent restaurateur, culinary arts instructor and food consultant to restaurants and manufacturers. Stephen F. Mandel, Jr. Mr. Mandel has served as a director of the Company since December 1997. Since July 1997, Mr. Mandel has served as managing director, portfolio manager and consumer retail/analyst at Lone Pine Capital LLC, a hedge fund which he founded. Prior to that, he served as senior managing director and consumer analyst at Tiger Management Corporation from 1990 to 1997 and served on that company's management committee, as director of equities and portfolio manager. Prior to 1990, Mr. Mandel served as a vice president and mass-market retailing analyst at Goldman, Sachs and Co. James J. Morgan. Mr. Morgan has served as a director of the Company since December 1997. From 1963 until his retirement in 1997, Mr. Morgan was employed by Philip Morris U.S.A. where he served as President and Chief Executive Officer from 1994 until his retirement in 1997. Prior to 1994, Mr. Morgan served in various capacities at Philip Morris including Senior Vice President of Marketing, and Corporate Vice President of Marketing Planning of the Philip Morris Companies Inc. David A. Roosevelt. Mr. Roosevelt has served as a director of the Company since December 1997. Mr. Roosevelt has been an associate at Jacobson Partners since 1996. Prior to that he was a principal of General Gas Company, a natural gas marketing company from 1995 to 1996 and a financial analyst in the account management group of Black Rock Financial Management from 1993 to 1995. Thomas R. Devlin. Mr. Devlin has served as a director of the Company since July 1998. Since 1987, Mr. Devlin has served as Chief Executive Officer of Devlin Enterprises, which owns positions in numerous operating companies. Mr. Devlin is a director of a number of privately-held corporations. Mr. Devlin previously served as a director of the Company from October 1991 through August 1997. Page 24 of 59 James R. Parish. Mr. Parish has been employed in the restaurant industry for 23 years and has served as a director of the Company since July 1998. Since 1991, Mr. Parish has served as Chief Executive Officer of Parish Partners, Inc. From 1995 to 1996, Mr. Parish served as Chief Executive Officer of Sfuzzi, Inc. From 1983 to 1991, Mr. Parish served as Executive Vice President and Chief Financial Officer of Chili's Inc. (now named Brinker International, Inc.). On October 28, 1999, Dennis Pedra tendered his resignation as President, Chief Executive Officer and Director of the Company. Mr. Pedra continues to be a significant shareholder of the Company. On February 4, 2000, Gary Schwab tendered his resignation as Vice President of the Company. Term of Directors The Company's directors serve in such capacity until the next annual meeting of the shareholders of the Company or until their successors are duly elected and qualified. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table summarizes the compensation for fiscal 1999 for the Company's Chief Executive Officer and each of its four other most highly compensated executive officers (the Chief Executive Officer and such other officers, collectively, the "Named Executive Officers"): Summary Compensation Table
------------------------------------------------------------------------------ Annual Compensation Long Term Compensation - ------------------------------------------- ------------------------------------------------------------------------------ Name and Principal Position Salary($) Bonus($) Other Annual Securities Underlying Compensation Options (#) - ------------------------------------------- ------------------------------------------------------------------------------ Dennis D. Pedra 1999 278,077 - 9,086 122,948 (e) President and Chief Executive Officer (a) 1998 288,982 (b) 225,000 110,348 (d) 122,948 (e) 1997 212,508 179,646 (c) 80,142 (d) 99,198 (e) Raymond P. Barbrick 1999 133,962 108,002 8,100 29,776 Vice President 1998 109,154 92,344 7,200 24,568 1997 85,895 69,175 6,000 21,268 Paul V. Hoagland 1999 184,000 - 10,378 41,635 Executive Vice President 1998 171,575 (f) 159,000 88,205 (d) 41,635 1997 152,417 142,010 (g) 60,545 (d) 33,068 Richmond A. Brittingham 1999 91,071 88,519 7,400 17,034 Vice President 1998 81,749 62,009 7,200 17,034 1997 79,154 50,600 7,200 14,178 Kathleen P. Federico 1999 131,500 23,449 6,192 5,761 Vice President - Human Resources 1998 - - - - 1997 - - - -
Page 25 of 59 (a) Mr. Pedra resigned his position as President and Chief Executive Officer on October 28, 1999. (b) Includes $33,404 payable for fiscal 1998 but deferred pursuant to the Non-qualified Deferred Compensation Plan. (c) Includes $100,000 payable for fiscal 1997 but deferred pursuant to the Non-qualified Deferred Compensation Plan. (d) Includes auto lease payments paid by the Company and compensation to cover certain taxes incurred by such officer in connection with the payment by the Company in August 1997 of a dividend and return of capital contribution to shareholders of $8.31 per share and the related repurchase by the Company of certain shares of common stock at $11.63 per share. (e) Mr. Pedra's options expired on January 26, 2000. (f) Includes $3,252 payable for fiscal 1998 but deferred pursuant to the Non-qualified Deferred Compensation Plan. (g) Includes $103,496 payable for fiscal 1997 but deferred pursuant to the Non-qualified Deferred Compensation Plan. Options Granted in Last Fiscal Year The following table sets forth information concerning options granted during fiscal 1999 to each of the Named Executive Officers.
Potential Realizable Value Number of at Assumed Annual Securities Stock Price Underlying % of Total Appreciation for Options Granted in Exercise Expiration Option Term(c) Name Granted (a) Fiscal 1999 Price (b) Date 5% 10% Dennis D. Pedra 0 0.0% Raymond P. Barbrick 5,208 14.4% $15.00 8/10/04 $ 21,583 $ 47,693 Paul V. Hoagland 0 0.0% Richmond A. Brittingham 0 0.0% Kathleen P. Federico 4,333 12.0% $15.00 8/10/04 $ 17,957 $ 39,680
(a) Each of the options granted becomes exercisable at the rate of 25% on or after each of the second, third, fourth and fifth anniversaries of the date of grant. Each of the options expires 90 days following the fifth anniversary of the date of the grant. See "--Stock Option and Other Plans for Employees--Stock Option Plan." (b) The exercise price was fixed at the date of the grant and represented the fair market value per share of common stock on such date. (c) In accordance with the rules of the Commission, the amounts shown on this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and do not reflect the Company's estimates or projections of future prices of the Company's common stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. Actual gains, if any, on stock option exercises will depend on the future performance of the Company's common stock, the option holders' continued employment through the option period, and the date on which the options are exercised. Page 26 of 59 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values The following table sets forth information concerning option exercises during fiscal 1999, and the fiscal year-end value of unexercised options for each of the Named Executive Officers.
Value Of Unexercised Number Of In-The-Money Securities Options At Shares Underlying At Fiscal Year-End Acquired on Value Fiscal Year-End Exerciseable/ Name Exercise Realized(a) Exerciseable/Unexercisable Unexerciseable(b) Dennis D. Pedra 0 $0 24,800 / 98,148 (c) $0/$0 Raymond P. Barbrick 0 0 5,317 / 24,459 0/0 Paul V. Hoagland 0 0 8,267 / 33,368 0/0 Richmond A. Brittingham 0 0 3,545 / 13,489 0/0 Kathleen P. Federico 0 0 0 / 5,761 0/0
(a) The amount "realized" reflects the appreciation on the date of exercise (based on the fair market value of the shares on the date of exercise over the exercise price). (b) Based upon a price of $9.22 (c) Mr. Pedra's stock options expired on January 26, 2000 Employment Agreements Executive officers of the Company are elected by the Board of Directors and serve at the discretion of the Board or pursuant to an employment agreement. The Company is party to an employment agreement with an executive officer as described below: Paul V. Hoagland. Mr. Hoagland's employment agreement (as amended, the "Hoagland Agreement") provides that he will serve as Executive Vice President of the Company until such time as such agreement is terminated by either party upon six months' prior written notice or pursuant to the other termination provisions of the Hoagland Agreement. If Mr. Hoagland's employment is terminated, the Hoagland Agreement provides that he may not engage in a competing business within a ten-mile radius of a Company-owned restaurant, for a period of one year following his termination. Mr. Hoagland's fiscal 1999 base salary of $184,000 may be increased, from time to time, in the Company's sole discretion. In addition to his base salary, Mr. Hoagland is entitled to receive (i) an annual performance bonus in the amount of up to fifty (50%) percent of his base salary which will be based on a bonus plan tied to the combined operating results of the Company as such plan may be revised from time to time, (ii) an automobile allowance and reimbursement of reasonable expenses, including insurance and repairs, and (iii) certain insurance and other benefits to be maintained and paid by the Company. Stock Option and Other Plans for Employees Stock Option Plan. On September 15, 1997, the Board of Directors of the Company established the 1997 Equity Incentive Plan, which includes a nonqualified stock option plan (the "Stock Option Plan"), for certain key employees and directors. The Stock Option Plan is administered by the Board of Directors of the Company and may be modified or amended by the Board of Directors in any respect. Options granted to employees under the Stock Option Plan are generally exercisable cumulatively at the rate of 25% on or after each of the second, third, fourth and fifth anniversaries of the date of grant and options granted to directors thereunder are generally exercisable immediately upon grant. Options granted under the Stock Option Plan to date expire 90 days following the fifth anniversary of the date of the grant. Between September 15, 1997 and December 31, 1997, 331,123 options were granted at a price of $11.63 per share under the Stock Option Plan (of which 11,020 options have been exercised as of December 29, 1999). In addition, between July 21, 1998 and October 19, 1998, 58,429 options were granted at a price of $17.51 per share under the Stock Option Plan of which none have been exercised as of December 29, Page 27 of 59 1999. At December 31, 1997, there were 1,316,656 shares of common stock of the Company outstanding. An additional 1,671,394 such shares were issued pursuant to the Equity Investment resulting in 2,988,050 shares of common stock outstanding at December 30, 1998. At December 29, 1999, 2,988,050 shares of common stock were outstanding. An additional 36,110 options were granted during fiscal 1999 at a price of $15.00 per share. Management Incentive Plan. Certain management employees of the Company, including directors of operations, managing partners (who are senior general managers), general managers and assistant managers are eligible, at the discretion of the Company, to participate in the Company's management incentive plan that provides incentives and rewards for performance with bonus awards that reflect a percentage of each restaurant's cash contribution. Payments under the management incentive plan are payable monthly or in accordance with the then current payroll cycle of the Company. Non-qualified Deferred Compensation Plan. The Company has established the NE Restaurant Company Deferred Compensation Plan (the "Non-qualified Deferred Compensation Plan") pursuant to which certain eligible executives of the Company may elect to defer a portion of their salary. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to The Merrill Lynch Non-qualified Deferred Compensation Plan Trust Agreement, dated December 21, 1993, by and between the Company and Merrill Lynch Trust Company of America, an Illinois corporation, as trustee, for the purpose of paying benefits under the Non-qualified Deferred Compensation Plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of December 29, 1999, trust account balances for Paul Hoagland and Dennis Pedra were $475,333 and $671,549, respectively. During 1999, the Company has also established the NE Restaurant Company, Inc. Executive Savings and Investment Plan (the "Executive Savings and Investment Plan") to which highly compensated executives of the company may elect to defer a portion of their salary and or earned bonus. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to the Scudder Kemper Investments Non-Qualified Deferred Compensation Plan Trust Agreement, dated September 20, 1999. The agreement is between the Company and Scudder Kemper Investments, as trustee, for the purpose of paying benefits under non-qualified deferred compensation plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of February 2000, there were 29 participants in the plan with a total market value of approximately $153,068. 401(k). The Company maintains two defined contribution plans (the "Bertucci's 401(k) Plan" and the "NE Restaurant 401(k) Plan"). Under the Bertucci's 401(k) Plan, substantially all employees of the Company may defer a portion of their current salary, on a pretax basis, to the 401(k) Plan. The Company makes a matching contribution to the 401(k) Plan that is allocated, based on a formula as defined by the 401(k) Plan, to the 401(k) Plan participants. The Company is currently in the process of terminating the NE Restaurant 401(k) Plan and as of May 1, 1999 all eligible participants were transferred to the Bertucci's 401(k) Plan in order to consolidate the Plans after the Acquisition. Matching contributions made by the Company for the years ended December 29, 1999, December 30, 1998 and December 31, 1997 were approximately $89,000, $160,000 and $67,000, respectively. Two officers of the Company are also the 401(k) Plan's trustees. Compensation of Directors Each of the Company's directors is reimbursed for any expenses incurred by such director in connection with such director's attendance at a meeting of the Board of Directors, or committee thereof. In addition, all directors are eligible to receive options under the Company's stock option plans. Directors receive no other compensation from the Company for serving on the Board of Directors. Page 28 of 59 Compensation Committee Interlocks and Insider Participation Effective as of January 1, 1998, the Board of Directors appointed a Compensation Committee and an Audit Committee. Currently, the Compensation Committee is comprised of Messrs. Jacobson, Mandel, Morgan and Devlin and the Audit Committee is comprised of Messrs. Parish, Mandel, Hoagland and Nace. Prior to 1998, the Board of Directors of the Company did not have a formal compensation committee and decisions with respect to executive officer compensation were made by Mr. Jacobson and other non-management directors. Mr. Jacobson has in the past and will in the future provide certain consulting services to the Company. See "Item 13. Certain Relationships And Related Transactions." Page 29 of 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table provides information at March 15, 2000, with respect to ownership of the Company's common stock $0.01 par value per share (the "Company Common Stock"), by (i) each beneficial owner of five percent or more of the Company's Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers and (iv) all directors and officers as a group. For the purpose of computing the percentage of the shares of Company Common Stock owned by each person or group listed in this table, shares which are subject to options exercisable within 60 days after March 15, 2000 have been deemed to be outstanding and owned by such person or group, but have not been deemed to be outstanding for the purpose of computing the percentage of the shares of Company Common Stock owned by any other person. Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Company Common Stock shown as beneficially owned by them. Shares Beneficially Percent Name and Address of Beneficial Owner Owned of Class - ------------------------------------ ----- -------- Puma Limited Partnership(1) 727,012 24.32% 101 Park Avenue New York, New York 10176 Thomas R. Devlin(2) 234,504 7.84% 1313 North Webb Road P.O. Box 782170 Wichita, Kansas 67206 Benjamin R. Jacobson(3) 691,872 23.14% 595 Madison Avenue New York, New York 10022 Stephen F. Mandel, Jr.(4) 89,602 3.00% James J. Morgan(5) 19,162 * David A. Roosevelt 2,856 * James R. Parish 11,422 * Dennis D. Pedra(6) 190,670 6.41% Paul V. Hoagland(7) 114,132 3.84% Raymond P. Barbrick 7,467 * Richmond A. Brittingham 8,412 * Paul J. Seidman 5,063 * All directors and executive officers as a group (10 persons) 1,375,162 37.50% * Less than 1%. Page 30 of 59 (1) Puma Limited Partnership, a New York limited partnership ("Puma") previously held its interest in the Company through Puma's wholly-owned subsidiary Holdings Group, Inc., a Delaware holding company ("HGI"). To permit Puma to directly hold such shares, HGI was merged with and into the Company pursuant to a merger agreement dated as of August 31, 1996 among HGI, Puma and the Company. (2) Includes 53,207 shares of Company Common Stock held by J.P. Acquisition Fund II, L.P., a Delaware limited partnership ( "JPAF II "), representing Mr. Devlin's pro rata interest as a limited partner of JPAF II. (3) Includes (a) 481,016 shares of Company Common Stock held by JPAF II, (b) 49,599 shares of Company Common Stock issuable upon exercise of outstanding stock options exercisable within 60 days after September 30, 1998 held by Jacobson Partners and (c) 13,800 shares of Company Common Stock held by trusts for the benefit of Mr. Jacobson's children, with respect to which a third party is trustee and has voting control. JPAF, Inc., a Delaware corporation, is the general partner of JPAF II and Mr. Jacobson is president of JPAF, Inc. Mr. Jacobson is a general partner of Jacobson Partners, which is the sole shareholder of JPAF, Inc. Mr. Jacobson disclaims beneficial ownership of the shares described (i) in clause (a) above, except to the extent of his general partnership interest in JPAF II, and (ii) in clause (c) above. (4) Includes 2,596 shares of Company Common held by Lone Spruce, L.P., 6,812 shares of Company Common Stock held by Lone Balsam, L.P. 6,812 shares of Company Common Stock held by Lone Sequoia, L.P. and 73,382 shares of Company Common Stock held by Lone Cypress, Ltd. Each of Lone Spruce, L.P., Lone Balsam, L.P. and Lone Sequoia, L.P., is a Delaware limited partnership of which Lone Pine Associates LLC is the general partner. Mr. Mandel is the managing member of Lone Pine Associates LLC. Lone Cypress Ltd. is a Cayman Islands company of which Lone Pine Capital LLC is the investment manager. Mr. Mandel is the managing member of Lone Pine Capital LLC. Mr. Mandel disclaims beneficial ownership of all such shares. (5) Includes 6,651 shares of Company Common Stock held by JPAF II, representing Mr. Morgan's pro rata interest as a limited partner of JPAF II. (6) Includes 30,000 shares of Company Common Stock held by trusts for the benefit of Mr. Pedra's children, with respect to which Mr. Pedra's sister is trustee and has sole voting control. Mr. Pedra disclaims beneficial ownership of all such shares. (7) Includes 14,000 shares of Company Common Stock held in custodial accounts for the benefit of Mr. Hoagland's children, with respect to which Mr. Hoagland is custodian and has sole voting control. Mr. Hoagland disclaims beneficial ownership of all such shares. Stockholders Agreement The Company and the current stockholders of the Company are parties to a Shareholders' Agreement, dated as of December 31, 1993 (the "Stockholders Agreement"). The Stockholders Agreement provides, among other things, that (i) a stockholder may not transfer his or its shares in the Company, whether voluntarily or by operation of law, other than in certain limited circumstances specified therein, including transfers through a right of first refusal procedure, distributions by a partnership to its partners, and gifts, trust contributions or bequests to or in favor of family members, (ii) the Company shall have the option to purchase the shares of any stockholder who is a manager of the Company following the termination of such stockholder's employment with the Company for any reason at a purchase price equal to book value or fair market value depending upon the reason for such termination as permitted under the Indenture, (iii) if the Company fails to exercise its option to purchase as described in the immediately preceding clause (ii), the remaining stockholders shall have the option to purchase the applicable shares, (iv) in certain circumstances, a stockholder seeking to transfer shares shall have the option to require the Company to purchase such stockholder's shares, (v) no transfer of shares may occur unless the transferee thereof agrees to be bound by the terms of the Stockholders Agreement and (vi) all share certificates shall bear customary legends and all share transfers must be in compliance with applicable securities laws. Page 31 of 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In consideration of certain financial advisory services provided by Benjamin R. Jacobson to the Company, Mr. Jacobson received from the Company a consulting fee with reimbursement of certain travel and other incidental expenses. The amounts paid to Mr. Jacobson for financial consulting fees were $61,000 for the year ended December 29, 1999, $330,000 for the year ended December 30, 1998 and $160,000 for each of the two years ended December 31, 1997, and 1996. In addition, Mr. Jacobson was paid $400,000 for consulting fees associated with obtaining the FFCA mortgages. In connection with the Acquisition, and in lieu of the Company's arrangement with Mr. Jacobson, the Company entered into a financial advisory services agreement with Jacobson Partners, Limited Partnership ("Jacobson Partners"), a limited partnership of which Mr. Jacobson is the managing general partner. Under this agreement, Jacobson Partners will provide various financial advisory services to the Company, including, among other things, assistance in preparing internal budgets, performing cash management activities, maintaining and improving accounting and other management information systems, negotiating financing arrangements, complying with public reporting and disclosure requirements and communicating with creditors and investors. In consideration of these services, the Company has entered into an agreement with Jacobson Partners whereby the Company would pay Jacobson Partners $500,000 per year together with reimbursement of certain travel and other incidental expenses. During 1999, Jacobson Partners agreed to reduce its annual fee to $250,000 until further notice. The amounts paid to Jacobson Partners for financial consulting fees were $313,000 for the fiscal year ended December 29, 1999 and $330,000 for the year ended December 30, 1998. The Company believes the financial advisory services agreement was made on terms that are no less favorable to the Company than those that could be obtained from an unrelated party. In addition, Jacobson Partners received from the Company a $1.0 million cash fee as compensation for Jacobson Partners' services as financial advisors in connection with the Acquisition and related financing. Jacobson Partners is the sole shareholder of the corporate general partner of JPAF II, which owns approximately 16.1% of the outstanding common stock of the Company. Mr. Jacobson is the Chairman of the Board of Directors of the Company. David A. Roosevelt, an associate with Jacobson Partners, is a Director of the Company. The Company has established the NE Restaurant Company Deferred Compensation Plan (the "Non-qualified Deferred Compensation Plan") pursuant to which certain eligible executives of the Company may elect to defer a portion of their salary. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to The Merrill Lynch Non-qualified Deferred Compensation Plan Trust Agreement, dated December 21, 1993, by and between the Company and Merrill Lynch Trust Company of America, an Illinois corporation, as trustee, for the purpose of paying benefits under the Non-qualified Deferred Compensation Plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of December 29, 1999, trust account balances for Paul Hoagland and Dennis Pedra were $475,333 and $671,549, respectively. In January 2000, the Non-qualified Deferred Compensation Plan was terminated and the balances were paid to the participants. During 1999, the Company has also established the NE Restaurant Company, Inc. Executive Savings and Investment Plan (the "Executive Savings and Investment Plan") to which highly compensated executives of the company may elect to defer a portion of their salary and or earned bonus. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to the Scudder Kemper Investments non-qualified deferred compensation plan trust agreement, dated September 20, 1999. The agreement is between the Company and Scudder Kemper Investments, as trustee, for the purpose of paying benefits under non-qualified deferred compensation plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of February 2000, there were 29 participants in the plan with a total market value of approximately $153,068. Page 32 of 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Public Accountants Consolidated Balance Sheets as of December 29, 1999 and December 30, 1998 Consolidated Statements of Operations for each of the years ended December 29, 1999, December 30, 1998 and December 31, 1997. Consolidated Statements of Stockholders' Equity for each of the years ended December 29, 1999, December 30, 1998 and December 31, 1997. Consolidated Statements of Cash Flows for each of the years ended December 29, 1999, December 30, 1998 and December 31, 1997. Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II: Valuation and Qualifying Accounts (3) Exhibit Index (b) The Company did not file a Current Report on Form 8-K during the 4th Quarter of fiscal 1999. Page 33 of 59 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. NE RESTAURANT COMPANY, INC. Registrant By: /s/ Benjamin R. Jacobson ------------------------------- Benjamin R. Jacobson, Chairman of the Board Date: March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Benjamin R. Jacobson Chairman of the Board of March 28, 2000 - ------------------------ Directors, Acting President Benjamin R. Jacobson and Chief Executive Officer, Treasurer (Principal Executive Officer) /s/ Paul V. Hoagland Executive Vice President, March 28, 2000 - ------------------------ Assistant Treasurer, Paul V. Hoagland Assistant Secretary, Director /s/ David J. Nace Executive Vice President, March 28, 2000 - ------------------------ Chief Financial Officer, David J. Nace Director (Principal Financial Officer and Principal Accounting Officer) /s/ David A. Roosevelt Director March 28, 2000 - ------------------------ David A. Roosevelt /s/ James J. Morgan Director March 28, 2000 - ------------------------ James J. Morgan Page 34 of 59 EXHIBIT LISTING AND INDEX ------------------------------------------------------------------------ Exhibit Description No. ------------------------------------------------------------------------ 2.1* Agreement and Plan of Merger, dated as of May 13, 1998 among Bertucci's, Inc., NE Restaurant Company, Inc. ("NERCO") and NERC Acquisition Corp. ------------------------------------------------------------------------ 3.1* Certificate of Incorporation of NERCO. ------------------------------------------------------------------------ 3.2* Certificate of Amendment of Certificate of Incorporation of NERCO, dated August 1, 1998. ------------------------------------------------------------------------ 3.3* Certificate of Amendment of Certificate of Incorporation of NERCO, dated August 20, 1998. ------------------------------------------------------------------------ 3.4* By-laws of NERCO. ------------------------------------------------------------------------ 3.5* Articles of Incorporation of Bertucci's of Baltimore County, Inc., as amended. ------------------------------------------------------------------------ 3.6* Bylaws of Bertucci's of Baltimore County, Inc. ------------------------------------------------------------------------ 3.7* Articles of Incorporation of Bertucci's of White Marsh, Inc. ------------------------------------------------------------------------ 3.8* Bylaws of Bertucci's of White Marsh, Inc. ------------------------------------------------------------------------ 3.9* Articles of Incorporation of Bertucci's of Columbia, Inc. ------------------------------------------------------------------------ 3.10* Bylaws of Bertucci's of Columbia, Inc. ------------------------------------------------------------------------ 3.11* Articles of Incorporation of Bertucci's of Anne Arundel County, Inc. ------------------------------------------------------------------------ 3.12* Bylaws of Bertucci's of Anne Arundel County, Inc. ------------------------------------------------------------------------ 3.13* Articles of Incorporation of Bertucci's of Bel Air, Inc. ------------------------------------------------------------------------ 3.14* Bylaws of Bertucci's of Bel Air, Inc. ------------------------------------------------------------------------ 3.15* Articles of Organization of Sal & Vinnie's Sicilian Steakhouse, Inc. ------------------------------------------------------------------------ 3.16* By-Laws of Sal & Vinnie's Sicilian Steakhouse, Inc. ------------------------------------------------------------------------ 3.17* Articles of Organization of Berestco, Inc., as amended ------------------------------------------------------------------------ 3.18* By-Laws of Berestco, Inc. ------------------------------------------------------------------------ 3.19* Articles of Organization of Bertucci's Restaurant Corp., as amended ------------------------------------------------------------------------ 3.20* By-Laws of Bertucci's Restaurant Corp. ------------------------------------------------------------------------ 3.21* Articles of Organization of Bertucci's, Inc., as amended ------------------------------------------------------------------------ 3.22* By-Laws of Bertucci's, Inc. ------------------------------------------------------------------------ 3.23* Articles of Organization of Bertucci's Securities Corporation ------------------------------------------------------------------------ 3.24* By-Laws of Bertucci's Securities Corporation ------------------------------------------------------------------------ 4.1* Indenture, date July 20, 1998 between NERCO and United States Trust Company of New York ("U.S. Trust") as Trustee (including the form of 10 3/4% Senior Note due July 15, 2008). ------------------------------------------------------------------------ 4.2* Supplemental Indenture, dated as of July 21, 1998 by and among Bertucci's, Inc., Bertucci's Restaurant Corp., Bertucci's Securities Corporation, Berestco, Inc., Sal & Vinnie's Sicilian Steakhouse, Inc., Bertucci's of Anne Arundel County, Inc., Bertucci's of Columbia, Inc., Bertucci's of Baltimore County, Inc., Bertucci's of Bel Air, Inc. and Bertucci's of White Marsh, Inc. (collectively, the "Guarantors"), NERCO and U.S. Trust ------------------------------------------------------------------------ 4.3* Purchase Agreement, dated July 13, 1998 by and among NERCO, Chase Securities Inc. and BancBoston Securities Inc. ------------------------------------------------------------------------ 4.4* Amendment No. 1 to the Purchase Agreement, dated July 21, 1998 by and among NERCO, Chase Securities Inc., BancBoston Securities Inc. and the Guarantors ------------------------------------------------------------------------ 4.5* Exchange and Registration rights Agreement, dated July 20, 1998 by and among NERCO, Chase Securities Inc. and BancBoston Securities Inc. ------------------------------------------------------------------------ 4.6* Amendment No. 1 to Exchange and Registration Rights Agreement, dated July 21, 1998 by and among NERCO, Chase Securities Inc., BancBoston Securities Inc. and the Guarantors. ------------------------------------------------------------------------ 4.7* Form of Stockholders Agreement, dated as of December 31, 1993 between the stockholders of NERCO and NERCO. ------------------------------------------------------------------------ 4.8* Form of Stockholders Agreement, dated September 15, 1997 by and among certain stockholders of NERCO and NERCO. ------------------------------------------------------------------------ Page 35 of 59 ------------------------------------------------------------------------ Exhibit Description No. ------------------------------------------------------------------------ 10.1* 1997 Equity Incentive Plan of NERCO, dated September 15, 1997 for certain key employees and directors of NERCO. ------------------------------------------------------------------------ 10.2* Form of NE Restaurant Company, Inc. 401(k) profit Sharing Plan, dated January 1, 1996. ------------------------------------------------------------------------ 10.3* Form of NE Restaurant Company Deferred Compensation Plan for certain eligible executives of NERCO. ------------------------------------------------------------------------ 10.4* Employment Agreement by and between NE Restaurant Company Limited Partnership, NE Restaurant (Glastonbury) Limited Partnership and NE Restaurant (Cambridge) Limited Partnership(collectively, the "Partnerships"), the respective general partners of the Partnerships, NERCO, NE Restaurant (Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and Dennis D. Pedra, dated September 30, 1991 (the "Pedra Employment Agreement"). ------------------------------------------------------------------------ 10.5* Employment Agreement by and between NE Restaurant Company Limited Partnership, NE Restaurant (Glastonbury) Limited Partnership and NE Restaurant (Cambridge) Limited Partnership (collectively, the "Partnerships"), the respective general partners of the Partnerships, NERCO, NE Restaurant (Connecticut), Inc. and NE Restaurant (Cambridge), Inc. and Paul V. Hoagland, dated September 30, 1991 (the "Hoagland Employment Agreement"). ------------------------------------------------------------------------ 10.6* Amendment to the Pedra Employment Agreement, dated December 31, 1993. ------------------------------------------------------------------------ 10.7* Amendment to the Hoagland Employment Agreement, dated December 31, 1993. ------------------------------------------------------------------------ 10.8* Form of Chili's Grill & Bar Restaurant Development Agreement, dated May 17, 1994 between Brinker International, Inc. and NERCO. ------------------------------------------------------------------------ 10.9* On The Border Restaurant Development Agreement, dated June 23, 1997 between Brinker International, Inc. and NERCO (including form of Franchise Agreement) as amended ------------------------------------------------------------------------ 10.10* Lease of Headquarters of the Company at 80A Turnpike Road, Westborough, Massachusetts, dated September 30, 1997, as amended on March 25, 1998. ------------------------------------------------------------------------ 10.11* Form of Credit Agreement among BankBoston, N.A., Chase Bank of Texas, N.A. NERCO, the Guarantors and Bertucci's of Montgomery County, Inc., dated as of July 21, 1998. ------------------------------------------------------------------------ 10.13* Loan Agreement, dated August 6, 1997 by and between FFCA Acquisition