10-Q 1 ryans10q3rd.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended October 1, 2003 Commission File No. 0-14311 FAMILY STEAK HOUSES OF FLORIDA, INC. Incorporated under the laws of IRS Employer Identification Florida No. 59-2597349 2113 FLORIDA BOULEVARD NEPTUNE BEACH, FLORIDA 32266 Registrant's Telephone No. (904) 249-4197 Indicate by check mark whether the registrant 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_____ Title of each class Number of shares outstanding Common Stock 3,706,200 $.01 par value As of November 11, 2003 Family Steak Houses of Florida, Inc. Condensed Consolidated Results of Operations (Unaudited) For The Quarters Ended For The Nine Months Ended ----------------------- ------------------------- Oct. 1, Oct. 2, Oct. 1, Oct. 2, 2003 2002 2003 2002 ----------------------- ------------------------- Revenues: Sales $8,558,900 $9,525,900 $28,854,500 $32,855,700 Vending revenue 53,600 47,000 160,900 152,500 ----------- ----------- ----------- ----------- Total revenues 8,612,500 9,572,900 29,015,400 $33,008,200 ----------- ----------- ----------- ----------- Cost and expenses: Food and beverage 3,271,200 3,589,700 10,989,700 12,205,900 Payroll and benefits 2,707,300 2,993,200 8,697,300 9,649,500 Depreciation and amortization 488,300 558,500 1,511,900 1,667,500 Other operating expenses 1,563,100 1,699,900 4,803,500 5,157,100 General and administrative expenses 546,800 534,300 1,767,800 1,809,500 Franchise fees 341,800 381,000 1,153,400 1,313,800 Asset valuation charge -- --- --- 260,000 Loss on store closings and disposition of equipment 23,300 68,800 87,900 207,300 ----------- ----------- ----------- ----------- 8,941,800 9,825,400 29,011,500 32,270,600 ----------- ----------- ----------- ----------- (Loss) earnings from operations (329,300) (252,500) 3,900 737,600 Investment (loss) gain (78,300) (100) (105,800) 24,500 Interest and other income 61,800 56,600 193,500 96,500 Interest expense (422,700) (458,200) (1,309,900) (1,297,700) ----------- ----------- ----------- ----------- (Loss) before income taxes (768,500) (654,200) (1,218,300) (439,100) Provision for income taxes -- -- -- -- ----------- ----------- ----------- ----------- Net loss ($768,500) ($654,200)($1,218,300) ($439,100) =========== =========== =========== =========== Basic loss per share ($0.21) ($0.18) ($0.33) ($0.12) =========== =========== =========== =========== Basic weighted average common shares outstanding 3,706,200 3,706,200 3,706,200 3,521,700 =========== =========== =========== =========== Diluted loss per share ($0.21) ($0.18) ($0.33) ($0.12) =========== =========== =========== =========== Diluted weighted average common shares outstanding 3,706,200 3,706,200 3,706,200 3,521,700 =========== =========== =========== =========== See accompanying notes to condensed consolidated financial
2 Family Steak Houses of Florida, Inc. Condensed Consolidated Balance Sheets (Unaudited) October 1, January 1, 2003 2003 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $2,175,600 $1,679,600 Investments 37,500 58,100 Receivables 112,600 105,400 Current portion of mortgages receivable -- 342,000 Inventories 236,200 236,400 Prepaid and other current assets 498,500 372,900 ---------- ----------- Total current assets 3,060,400 2,794,400 Certificate of deposit 10,000 10,000 Property and equipment: Land 7,976,500 8,703,800 Buildings and improvements 23,877,500 25,496,600 Equipment 11,873,800 12,826,600 Construction in progress 242,400 60,800 ----------- ----------- 43,970,200 47,087,800 Accumulated depreciation (18,227,900) (18,741,200) ----------- ----------- Net property and equipment 25,742,300 28,346,600 Property held for sale 1,215,200 1,504,800 Other assets, principally deferred charges, net of accumulated amortization 993,600 1,011,600 ----------- ----------- $31,021,500 $33,667,400 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,137,400 $1,346,200 Securities sold, not yet purchased 790,600 19,200 Accrued liabilities 1,343,800 1,383,400 Current portion of workers compensation liability 575,000 501,000 Current portion of long-term debt 722,700 724,600 Current portion of obligation under capital lease 30,400 27,800 ----------- ----------- Total current liabilities 4,599,900 4,002,200 Deferred rent 39,600 15,800 Deposit liability 31,300 14,800 Workers compensation benefit liability 277,300 345,200 Long-term debt 17,581,700 19,523,000 Deferred gain 1,258,000 1,311,100 Obligation under capital lease 2,287,600 2,310,800 ----------- ----------- Total liabilities 26,075,400 27,522,900 Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; none issued -- -- Common stock of $.01 par; authorized 8,000,000 and 4,000,000 shares; outstanding 3,706,200 and 3,251,000 shares 37,100 37,100 Additional paid-in capital 9,869,600 9,869,600 Accumulated deficit (4,976,400) (3,758,100) Accumulated other comprehensive income 15,800 (4,100) ----------- ----------- Total shareholders' equity 4,946,100 6,144,500 ----------- ----------- $31,021,500 $33,667,400 =========== =========== See accompanying notes to condensed consolidated financial statements.