Corporation and NERC Limited Partnership. ------------------------------------------------------------------------ 10.14* First Amendment to Loan Agreement, dated August 6, 1997 by and between FFCA Acquisition Corporation and NERC Limited Partnership. ------------------------------------------------------------------------ 10.15* Form of Promissory Note between FFCA Acquisition Corporation and NERC Limited Partnership. ------------------------------------------------------------------------ 10.18* Form of Amendment to NE Restaurant Company, Inc. 401(k) Profit Sharing Plan, dated April 29, 1996. ------------------------------------------------------------------------ 10.19* Form of Amendment of Chili's Grill & Bar Restaurant Development Agreement, dated as of June 1, 1997 by and between Brinker International, Inc. and NE Restaurant Company, Inc. ------------------------------------------------------------------------ 10.20* Form of Chili's Grill & Bar Restaurant Franchise Agreement between Brinker International, Inc. and NE Restaurant Company, Inc. ------------------------------------------------------------------------ 10.21* Financial Advisory Services Agreement, dated July 21, 1998 by and between the Company and Jacobson Partners. ------------------------------------------------------------------------ 10.22* Loan Agreement, dated June 30, 1998 by and between FFCA Acquisition Corporation and NERC Limited Partnership II. ------------------------------------------------------------------------ 10.23* Form of Promissory Note between FFCA Acquisition Corporation and NERC Limited Partnership II. ------------------------------------------------------------------------ 12.1* Statement Regarding Computation of Ratio of Earnings to Fixed Charges. ------------------------------------------------------------------------ 21.1* Subsidiaries of Registrant. ------------------------------------------------------------------------ 27.1(1) Financial Data Schedule ------------------------------------------------------------------------ Page 36 of 59 - --------------------- * Filed as an Exhibit, with the same Exhibit number, to Amendment No. 3 to the Registrant's registration statement on Form S-4 filed with the Securities and Exchange Commission on November 12, 1998. (1) Filed herewith. Page 37 of 59 Report of Independent Public Accountants To the Board of Directors of NE Restaurant Company, Inc.: We have audited the accompanying consolidated balance sheets of NE Restaurant Company, Inc., a Delaware Corporation (the Company), and its subsidiaries as of December 29, 1999 and December 30, 1998, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 29, 1999. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits provide 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 NE Restaurant Company, Inc. and its subsidiaries as of December 29, 1999 and December 30, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 1999 in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts February 25, 2000 Page 38 of 59 NE RESTAURANT COMPANY, INC. CONSOLIDATED BALANCE SHEETS
As of Fiscal Year Ended: December 29, December 30, 1999 1998 ------------- ------------- ASSETS Current Assets: Cash $ 7,578,632 $ 5,456,110 Credit card receivables 1,630,844 1,115,925 Inventories 1,804,346 2,063,964 Prepaid expenses and other current assets 668,698 866,643 Short-term assets held for sale 1,847,584 -- Prepaid and current deferred income taxes 8,647,600 10,530,585 Preopening costs, net of accumulated amortization -- 1,135,055 ------------- ------------- Total current assets 22,177,704 21,168,282 ------------- ------------- Property and Equipment, at cost: Land and land right 8,422,025 8,190,477 Buildings and building improvements 12,199,895 11,676,629 Leasehold improvements 76,017,712 65,525,594 Furniture and equipment 44,732,345 38,436,293 ------------- ------------- 141,371,977 123,828,993 Less - Accumulated depreciation (27,662,046) (16,340,923) ------------- ------------- 113,709,931 107,488,070 Construction work in process 4,300,112 3,309,822 ------------- ------------- Net property and equipment 118,010,043 110,797,892 Goodwill, net 30,682,037 32,958,037 Deferred finance costs, net 8,761,004 9,116,719 Assets held for sale -- 6,601,000 Liquor licenses 3,057,235 3,138,464 Restricted investments 1,177,685 1,170,043 Deferred taxes, noncurrent 4,294,982 -- Other assets, net 1,417,140 1,781,278 ------------- ------------- TOTAL ASSETS $ 189,577,830 $ 186,731,715 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of mortgage loans and bonds payable 1,255,406 843,708 Accounts payable 13,720,971 10,649,346 Accrued expenses 23,337,877 27,790,614 Capital lease obligation- current portion 72,647 72,647 ------------- ------------- Total current liabiliites 38,386,901 39,356,315 Capital lease obligation, net of current portion 57,861 150,739 Mortgage loans payable, net of current portion 38,017,489 28,151,894 Bonds payable, net of current portion 100,000,000 100,000,000 Deferred rent and other long-term liabilities 5,590,010 4,960,790 ------------- ------------- TOTAL LIABILITIES 182,052,261 172,619,738 Commitments and contingencies (Note 8) Stockholders' Equity: Common stock, $.01 par value Authorized 4,000,000 shares Issued - 3,677,394 at December 29, 1999 and December 30, 1998 36,774 36,774 Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070) Additional paid in capital 29,003,920 29,053,920 Accumulated deficit (13,498,055) (6,961,647) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 7,525,569 14,111,977 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 189,577,830 $ 186,731,715 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. Page 39 of 59 NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended: December 29 December 30, December 31, ------------- ------------- ------------- 1999 1998 1997 ------------- ------------- ------------- Net sales $ 267,664,677 $ 160,805,177 $ 81,363,751 ------------- ------------- ------------- Cost of Sales and Expenses Cost of sales 73,859,788 44,376,765 23,383,851 Operating expenses 141,888,760 84,540,209 40,931,889 General and administrative expenses 14,608,799 8,203,830 4,206,862 Deferred rent, depreciation, amortization and preopening expenses 17,862,892 10,920,968 3,910,946 Taxes other than income 13,652,827 7,490,316 3,828,798 ------------- ------------- ------------- Total cost of sales and expenses 261,873,066 155,532,088 76,262,346 ------------- ------------- ------------- Income from operations 5,791,611 5,273,089 5,101,405 Interest expense, net 14,007,051 8,004,260 1,917,605 ------------- ------------- ------------- (Loss) income before (benefit) provision for income taxes and change in accounting principle (8,215,440) (2,731,171) 3,183,800 (Benefit) provision for income taxes (2,357,000) (901,808) 1,083,470 ------------- ------------- ------------- (Loss) income before change in accounting principle (5,858,440) (1,829,363) 2,100,330 Change in accounting principle, net of tax (Note 3) (677,968) ------------- ------------- ------------- Net (loss) income $ (6,536,408) $ (1,829,363) $ 2,100,330 ============= ============= ============= Basic and diluted (loss) earnings per share before change in accounting principle $ (1.97) $ (0.89) $ 1.22 Change in accounting principle per share (0.22) ------------- ------------- ------------- Basic and diluted (loss) earnings per share $ (2.19) $ (0.89) $ 1.22 ============= ============= ============= Weighted Average Shares Outstanding 2,988,050 2,053,692 1,722,918
The accompanying notes are an integral part of these consolidated financial statements. Page 40 of 59 NE RESTAURANT COMPANY, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) For the fiscal years ended December 29, 1999, December 30, 1998 and December 31, 1997
Common Stock Treasury Stock Retained Total -------------------------------------------- Earnings Stockholders' Number of $.01 per Number of Additional Paid (Accumulated Equity Shares Share Shares Amount In Capital Deficit) (Deficit) ------------------------------------------------------------------------------------------- Balance December 31, 1996 2,000,000 20,000 -- -- 4,447,933 4,989,313 9,457,246 Net income -- -- -- -- -- 2,100,330 2,100,330 Issuance of common stock 6,000 60 -- -- 22,440 -- 22,500 Cash dividend and return of capital -- -- -- -- (4,447,933) (12,221,927) (16,669,860) Purchase of treasury stock -- -- (716,429) (8,332,069) -- -- (8,332,069) Sale of treasury stock -- -- 27,085 314,999 -- -- 314,999 --------- ------- -------- ----------- ------------ ------------ ------------ Balance December 31, 1997 2,006,000 20,060 (689,344) (8,017,070) 22,440 (5,132,284) (13,106,854) Net (loss) -- -- -- -- -- (1,829,363) (1,829,363) Issuance of common stock 1,671,394 16,714 -- -- 29,031,480 -- 29,048,194 --------- ------- -------- ----------- ------------ ------------ ------------ Balance December 30, 1998 3,677,394 36,774 (689,344) (8,017,070) 29,053,920 (6,961,647) 14,111,977 Net (loss) -- -- -- -- -- (6,536,408) (6,536,408) Return of capital -- -- -- -- (50,000) -- (50,000) --------- ------- -------- ----------- ------------ ------------ ------------ Balance December 29, 1999 3,677,394 $36,774 (689,344) $(8,017,070) $ 29,003,920 $(13,498,055) $ 7,525,569 ========= ======= ======== =========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. Page 41 of 59 NE RESTAURANT COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOW For the years ended December 31, 1997 and December 30, 1998 and December 29, 1999
December 29, 1999 December 30, 1998 December 31, 1997 Cash Flows from Operating Activities: Net (loss) income $ (6,536,408) $ (1,829,363) $ 2,100,330 ------------------ ------------------ ------------------ Adjustments to reconcile net (loss) income to net cash provided by operating activities- Change in accounting principle 1,135,055 -- -- Depreciation, amortization and deferred rent 16,418,060 10,920,968 3,910,946 Write off of liquor licenses 81,229 -- -- Deferred income taxes (2,411,997) (1,570,892) (34,243) Changes in operating assets and liabilities- Refundable and prepaid income taxes -- (1,265,572) -- Inventories 259,618 (267,887) 115,026 Prepaid expenses, receivables and other (316,974) (335,987) 229,495 Accrued expenses (4,452,737) 9,642,444 753,267 Accounts payable 3,071,625 3,041,742 1,376,364 Other operating assets and liabilities (789,689) (1,113,121) 65,595 ------------------ ------------------ ------------------ Total adjustments 12,994,190 19,051,695 6,416,450 ------------------ ------------------ ------------------ Net cash provided by operating activities 6,457,782 17,222,332 8,516,780 ------------------ ------------------ ------------------ Cash Flows from Investing Activities: Business acquired -- (89,358,175) -- Additions to property and equipment (18,983,091) (19,354,475) (4,478,755) Proceeds from sale of properties 4,753,416 -- -- Development and franchise fees paid (240,000) (240,000) (320,000) Acquisition of liquor licenses -- (64,301) (20,464) Additions to preopening costs -- (1,954,082) (392,371) ------------------ ------------------ ------------------ Net cash used in investing activities (14,469,675) (110,971,033) (5,211,590) ------------------ ------------------ ------------------ Cash Flows from Financing Activities Borrowings of mortgage loans 11,272,464 5,677,000 24,250,000 Repayments of mortgage loans (995,171) (802,249) (154,149) Financing costs -- (7,876,598) (1,439,402) Cash dividend paid -- -- (12,221,927) Return of capital (50,000) -- (4,447,933) Issuance of common stock -- 29,048,084 22,500 Repurchase of treasury stock -- -- (8,260,827) Sale of treasury stock -- -- 243,757 Principal payments under capital lease obligations (92,878) (89,101) (85,463) Net payments under lines of credit -- (27,000,000) (1,375,000) Issuance of bonds payable -- 100,000,000 -- ------------------ ------------------ ------------------ Net cash provided by (used in) financing activities 10,134,415 98,957,136 (3,468,444) ------------------ ------------------ ------------------ Net Increase (Decrease) in Cash 2,122,522 5,208,435 (163,254) Cash, beginning of year 5,456,110 247,675 410,929 ------------------ ------------------ ------------------ Cash, end of year $ 7,578,632 $ 5,456,110 $ 247,675 ================== ================== ================== Supplemental Disclosure of Cash Flow Information: Cash paid for interest, net of amounts capitalized $ 13,808,068 $ 3,756,100 $ 1,946,811 ================== ================== ================== Cash paid for income taxes $ -- $ 457,000 $ 1,217,812 ================== ================== ==================
The accompanying notes are an integral part of these consolidated financial statements. Page 42 of 59 NE RESTAURANT COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 29, 1999 (1) ORGANIZATION AND OPERATIONS NE Restaurant Company, Inc. (a Delaware corporation) (the Company) was incorporated on January 1, 1994. The Company was formed to acquire and operate restaurants situated in Massachusetts, New Hampshire, Maine, Vermont, Rhode Island, Connecticut and portions of New York. As of December 29, 1999, the Company operated 38 Chili's and 5 On The Border restaurants in five New England states. The restaurants are operated under franchise agreements with Brinker International (a Texas corporation) (Brinker). The restaurants offer a full bar and dining service featuring a limited menu of broadly appealing food items prepared daily according to special Chili's and On The Border recipes. In July 1998, the Company completed its acquisition of Bertucci's, a publicly owned restaurant company. As of December 29, 1999, the Company owned and operated 79 full-service casual dining, Italian-style restaurants under the name Bertucci's Brick oven Pizzeria located primarily in the Northeastern and Mid-Atlantic United States and one Sal and Vinnie's Steakhouse located in Massachusetts. On August 6, 1997, the Company formed a wholly-owned limited partnership, NERC Limited Partnership (NERCLP), to obtain mortgage loans from FFCA Acquisition Corporation (FFCA) discussed below. On April 3, 1998, the Company formed a wholly owned limited partnership, NERC Limited Partnership II (NERCLPII) to obtain the additional FFCA loans, discussed below. All significant intercompany accounts and transactions have been eliminated in consolidation. Change in Year End In 1998, the Company changed its fiscal year to the 52 or 53 week period ended on the Wednesday closest to December 31st. Fiscal years prior to 1998 ended on December 31st. Each of the years presented consists of 52 weeks. (2) ACQUISITION On July 21, 1998, the Company through a wholly owned subsidiary, NE Restaurant Acquisition Corp., completed its acquisition of Bertucci's Inc. ("Bertucci's") pursuant to the terms of an Agreement and Plan of Merger dated as of May 13, 1998 (the "Acquisition"). The Company purchased all of the issued and outstanding shares of Bertucci's common stock at a price of $10.50 per share. The total purchase price was $89.4 million. NE Restaurant Acquisition Corp. had no operations prior to the acquisition and was subsequently merged into the Company. In connection with the Acquisition, the Company sold $100,000,000 principal amount of 10 3/4% Senior Notes due July 15, 2008. The net proceeds along with equity financing of approximately $29 million were used to consummate the Acquisition, repay certain outstanding indebtedness of the Company and Bertucci's and pay fees and expenses incurred in connection with the financing and the Acquisition. The purchase price, including expenses related to the acquisition has been allocated to assets and liabilities based on estimated fair market values on July 21, 1998. The difference between the purchase price and the net assets acquired of $34 million has been recorded as Goodwill and is being amortized over 15 years. Amortization expense for the period from the date of Acquisition to December 30, 1998 was approximately $1.0 million, and $2.3 million for the year ending December 29, 1999. Page 43 of 59 The purchase price has been allocated to assets acquired and liabilities assumed, as follows (dollars in thousands): Cash $ 3,669 Accounts receivable 204 Inventories 1,204 Other current assets 2,982 Property and equipment 67,976 Assets held for sale 6,601 Other assets 7,353 Accounts payable (3,620) Accrued liabilities (12,851) Line of credit and notes payable (13,525) Other liabilities (929) --------- Net assets acquired 59,064 Goodwill 33,963 Total purchase price 93,027 Cash acquired (3,669) --------- Net purchase price $ 89,358 ========= Assets Held for Sale The acquisition of Bertucci's included 90 Bertucci's restaurants and one Sal & Vinnie's restaurant. The Company sold the former Bertucci's headquarters located in Wakefield, Massachusetts and closed the Bertucci's test kitchen restaurant located in the former Bertucci's headquarters. The Company also closed 17 other underperforming Bertucci's restaurants. The assets related to these locations, which are primarily property and equipment, have been assigned a value of approximately $6.6 million based on estimated sale proceeds. For the year ended December 29, 1999 and from the date of the Acquisition to December 30, 1998, these locations had combined net sales of approximately $14.7 million and $7.0 million and an approximate combined loss from operations of $1.5 million and $0.7 million, respectively. Any operating profit or loss related to these locations held for sale are and will be included in the consolidated statement of income through the date of closing, as the operating locations to be sold had not been identified at the date of the Acquisition. As of December 29, 1999, 11 of these locations have been closed, including the former Bertucci's headquarters. The Company has received net proceeds from the sale of these assets of approximately $4.8 million. Subsequent to year-end, the remaining 7 locations were closed. As of the date of Acquisition, the Company accrued approximately $3 million related to closing these locations, consisting of estimated lease commitments beyond the closings and certain exit costs. During fiscal 1999 the Company utilized approximately $0.8 million of the store closing reserves. As of December 29, 1999 and December 30, 1998, these accrued costs are included in accrued expenses. The following presents the approximate unaudited proforma consolidated statements of income of the Company for the years ended December 29, 1999 and December 30, 1998 and December 31, 1997. The below statements give proforma effect to the acquisition of Bertucci's as if the Acquisition, the sale of $100,000,000 principal amount of 10.75% Notes and the closing of the restaurant locations discussed above had occurred on January 1, 1997. Page 44 of 59
December 29, December 30, December 31, 1999 1998 1997 (In thousands) Net Sales $ 252,920 $ 243,414 $ 218,084 Costs and Expenses- Cost of sales 69,483 64,980 57,486 Operating expenses 131,129 129,163 112,037 General and administrative expenses 14,472 11,604 12,353 Deferred rent, depreciation, amortization and preopening 17,863 18,167 16,124 Taxes other than income 12,568 11,799 10,819 --------- --------- --------- Total costs and expenses 245,516 235,713 208,819 Operating income 7,405 7,701 9,265 Interest expense, net 14,007 14,474 12,998 --------- --------- --------- Loss before income taxes (6,603) (6,773) (3,733) Income tax benefit (1,826) (1,838) (979) Change in accounting principle, net of tax (678) -- -- --------- --------- --------- Net loss (5,455) (4,935) (2,754) ========= ========= =========
In computing the proforma earnings, earnings have been reduced by the net interest expense on indebtedness incurred in connection with the Acquisition and related amortization of deferred finance costs. In addition, earnings have been increased by the losses incurred by the locations to be closed discussed above and decreased by the amortization of goodwill related to the Acquisition. The proforma information presented does not purport to be indicative of the results which would have been reported if these transactions had occurred on January 1, 1997, or which may be reported in the future. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reclassification Certain reclassifications have been made to prior year financial statements to make them consistent with the current year's presentation. Use of Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the reserve for closing restaurant locations as discussed previously in Note 2. Actual results could differ from those estimates. Page 45 of 59 Inventories Inventories are carried at the lower of first-in, first-out cost or market value, and consist of the following: 1998 1999 Food $ 1,190,961 $ 1,059,449 Liquor 664,560 663,089 Supplies 208,443 81,808 --------------- --------------- Total inventory $ 2,063,964 $ 1,804,346 =============== =============== Property and Equipment Property and equipment are carried at cost. The Company provides for depreciation and amortization using the straight-line method to charge the cost of properties to expense over the estimated useful lives of the assets. The lives used are as follows: Asset Classification Estimated Useful Life Buildings and building improvements 20-40 years Leasehold improvements Shorter of term of the lease (ranging between 10-20 years) or life of asset Furniture and equipment 3-10 years Included in furniture and equipment in the accompanying consolidated balance sheets is the opening amount of small kitchen and dining room equipment and utensils including but not limited to pots, pans, dishes, flatware and blenders ("Smallwares"). The Company capitalizes a normal complement of Smallwares for each location prior to the store's opening date and expenses all Smallwares purchased after each store's opening date. Long-Lived Assets In 1996, the Financial Accounting Standards Board (FASB) issued 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's long-lived assets consist primarily of goodwill, real estate and leasehold improvements related to its restaurant operations. SFAS No. 121 requires management to consider whether long-lived assets have been impaired by comparing undiscounted future cash flows expected to be generated from utilizing these assets to their carrying amounts. If cash flows are not sufficient to recover the carrying amount of the assets, impairment has occurred and the assets should be written down to their fair market value. Significant estimates and assumptions regarding future sales, cost trends, productivity and market maturity are required to be made by management in order to test for impairment under this standard. Based on current facts, estimates and assumptions, management believes that no assets are impaired under this standard. There is no assurance that management's estimates and assumptions will prove correct. Land Right In 1994, the Company executed an agreement to prepay the rent associated with a 99-year lease for land in Southington, Connecticut. Prepaid rental payments totaled $735,000 and are reflected as a land right in the accompanying consolidated balance sheets. The lease is renewable for an additional 99 years for a payment of $1. Page 46 of 59 Capitalized Interest The Company capitalizes interest costs during the construction period on capital expenditures funded by debt. Total interest costs incurred and amounts capitalized are as follows:
1999 1998 1997 Total interest expense $14,073,213 $ 8,200,344 $ 1,961,428 Less--Amount capitalized 66,162 196,084 43,823 ----------- ----------- ----------- Interest expense, net of amounts capitalized $14,007,051 $ 8,004,260 $ 1,917,605 =========== =========== ===========