3 Family Steak Houses of Florida, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended ---------------------------- Oct. 1, Oct. 2, 2003 2002 ------------ ------------ Operating activities: Net (loss) ($1,218,300) ($439,100) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,511,900 1,667,500 Asset valuation charge -- 260,000 Directors' fees in the form of stock options -- 15,000 Investment loss (gain) 105,800 (24,500) Amortization of loan fees 46,200 56,700 Amortization of deferred gain (53,100) (17,700) (Gain) loss on disposition of equipment (132,700) 59,900 Decrease (increase) in: Receivables (7,200) 53,800 Inventories 200 48,300 Prepaids and other current assets (125,600) (85,600) Other assets (44,600) (30,700) (Decrease) increase in: Accounts payable (208,800) (299,800) Accrued liabilities (39,600) (251,700) Deferred rent 23,800 7,900 Deposit liability 16,500 -- Workers compensation benefit liability 6,100 -- ---------- ----------- Net cash (used in) provided by operating activities (119,400) 1,020,000 ---------- ----------- Investing activities: Purchases of investments (284,900) (303,600) Principal receipts on mortgages receivable 342,000 10,000 Proceeds from sale of investments 272,000 3,800 Proceeds from securities sold, not yet purchased 727,600 -- Proceeds from sale of property and equipment 1,796,000 -- Capital expenditures (608,500) (1,672,100) Proceeds from sale of assets held for sale 335,000 32,600 ---------- ---------- Net cash provided by (used in) investing activities 2,579,200 (1,929,300) ---------- ---------- Financing activities: Payments on long-term debt and obligation under capital lease (1,963,800) (1,619,600) Proceeds from issuance of long-term debt -- 209,000 Proceeds from sale-leaseback -- 3,000,000 Payment of sale-leaseback costs -- (151,300) Proceeds from investment margin debt -- 10,200 Proceeds from issuance of common stock -- 400,400 ---------- ---------- Net cash (used in) provided by financing activities (1,963,800) 1,848,700 ---------- ---------- Net increase in cash and cash equivalents 496,000 939,400 Cash and cash equivalents - beginning of period 1,679,600 183,100 ---------- ---------- Cash and cash equivalents - end of period $2,175,600 $1,122,500 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for interest $1,390,300 $1,253,300 ========== ========== Cash paid during the period for income taxes -- -- ========== ========== Noncash investing and financing activities: Net change in unrealized gain $15,800 ($30,000) ========== ========== Capital lease entered to acquire building -- $1,320,000 ========== =========== See accompanying notes to condensed consolidated financial statements.
4 FAMILY STEAK HOUSES OF FLORIDA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 1, 2003 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial information instructions to Form 10-Q, and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the thirteen and thirty-nine week periods ended October 1, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2003. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany profits, transactions and balances have been eliminated. Note 2. Earnings Per Share Basic earnings per share for the thirteen and thirty-nine weeks ended October 1, 2003 and October 2, 2002 were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive shares are represented by shares under option and stock warrants. Due to the Company's net losses for the quarters ended October 1, 2003, and October 2, 2002, and for the nine months ended October 1, 2003 and October 2, 2002, all potentially 5 dilutive securities are antidilutive and have been excluded from the computation of diluted earnings per share for those periods. Note 3. Other Assets Other assets consist principally of deferred charges, which are amortized on a straight-line basis. Deferred charges and related amortization periods are as follows: financing costs - term of the related loan, and initial franchise rights - 40 years. The gross carrying amount of the deferred financing costs was $924,100 and $931,200 as of October 1, 2003 and January 1, 2003, respectively. Accumulated amortization related to deferred financing costs was $204,500 and $168,900 as of October 1, 2003 and January 1, 2003, respectively. Amortization expense was $12,000 and $37,500 for the three-month periods ended October 1, 2003 and October 2, 2002, respectively. Amortization expense was $46,200 and $56,700 for the nine-month periods ended October 1, 2003 and October 2, 2002, respectively. Amortization expense for each of the next five years is expected to be $48,000. The gross carrying amount of the initial franchise rights was $384,700 as of October 1, 2003 and January 1, 2003. Accumulated amortization related to initial franchise rights was $194,600 and $186,700 as of October 1, 2003 and January 1, 2003, respectively. Amortization expense was $2,500 and $2,700 for the three-month periods ended October 1, 2003 and October 2, 2002, respectively. Amortization expense was $7,900 and $8,200 for the nine-month periods ended October 1, 2003 and October 2, 2002, respectively. Amortization expense for each of the next five years is expected to be $10,200. Note 4. Reclassifications Certain items in the prior interim financial statements have been reclassified to conform to the 2003 presentation. Note 5. New Accounting Pronouncements In June 2001, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". This statement requires entities to record the cost of any legal obligation for the retirement of tangible long-lived assets in the period in which it is incurred. SFAS 143 is effective for 6 fiscal years beginning after June 15, 2002. The Company adopted the standard effective January 2, 2003. The adoption of SFAS 143 did not have a material effect on the Company's financial position, results of operations or cash flows. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Disposal Activities". Under SFAS 146, liabilities for costs associated with a plan to dispose of an asset or to exit a business activity must be recognized in the period in which the costs are incurred. SFAS 146 is effective for disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 effective January 2, 2003. The adoption of SFAS 146 did not have a significant impact on the Company's financial position, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock- based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for annual periods ending after December 15, 2002 and interim periods beginning after December 31, 2002. The Company has adopted the amendments to SFAS 123 disclosure provisions required under SFAS 148, but will continue to use the intrinsic value method under APB 25 to account for stock-based compensation. As such, the adoption of this statement has not had a significant impact on the Company's financial position, results of operations or cash flows. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. At October 1, 2003, the Company does not have any significant guarantees. The Company adopted the disclosure requirements of FIN 45 for the fiscal 7 year ended January 1, 2003, and the recognition provisions effective January 2, 2003. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This statement establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company did not enter into any financial instruments with characteristics outlined within the statement during the period from June 1, 2003 through October 1, 2003. The Company adopted the standard effective July 3, 2003 and adoption did not have an impact on the Company's financial condition, results of operations or cash flows. Note 6. Stock Based Compensation The Company accounts for stock-based compensation utilizing the intrinsic value method per Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees". The Company's long-term incentive plan provides for the grant of stock options and restricted stock. The exercise price of each option equals the market price of the Company's stock on the date of the grant. Options vest in one-quarter increments over a four-year period starting on the date of the grant. An option's maximum term is ten years. See Note 9 "Common Shareholders' Equity" in the Company's Annual Report for the year ended January 1, 2003 for additional information regarding the Company's stock options. 8 In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure". Pursuant to the disclosure requirements of SFAS 148, the following table provides an expanded reconciliation for all periods presented: Three Months Ended Nine Months Ended Oct.1, 2003 Oct. 2, 2002 Oct. 1, 2003 Oct. 2, 2002 ------------------ ---------------- Net (loss) earnings, as reported $(768,500) $(654,200) $(1,218,300) $(439,100) Add: Stock based compensation expense included in net income, net of tax --- --- --- --- Deduct: Total stock-based compensation expense determined under fair value, net of tax (1,400) (3,100) (4,500) (6,200) --------- ---------- ---------- -------- Pro forma net loss $(769,900) $(657,100) $(1,222,800) $(445,300) ========= ========= ========== ========= (Loss) earnings per share - basic and diluted as reported $(0.21) $(0.18) $(0.33) $(0.13) Pro forma $(0.21) $(0.18) $(0.33) $(0.13)
Note 7. Subsequent Events On October 22, 2003, the Company closed its operating location in Apopka, Florida. This restaurant has been listed for sale. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter Ended October 1, 2003 versus October 2, 2002 The Company experienced a decrease in total sales during the third quarter of 2003 compared to the third quarter of 2002. Total sales decreased 10.2%, due primarily to the closure of three under-performing restaurants in 2003, and a decline in same-store sales. Average unit sales per store increased 3.7% in the third quarter, due primarily to the closure of the three under-performing restaurants. Same-store sales (average unit sales in restaurants that have been open for at least 18 months and operating during comparable weeks during the current and prior year) in the third quarter of 2003 decreased 4.8% from the same period in 2002, compared to a decrease of 8.8% in the third quarter of 2002 as compared to 2001. The decrease in same-store sales results primarily from new competition in some of the Company's markets compared to 2002. The operating expenses of the Company's restaurants include food and beverage, payroll and benefits, depreciation and 9 amortization, and other operating expenses, which include repairs, maintenance, utilities, supplies, advertising, insurance, property taxes and rents. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 93.8% in the third quarter of 2003 from 92.8% in the same quarter of 2002, primarily as a result of higher food costs and the decline in same-store sales. Food and beverage costs as a percentage of sales increased to 38.2% in the third quarter of 2003 from 37.7% in the same period of 2002 primarily as a result of enhanced menus initiated by the Company and higher beef costs in 2003. Payroll and benefits as a percentage of sales increased to 31.6% in the third quarter of 2003 from 31.4% in the same quarter of 2002 due to an increase in health insurance costs in 2003. Other operating expenses as a percentage of sales increased to 18.3% in the third quarter of 2003 from 17.8% in 2002 primarily due to increased utility costs in 2003. Depreciation and amortization decreased to 5.7% in 2003 from 5.9% in 2002. General and administrative expenses as a percentage of sales were 6.4% in the third quarter of 2003, as compared to 5.6% in the third quarter of 2002, primarily due to increased site selection expenses resulting from the write-off of costs from a restaurant site for which the Company could not obtain a building permit, and to increased legal expenses. The effective income tax rate for the quarters ended October 1, 2003 and October 2, 2002 was 0.0%. Net loss for the third quarter of 2003 was $768,500, compared to net loss of $654,200 in the third quarter of 2002. Net loss per share was $.21 for 2003, compared to net loss per share of $.18 in 2002. Nine Months Ended October 1, 2003 versus October 2, 2002 For the nine months ended October 1, 2003, total sales decreased 12.2% compared to the same period of 2002, due to the closing of under-performing restaurants and a reduction in same- store sales. Same-store sales decreased 6.6% for the nine months ended October 1, 2003 from the same period in 2002, primarily due to a sluggish economy in the first half of 2003, and to increased competition at certain restaurants. 10 Food and beverage costs as a percentage of sales for the nine month period ended October 1, 2003 increased to 38.1% from 37.2% for the same period in 2002 as a result of enhanced menu initiatives by the Company and due to higher beef prices during a portion of 2003. Payroll and benefits as a percentage of sales increased to 30.1% in 2003 from 29.4% in 2002, due primarily to increased workers' compensation costs in 2003, and the decline in same-store sales. For the nine months ended October 1, 2003, other operating expenses as a percentage of sales increased to 16.7% from 15.7% in 2002, primarily due to increased rent expenses from a sale leaseback completed in July 2000, higher property insurance costs, and increased utilities costs. Depreciation and amortization increased to 5.2% for the nine-month period ended October 1, 2003, compared to 5.1% in 2002. General and administrative expenses for the nine-month periods ended October 1, 2003 and October 2, 2002 were 6.1% and 5.5% of sales respectively primarily due to a decline in same- store sales and the addition of an operations district supervisor position in 2003. Interest expense increased for the first nine months to $1,309,900 from $1,297,700 for the same period in 2002 due to interest expense associated with the sale leaseback. The effective income tax rate for the nine-month periods ended October 1, 2003 and October 2, 2002 was 0.0%. The Company invests a portion of its available cash in marketable securities. The Company maintains an investment account to effect these transactions. Investments are made based on a combination of fundamental and technical analysis primarily using a value-based investment approach. The holding period for investments usually ranges from 60 days to 24 months. Management occasionally purchases marketable securities using margin debt. In determining whether to engage in transactions on margin, management evaluates the risk of the proposed transaction and the relative returns offered thereby. If the market value of securities purchased on margin were to decline below certain levels, the Company would be required to use additional cash from its operating account to fund a margin call in its investment account. Management reviews the status of the investment account on a regular basis and analyzes such margin positions and adjusts purchase and sale transactions as necessary to ensure such margin calls are not likely. The results for the nine months of 2003 include realized losses from 11 the sale of marketable securities of $105,800, compared to realized gains of $24,500 in 2002. Net loss for the first nine months of 2002 was impacted by an asset valuation charge of $260,000, or 7 cents per share. This charge was based on management's review of the estimated disposal value of two closed restaurants held for sale. No such charges were considered necessary in 2003. Net loss for the nine months ended October 