Other Assets Other assets are comprised partially of development and franchise fees (see Note 10) and trademarks. Development fees are amortized over seven years, and franchise fees are amortized over the life of the franchise agreements (20 years). Trademarks are amortized over 25 years. Accumulated amortization of these assets amounts to approximately $682,543 and $509,000 at December 29, 1999 and December 30, 1998, respectively. Other assets also include investments restricted for the payment of certain officers' deferred compensation. These investments are stated at market value at December 29, 1999 and December 30, 1998. Since these securities are from time to time bought and sold at the discretion of the officers they are classified as trading securities. Preopening Costs In April 1998, the American Institute of Certified Public Accountants (AICPA) issued its Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 was effective for financial statements for fiscal years beginning after December 15, 1998. The Company adopted SOP 98-5 as of January 1, 1999. Upon adoption, the Company incurred a cumulative effect of a change in accounting principle of approximately $1.1 million (approximately $0.7 million net of tax) in 1999. This charge was primarily to write off unamortized preopening costs which were previously amortized over the 12-month period subsequent to a restaurant opening. These costs primarily consist of costs incurred to develop new restaurant management teams; travel and lodging for both the training and opening unit management teams; and the food, beverage and supplies costs incurred to perform role-play testing of all equipment, concept systems and recipes. Accrued Expenses Accrued expenses consisted of the following as of December 29, 1999 and December 30, 1998: 1999 1998 Accrued occupancy costs $ 896,765 $ 1,418,327 Accrued payroll and related benefits 7,219,555 9,490,222 Accrued interest 4,999,345 4,800,362 Accrued advertising 1,692,244 1,741,820 Accrued royalties 553,034 420,022 Unredeemed gift certificates 2,100,453 1,857,568 Accrued sales tax 787,111 623,958 Accrued income taxes 645,320 195,932 Store closing reserves 2,281,524 3,040,000 Other accrued liabilities 2,162,526 4,202,403 ----------- ----------- $23,337,877 $27,790,614 =========== =========== Page 47 of 59 Deferred Finance Costs Underwriting, legal and other direct costs incurred in connection with the issuance of the senior notes and mortgages discussed below have been capitalized and are being amortized over the life of the related borrowings. Liquor Licenses Liquor licenses purchased are accounted for at the lower of cost or market. Annual renewal fees are expensed as incurred. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, line of credit loans and long-term debt. The carrying amounts of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these instruments. The senior bank facility loans bear interest at a variable market rate and therefore, the carrying amount approximates fair value. The fair value of the Company's senior notes and mortgage loans based on quoted market prices for similar issues approximate the current carrying value. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130, which is effective for fiscal 1999, establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income for fiscal 1999, 1998 and 1997 is equal to net income as reported. Segment Reporting In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise and requires that a company report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 allows aggregation of similar operating segments into a single operating segment if the businesses are considered similar under the criteria. The Company believes it meets the aggregation criteria for its operating segments. New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and for hedging activities) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedging accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June15, 2000. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. The Company does not anticipate that the adoption of this new standard will have a material impact on the Company's fiscal position or results of operations. Page 48 of 59 (4) INCOME TAXES The Company accounts for income taxes under the liability method in accordance with SFAS 109. The components of the (benefit) provision for income taxes for the years ended December 29, 1999, December 30, 1998, and December 31, 1997 are as follows:
1999 1998 1997 Current- Federal $ (276,651) $ 460,329 $ 704,254 State (125,459) 208,755 304,834 ----------- ----------- ----------- (402,110) 669,084 1,009,088 ----------- ----------- ----------- Deferred-- Federal (1,659,438) (1,080,772) 56,835 State (752,539) (490,120) 17,547 ----------- ----------- ----------- (2,411,977) (1,570,892) 74,382 ----------- ----------- ----------- Total (benefit) provision for income taxes (2,814,087) (901,808) 1,083,470 (Benefit) on change in accounting principle (457,087) ----------- ----------- ----------- (Benefit) provision on continuing (loss) income $(2,357,000) $ (901,808) $ 1,083,470
A reconciliation of the amount computed by applying the statutory federal income tax rate of 34% to (loss) income before taxes and change in accounting principle for the years ended December 29, 1999, December 30, 1998 and December 31, 1997 are as follows:
1999 1998 1997 Income tax (benefit) provision computed at federal statutory rate $(2,793,250) $ (928,598) $ 1,082,492 State taxes, net of federal benefit (485,355) (216,253) 212,771 FICA tax credit (340,000) (210,000) (216,253) Targeted jobs tax credit (1,650) (3,197) (1,897) Goodwill amortization 773,840 484,953 -- Other 32,328 (28,713) 6,357 ----------- ----------- ----------- Income tax (benefit) provision $(2,814,087) $ (901,808) $ 1,083,470 =========== =========== ===========
Page 49 of 59 Significant items giving rise to deferred tax assets and deferred tax liabilities at December 29, 1999 and December 30, 1998 are as follows:
1999 1998 Deferred tax assets- Deferred rent $ 1,683,890 $ 1,009,744 Store closing write downs and liabilities 6,155,245 7,467,000 Deferred and accrued compensation 990,593 549,223 Net operating loss carryforwards 4,169,304 -- Accrued expenses and other 1,996,537 1,658,012 ------------ ------------ 14,995,569 10,683,979 Deferred tax liabilities- Accelerated tax depreciation (1,656,235) (971,239) Pre-opening costs -- (344,094) Liquor licenses (396,752) (118,577) ------------ ------------ (2,052,987) (1,433,910) ------------ ------------ Total net deferred tax assets $ 12,942,582 $ 9,250,069 ============ ============ Current portion $ 8,647,600 $ 9,265,011 ============ ============ Noncurrent portion $ 4,294,982 $ (14,942) ============ ============
As of December 29, 1999, the Company had net operating loss carryforwards for federal purposes of approximately $10.4 million which are subject to review by the Internal Revenue Service. The net operating loss carryforwards begin to expire in 2014 and are subject to limitations on their use in any one year if there should be a change in control of the Company. No valuation allowance has been provided as the Company believes it is more likely than not that all of the net deferred tax assets will be realized. (5) SENIOR BANK FACILITY During 1998, the Company entered into the Senior Bank Facility with BankBoston, N.A. and Chase Bank of Texas, N.A (the Banks). The Senior Bank Facility replaced the existing Line-of-Credit Loans between the Company and BankBoston. The Senior Bank Facility is secured by substantially all the tangible and intangible assets of the Company and its subsidiaries, other than NERCLP. The Senior Bank Facility is in effect until August 2001, under which the Company may borrow up to $20,000,000 and will include a $1,000,000 sub-limit for the issuance of letters of credit. The Company pays a commitment fee of 0.5% on the aggregate undrawn portion of the Senior Bank Facility. Borrowings bear interest at the Company's option of either, the LIBOR rate, as defined in the agreement, plus an applicable margin based on the Company's ratio of debt to EBITDA, or the Base Rate, as defined in the agreement, plus an applicable margin based on the Company's ratio of debt to EBITDA. The weighted average interest rate on the line of credit loans and the Senior Bank Facility during months with outstanding borrowings in 1999 and 1998 was 7.75%. No borrowings were outstanding as of December 29, 1999 and December 30, 1998. The loan agreement contains various restrictive covenants that, among other thing, require the Company to comply with specified financial ratios and tests, including minimum interest coverage, minimum fixed charge coverage, and maximum leverage ratios, minimum net worth levels and maximum capital expenditure amounts. The Company was in compliance with these covenants at December 29, 1999. Page 50 of 59 (6) CAPITAL LEASE OBLIGATION During 1996, the Company entered into a capital lease for restaurant equipment. At the expiration of the lease in 2001, the Company may purchase the equipment at the then fair market value. The minimum lease payments due under the lease as of December 29, 1999 are as follows: Year- 2000 $ 92,892 2001 61,928 -------- 154,820 Less--Interest 24,312 -------- $130,508 ======== Current portion of obligation $ 72,647 ======== Long-term portion of obligation $ 57,861 ======== (7) MORTGAGE LOANS AND BOND PAYABLE On August 6, 1997, NERCLP entered into a loan agreement (the Loan Agreement) with FFCA Acquisition Corporation (FFCA) in the aggregate amount of $22,400,000 (the Initial FFCA Loans), evidenced by promissory notes maturing on various dates from September 2002 through September 2017, with interest at 9.67% per annum. Proceeds from the FFCA Loans were used to pay the Company for real estate assets sold and transferred to NERCLP. The Company then used the sale proceeds to make certain payments to its shareholders (see Note 13 for further discussion). NERCLP mortgaged 17 restaurant properties to FFCA as collateral for the Initial FFCA Loans. On or about August 28, 1997, NERCLP obtained additional financing from FFCA in the aggregate amount of $1,850,000 (the 1997 Additional FFCA Loans), evidenced by promissory notes maturing on various dates from September 2007 through September 2017, with interest at 9.701% per annum. The 1997 Additional FFCA Loans were collateralized by mortgages on three restaurant properties. Between July 2, 1998 and December 10, 1998, NERCLPII obtained additional financing from FFCA in the aggregate amount of $5,677,000 (the 1998 Additional FFCA Loans, which together with the Initial FFCA Loans and the 1997 Additional FFCA Loans are hereinafter referred to as the FFCA Loans), evidenced by promissory notes maturing on various dates from January 2006 to January 2019, with interest rates ranging from 8.440% to 9.822% per annum. The 1998 Additional FFCA Loans were collateralized by mortgages on 4 restaurant properties. The net book value of all properties covered by mortgages granted to FFCA on the dates of borrowing was $48,221,000. For the years ended December 30, 1999 and December 30, 1998, interest related to the FFCA Loans was $2,995,000 and $2,362,000, respectively. The Loan Agreements with FFCA contain restrictive covenants that requires the maintenance of Fixed Charge Coverage Ratios of 1.25:1, as determined on each December 31, with respect to each of the FFCA mortgaged restaurant properties individually. Fixed Charge Coverage Ratio is defined in the Loan Agreement to mean the ratio of (a) the sum of net income, depreciation and amortization, interest expense and operating lease expense, less a corporate overhead allocation equal to 5% of gross sales, for an FFCA mortgaged restaurant property to (b) the sum of FFCA debt service payments, equipment lease and equipment loan payments and ground lease rental payments for such restaurant property. If the Fixed Charge Coverage Ratio is not achieved by any individual restaurant, the Company is required to pay FFCA an amount sufficient to comply with the Fixed Charge Coverage Ratio. The Company was in compliance with these covenants as of December 29, 1999. Existing loan documents between FFCA, NERCLP and NERCLPII are cross-defaulted and cross-collateralized with all other loan agreements, existing or forthcoming, between FFCA, NERCLP and NERCLPII or the Company, subject to certain limited exceptions. Page 51 of 59 On July 13, 1998, the Company issued $100 million of 10 3/4% Senior Notes due 2008 (the Notes). Interest on the Notes is payable semi-annually on January 15 and July 15, with payments commencing on January 15, 1999. The net proceeds were $92.0 million, after expenses in connection with the offering. The proceeds were used to fund the purchase price of the acquisition of Bertucci's, Inc. and its subsidiaries and, along with equity contributions, to repay outstanding bank debt. After July 15, 2003, the Company may, at its option, redeem any or all of the Notes at face value, plus a premium of up to approximately 5% through July 15, 2006. Thereafter, the Notes may be redeemed at face value. In addition, anytime through July 15, 2001, the Company may redeem up to 35% of the Notes, subject to restrictions, with the net proceeds of one or more Equity Offerings, as defined, at a redemption price of 110.75% of the principal amount of such Notes. Additionally, under certain circumstances, including a change of control or following certain asset sales, the holders of the Notes may require the Company to repurchase the Notes, at a redemption price of 101%. The Notes are fully and unconditionally guaranteed, on a joint and several basis, on an unsecured senior basis, by all of the Company's subsidiaries, other than those that are, or will become, parties to the FFCA loans or other similar secured financings. These Senior Notes were exchanged for Senior Notes with the same terms pursuant to a registered exchange offer that was completed in November 1998. The loan payments due under the FFCA loans and the Notes as of December 29, 1999 are as follows: Year Ending- 2000 $ 1,255,406 2001 1,416,586 2002 1,527,076 2003 1,580,098 2004 1,694,181 Thereafter 131,799,548 ------------- $ 139,272,895 ============= (8) COMMITMENTS AND CONTINGENCIES Operating Leases The Company has entered into numerous lease arrangements, primarily for restaurant land, equipment and buildings, which are noncancelable and expire on various dates through 2028. Some operating leases contain rent escalation clauses whereby the rent payments increase over the term of the lease. Rent expense includes base rent amounts, percentage rent payable periodically, as defined in each lease, and rent expense accrued to recognize lease escalation provisions on a straight-line basis over the lease term. Rent expense recognized in operating expenses in the accompanying consolidated statements of income was approximately $15,938,0000, $10,292,000 and $3,955,000 for the years ended December 29, 1999, December 30, 1998 and December 31, 1997, respectively. The excess of accrued rent over amounts paid is classified as deferred rent in the accompanying consolidated balance sheets. Page 52 of 59 The approximate minimum rental payments due under all noncancelable operating leases as of December 29, 1999 are as follows: Year- 2000 $ 15,102,006 2001 15,229,451 2002 14,504,542 2003 12,671,135 2004 11,788,620 Thereafter 68,622,901 ------------- $ 137,918,655 ============= Certain leases require the payment of an additional amount, calculated as a percentage of annual sales, as defined in the lease agreement, which exceeds annual minimum rentals. The percentage rent factors generally range from 3% to 6% of sales. Contingencies The Company is subject to various legal proceedings that arise in the ordinary course of business. Based on discussion with the Company's legal counsel, management believes that the amount of ultimate liability with respect to these actions will not be material to the financial position or results of operations of the Company. (9) RELATED PARTIES Under the terms of the corporation agreements, the stockholders have consented to the payment of an ongoing financial consulting fee to Jacobson Partners, Limited Partnership ("Jacobson Partners"), a stockholder of the corporation. The amounts paid to Jacobson Partners for financial consulting fees were $313,000, $330,000 and $160,000 for the years ended December 29, 1999, December 30, 1998 and December 31, 1997, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of income. In addition, during fiscal 1998, Jacobson Partners was paid $400,000 for consulting fees associated with obtaining the above mentioned mortgages and $1,000,000 for consulting fees related to the Acquisition and related financing. The Company has a nonqualified deferred compensation plan (the Plan) for certain officers and management personnel, which allows them to defer receiving a portion of their compensation. This compensation is not taxable to the employee or deductible to the Company for tax purposes until the compensation is paid. An officer of the Company, who is also a participant in the Plan, is the trustee of the Plan. (10) FRANCHISE AND DEVELOPMENT AGREEMENTS All of the Company's Chili's and On the Border restaurants operate under franchise agreements with Brinker. The agreements provide, among other things, that the Company pay an initial franchise fee of $40,000 per restaurant and a royalty fee of approximately 4% of sales. The initial franchise fee is payable in two installments of $20,000. The first installment is due on or before the construction commencement date. The second installment is due at least 10 days prior to the date on which the restaurant opens for business. The initial franchise fees are capitalized and amortized over the term of the franchise agreement. Royalty fees averaged 3.9% of sales in 1999 and 1998 and 3.8% in 1997. In addition, the Company is required to pay an advertising fee to Brinker of .5% of sales and spend an additional 2% of sales on local advertising. In return, Brinker is obligated to provide certain support for restaurant operations, siting and promotion. Royalty and advertising fees are expensed as incurred. In addition, according to the franchise agreements, the Franchisor may require the Company to pay an additional amount of advertising. The Franchisor requested that the Company pay an additional 0.375% of net sales for supplemental advertising for the period from September 1999 through August 2000. In 1991, the Company entered into a development agreement with Brinker whereby the Company was granted the exclusive right to develop additional Chili's franchises within a certain geographic territory. In 1995, the Company paid $150,000 to renew the agreement, which now expires in 2000. The Company is required to develop a certain number of Chili's restaurants during the term of the agreement in order to maintain its exclusive development rights. Page 53 of 59 The agreement is renewable at the Company's option and the Company exercised its option to renew verbally with Brinker during 1999. The Company will be required to pay additional sums at the expiration date in connection with the renewal. Also during 1995, the Company paid $50,000 to Brinker in exchange for both the right to open its first On The Border franchise and the option to enter into an On The Border development agreement in the future. In 1997, the Company elected the option to enter into the On The Border development agreement, and the above $50,000 fee was applied against the cost of the development agreement. The On The Border development agreement expires in 2004. (11) 401(K) PROFIT SHARING PLAN AND DEFERRED COMPENSATION PLAN(S) The Company maintains two defined contribution plans (the "Bertucci's 401(k) Plan" and the "NE Restaurant 401(k) Plan"). Under the Bertucci's 401(k) Plan, substantially all employees of the Company may defer a portion of their current salary, on a pretax basis, to the 401(k) Plan. The Company makes a matching contribution to the Bertucci's 401(k) Plan that is allocated, based on a formula as defined by the Bertucci's 401(k) Plan, to the Bertucci's 401(k) Plan participants. The Company is currently in the process of terminating the NE Restaurant 401(k) Plan and as of May 1, 1999 all eligible participants were transferred to the Bertucci's 401(k) Plan in order to consolidate the Plans after the Acquisition. In connection with the termination of the NE Restaurant 401(k) Plan, all amounts became fully vested. Matching contributions made by the Company for the years ended December 29, 1999, December 30, 1998 and December 31, 1997 were approximately $89,000, $160,000 and $67,000, respectively. Prior to the termination of the NE Restaurant 401(k) Plan, two officers of the Company were also the NE Restaurant 401(k) Plan's trustees. The Company has established the NE Restaurant Company Deferred Compensation Plan (the "Non-qualified Deferred Compensation Plan") pursuant to which certain eligible executives of the Company may elect to defer a portion of their salary. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to The Merrill Lynch Non-qualified Deferred Compensation Plan Trust Agreement, dated December 21, 1993, by and between the Company and Merrill Lynch Trust Company of America, an Illinois corporation, as trustee, for the purpose of paying benefits under the Non-qualified Deferred Compensation Plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of December 29, 1999, trust account balances for Paul Hoagland and Dennis Pedra were $475,333 and $671,549, respectively. In January 2000, the Non-qualified Deferred Compensation Plan was terminated and the balances were paid to the participants. During 1999, the Company has also established the NE Restaurant Company, Inc. Executive Savings and Investment Plan (the "Executive Savings and Investment Plan") to which highly compensated executives of the company may elect to defer a portion of their salary and or earned bonus. The Company maintains an irrevocable grantor trust which has been established by the Company, as grantor, pursuant to the Scudder Kemper Investments non-qualified deferred compensation plan trust agreement, dated September 20, 1999. The agreement is between the Company and Scudder Kemper Investments, as trustee, for the purpose of paying benefits under non-qualified deferred compensation plan. The trust assets are held separately from other funds of the Company, but remain subject to claims of the Company's general creditors in the event of the Company's insolvency. As of February 2000, there were 29 participants in the plan with a total market value of approximately $153,068. (12) STOCK OPTION PLAN On September 15, 1997, the Board of Directors of the Company established the 1997 Equity Incentive Plan, which included a nonqualified stock option plan (the "Option Plan"), for certain key employees and directors. The Option Plan is administered by the Board of Directors of the Company and may be modified or amended by the Board of Directors in any respect. Page 54 of 59 Between September 15, 1997 and December 4, 1997, 331,123 options were granted. Between July 21, 1998 and October 19, 1998, 58,429 options were granted. During 1999, 36,110 options were granted. The options are exercisable as follows: Two years beyond options grant date 25% Three years beyond option grant date 50% Four years beyond option grant date 75% Five years beyond option grant date 100% The Company accounts for the Option Plan under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized since the options are granted at fair market value. Had compensation cost for the Option Plan been determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Company's net income (loss) and earnings per share would have been reduced to the following pro forma amounts: 1999 1998 1997 Net (loss) income- As reported $ (6,536,408) $ (1,829,363) $ 2,100,330 Pro Forma $ (6,800,665) $ (2,051,121) $ 2,100,330 EPS- As reported $ (2.19) $ (0.89) $ 1.22 Pro Forma $ (2.28) $ (1.00) $ 1.22 A summary of the Option Plan activity for the years ended December 29, 1999 and December 30, 1998 and December 31, 1997 is presented in the table and narrative below.