1, 2003 was $1,218,300 or $.33 per share, compared to net loss of $439,100, or $.12 per share for the same period in 2002. The Company's operations are subject to some seasonal fluctuations. Revenues per restaurant generally increase from January through April and decline from September through December. Operating results for the quarter or nine months ended October 1, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003. Liquidity and Capital Resources Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are converted rapidly to cash. Therefore, the Company does not carry significant receivables or inventories and, other than repayment of debt, working capital requirements for continuing operations are not significant. At October 1, 2003, the Company had a working capital deficit of $1,539,500 compared to $1,207,800 at January 1, 2003. Cash used in operating activities was $119,400 in the first nine months of 2003, compared to cash provided by operations of $1,020,000 in the first nine months of 2002, primarily due to the increased net losses in 2003, and to timing differences in the payments of accounts payable and accrued liabilities. On April 11, 2003, the Company sold one of its operating locations located in New Port Richey, Florida for $875,000. At the time of the sale, the location, including land, building, improvements and equipment had a net book value of $828,100. Related debt of $740,000 was paid off. Net of expenses of the sale of $81,600, the Company recognized a loss of $34,700 on the sale. 12 On May 13, 2003, the Company sold one of its properties located in Neptune Beach, Florida including land, building, improvements and equipment for $921,000. At the time of the sale, the property had a net book value of $813,600. Related debt of $626,000 was paid off. Net of expenses of the sale of $63,300, the Company recognized a gain of $44,100 on the sale. The Company spent approximately $608,500 in the first nine months of 2003 for property and equipment. Total capital expenditures for 2003, based on present costs and plans for capital improvements, are estimated to be approximately $1.2 million. This amount is based on budgeted expenditures for building, leasehold improvements and equipment for a new restaurant for which construction began October 1, 2003, and normal recurring equipment purchases and minor building improvements ("Capital Maintenance Items"). The Company believes it has sufficient sources of funds for these expenditures from existing cash on hand. However, the Company's ability to fund construction of future new restaurants will be dependent on improvement in sales trends, or its ability to raise additional capital. Management estimates the cost of opening one new restaurant based on current average costs to be approximately $2,900,000. To the extent the Company decides to open new restaurants in 2004 and beyond, management plans to fund any new restaurant construction either by GE Capital funding, sales leaseback financing, developer-funded leases, refinancing existing restaurants, or attempting to get additional financing from other lenders. The Company's ability to open new restaurants is also dependent upon its ability to locate suitable locations at acceptable prices, and upon certain other factors beyond its control, such as obtaining building permits from various government agencies. The sufficiency of the Company's cash to fund operations and necessary Capital Maintenance Items will depend primarily on cash provided by operating activities. In July 2002, the Company completed a sale leaseback transaction to refinance one of its restaurants in Tampa, Florida. The Company sold the property for $3.0 million and paid off its existing mortgage of approximately $1.1 million on the property. In the third quarter of 2002, the leaseback of the building was accounted for as a capital lease and the leaseback of the land is accounted for as an operating lease, with the deferred gain on the sale being recognized over the twenty-year life of the lease. The lease agreement requires annual payments of $330,000, with increases of 10% every five years. Management 13 is using the proceeds of the transaction to fund a portion of the construction of a new restaurant in 2003. On October 29, 2002, the Company completed a transaction with GE Capital that refinanced two existing mortgages on restaurant properties in order to provide funding of approximately $1.1 million. The Company plans to use the proceeds of this transaction to remodel several restaurants. The Company has entered into a series of loan agreements with GE Capital Franchise Finance Corporation ("GE Capital"). As of October 1, 2003, the outstanding balance due under the Company's various loans with GE Capital was $18,304,400. The weighted average interest rate for the GE Capital loans is 7.4%. The Company used the proceeds of the GE Capital loans primarily to refinance its debt and to fund construction of new restaurants. The preceding discussion of liquidity and capital resources contains certain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed herein, among the other factors that could cause