1999 1998 1997 Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 378,532 $ 12.54 331,123 $ 11.63 -- $ -- Granted 36,110 $ 15.00 58,429 $ 17.51 331,123 $ 11.63 Exercised -- $ -- (11,020) $ (11.63) -- $ -- Forfeited -- $ -- -- $ -- -- $ -- Expired -- $ -- -- $ -- -- $ -- ---------------------------------------------------------------- Outstanding at end of year 414,642 $ 12.75 378,532 $ 12.54 331,123 $ 11.63 ================================================================ Exercisable at end of year 80,026 $ 11.63 -- $ -- -- $ -- Weighted average fair value of each option granted $ 3.28 $ 3.24 $ 3.06
The 414,642 options outstanding at December 29, 1999 have a remaining weighted average contractual life of approximately five years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999: weighted average risk-free interest rates of 5.66 percent; weighted average expected lives of five years; and expected volatility of 0%. The weighted average risk-free interest rate used for 1998 was 5.29% and, for 1997, 5.88%. Page 55 of 59 (13) STOCKHOLDERS' EQUITY In August 1997, the Company made a dividend and return of capital payout to shareholders of $8.31 per share from additional paid-in capital, with the excess payout being charged to retained earnings. In addition, the Company repurchased 716,429 shares of common stock at $11.63 per share. The Company's repurchase of shares of common stock was recorded as treasury stock, at cost, and resulted in a reduction of Stockholders' Equity (Deficit). During 1999, the Company returned capital of $50,000 that was previously paid into the Company from two employees. (14) SUBSIDIARY GUARANTORS The Notes (see Note 7) are fully and unconditionally guaranteed on an unsecured senior basis by all of the Company's existing and future subsidiaries, other than those that are, or will become, parties to the FFCA loans or other similar secured financings (such guarantors, collectively, the Guarantor Subsidiaries). Those subsidiaries that are, or will become, parties to the FFCA loans and other similar secured financings are collectively known as the "Non-Guarantor Subsidiaries." The following are the 1999 consolidating financial statements of the combined Guarantor Subsidiaries and combined Non-Guarantor Subsidiaries: Page 56 of 59 NE RESTAURANT COMPANY, INC. CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 29, 1999
Combined Combined Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidated ------------- ------------- ------------- ASSETS Current Assets: Cash $ 7,578,632 $ 7,578,632 Credit card receivables 1,630,844 1,630,844 Inventories 1,804,346 1,804,346 Prepaid expenses and other current assets 668,698 668,698 Short-term assets held for sale 1,847,584 1,847,584 Prepaid and current deferred income taxes 8,647,600 8,647,600 Preopening costs, net of accumulated amortization -- -- ------------- ------------- ------------- Total current assets 22,177,704 -- 22,177,704 ------------- ------------- ------------- Property and Equipment, at cost: Land and land right 2,460,412 5,961,613 8,422,025 Buildings and building improvements 6,511,957 5,687,938 12,199,895 Leasehold improvements 50,218,926 25,798,786 76,017,712 Furniture and equipment 28,943,855 15,788,490 44,732,345 ------------- ------------- ------------- 88,135,150 53,236,827 141,371,977 Less - Accumulated depreciation (15,799,189) (11,862,857) (27,662,046) ------------- ------------- ------------- 72,335,961 41,373,970 113,709,931 Construction work in process 4,300,112 -- 4,300,112 ------------- ------------- ------------- Net property and equipment 76,636,073 41,373,970 118,010,043 Goodwill, net 30,682,037 30,682,037 Deferred finance costs, net 7,169,734 1,591,270 8,761,004 Assets held for sale -- -- Liquor licenses 3,057,235 3,057,235 Restricted investments 1,177,685 1,177,685 Deferred taxes, noncurrent 4,294,982 4,294,982 Other assets, net 1,417,140 1,417,140 ------------- ------------- ------------- TOTAL ASSETS $ 146,612,590 $ 42,965,240 $ 189,577,830 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current portion of mortgage loans and bonds payable 25,000 1,230,406 1,255,406 Accounts payable 13,720,971 13,720,971 Accrued expenses 23,337,877 23,337,877 Capital lease obligation- current portion 72,647 -- 72,647 Intercompany Payable (4,315,067) 4,315,067 -- ------------- ------------- ------------- Total current liabiliites 32,841,428 5,545,473 38,386,901 Capital lease obligation, net of current portion 57,861 -- 57,861 Mortgage loans payable, net of current portion (0) 38,017,489 38,017,489 Bonds payable, net of current portion 100,000,000 100,000,000 Deferred rent and other long-term liabilities 5,590,010 5,590,010 ------------- ------------- ------------- TOTAL LIABILITIES 138,489,299 43,562,962 182,052,261 Commitments and contingencies Stockholders' Equity: Common stock, $.01 par value Authorized 4,000,000 shares Issued - 3,677,394 at December 29, 1999 and December 30, 1998 36,774 36,774 Less Treasury stock-689,344 shares at cost (8,017,070) (8,017,070) Additional paid in capital 29,003,920 29,003,920 Accumulated deficit (12,900,333) (597,722) (13,498,055) ------------- ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 8,123,291 (597,722) 7,525,569 ------------- ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,612,590 $ 42,965,240 $ 189,577,830 ============= ============= =============
Page 57 of 59 NE RESTAURANT COMPANY, INC. CONSOLIDATING STATEMENTS OF INCOME FOR FISCAL YEAR ENDED DECEMBER 29, 1999
Combined Combined Guarantor Non-Guarantor Subsidiaries Subsidiaries Consolidated ------------- ------------- ------------- Net sales $ 267,664,677 $ -- $ 267,664,677 ------------- ------------- ------------- Cost of Sales and Expenses Cost of sales 73,859,788 -- 73,859,788 Operating expenses 146,949,105 (5,060,345) 141,888,760 General and administrative expenses 14,608,799 -- 14,608,799 Deferred rent, depreciation, amortization and preopening expenses 15,797,693 2,065,199 17,862,892 Taxes other than income 13,652,827 -- 13,652,827 ------------- ------------- ------------- Total cost of sales and expenses 264,868,212 (2,995,146) 261,873,066 ------------- ------------- ------------- Income from operations 2,796,465 2,995,146 5,791,611 Interest expense, net 11,011,905 2,995,146 14,007,051 ------------- ------------- ------------- Loss before income tax benefit and change in accounting principle (8,215,440) -- (8,215,440) Income tax benefit (2,357,000) -- (2,357,000) ------------- ------------- ------------- Loss before change in accounting principle (5,858,440) -- (5,858,440) Change in accounting principle, net of tax (677,968) (677,968) ------------- ------------- ------------- Net Loss (6,536,408) -- (6,536,408) ============= ============= =============
Page 58 of 59 NE Restaurant Company, Inc. Schedule II: VALUATION AND QUALIFYING ACCOUNTS. For the year ended December 29, 1999
Column A Column B Column C Column D Column E Additions (1) (1) Balance at Charged to Charged to other Deductions -- Balance at end of beginning of costs and accounts -- describe period Description 1 period expenses describe Store closing reserves 1998 $ 0 $ 0 $ 3,040,000 $0 $ 3,040,000 Store closing reserves 1999 $ 3,040,000 $ 0 $ 0 ($758,476) $ 2,281,524
(1) As described in Note 2 to the consolidated financial statements, store closing reserves have been established as part of the Acquisition of Bertucci's. These reserves are related to estimated future lease commitments and exit costs to close 18 Bertucci's locations. Usage to date includes costs related to facility closings, restaurant employee severance and legal fees associated with the store closings. Page 59 of 59 EX-27 2 EXHIBIT 27
5 THIS SCHEDULED CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR FISCAL YEAR EDNDED DECEMBER 29, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-29-2000 DEC-30-1998 DEC-31-1998 JAN-01-1998 DEC-29-1999 DEC-30-1998 7,579 5,456 0 0 1,631 1,116 0 0 1,804 2,064 22,178 21,168 145,672 127,139 27,662 16,341 189,578 186,732 38,387 39,356 100,000 100,000 0 0 0 0 37 37 7,488 14,075 189,578 186,732 267,665 160,805 267,665 160,805 73,860 44,377 261,873 155,532 0 0 0 0 14,007 8,004 (8,215) (2,731) (2,357) (902) (5,858) (1,829) 0 0 0 0 (678) 0 (6,536) (1,829) (2.19) (0.89) (2.19) (0.89)
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