actual results to differ materially are the following: failure of facts to conform to necessary management estimates and assumptions; the willingness of GE Capital or other lenders to extend financing commitments; repairs or similar expenditures required for existing restaurants due to weather or acts of God; the Company's ability to identify and secure suitable locations on acceptable terms and open new restaurants in a timely manner; the Company's success in selling restaurants listed for sale; the economic conditions in the new markets into which the Company expands; changes in customer dining patterns; competitive pressure from other national and regional restaurant chains and other food vendors; business conditions, such as inflation or a recession, and growth in the restaurant industry and general economy; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. However, this list is not a complete statement of all potential risks or uncertainties. These forward-looking statements are made as of the date hereof based on management's current expectations, and the Company does not undertake any obligation to update such statements, whether as a result of new information, future events or otherwise. 14 Recent Developments The Company operates its Ryan's restaurants under a Franchise Agreement between the Company and Ryan's dated as of September 16, 1987, which amended and consolidated all previous franchise agreements (as amended, the "Franchise Agreement"). The Franchise Agreement extends through December 31, 2010 and provides for two additional ten-year renewal options. The renewal options are subject to certain conditions, including the condition that the Company has performed its obligations under the Franchise Agreement during its original term. In October 1996, the Company amended the Franchise Agreement with Ryan's. The amended Franchise Agreement requires the Company to pay a monthly royalty fee of 3.0% through December 2001 and 4.0% thereafter on the gross receipts of each Ryan's Family Steak House restaurant. The Franchise Agreement granted the Company the exclusive right to open Ryan's restaurants in North and Central Florida. In order to maintain this exclusivity, the Company was required to have a total of 25 Ryan's restaurants operating on December 31, 2001. At December 31, 2001, the Company was only operating 23 restaurants. On January 4, 2002, the Company was notified by Ryan's that it had exercised its option to terminate the exclusive nature of the Company's franchise rights within North and Central Florida. Management believes that if Ryan's builds restaurants in the Company's territories, it could limit the Company's potential to locate and develop suitable restaurant sites in the future. The following schedule outlines the number of Ryan's restaurants required to be operated by the Company as of December 31 of each year under the amended Franchise Agreement. Failure to maintain the required number of restaurants is a default under the agreement, and could result in the Company losing the right to operate under the Ryan's name. Number of Restaurants Required to End of Fiscal Year be in Operation 2002 22 2003 24 2004 25 2005 27 2006 28 15 The Company was in compliance with this schedule as of the year ended January 1, 2003. However, due to the Company's sale in April 2003 of one of its operating stores, the sublease of two of its operating stores in April 2003 and July 2003 respectively, and the closing of one of its operating locations in October 2003, the Company now has 18 restaurants in operation. Accordingly, the Company will not meet the requirement as of fiscal year end 2003. Management is negotiating a potential solution with Ryan's to resolve this issue, and has inquired as to whether Ryan's will consider the shortage in restaurants a default under the Franchise Agreement. However, no final agreement has been reached to date with Ryan's. Ryan's has the option to declare the Company in default of the Franchise Agreement beginning January 1, 2004. The Company believes that it has complied with all other provisions of the Franchise Agreement, and that the closure of certain restaurants was a prudent and necessary business decision, which should not be considered a default. However, if Ryan's declares the Company in default, it could demand that the Company stop using the Ryan's name for its restaurants. The Company would then have to decide whether to comply with such a demand and change the name of all its restaurants, or attempt to have the default notice overturned by legal action through binding arbitration provisions stipulated by the Franchise Agreement. If the Company changes the name of its restaurants, management does not believe that such action would have a material effect on the Company's profitability due in part to the elimination of franchise fees paid to the franchisor. However, there can be no assurance that a name change would not result in a material decline in sales and profitability. The Franchise Agreement as amended also clarifies that the Franchisor's consent is needed for certain kinds of transactions. The transactions include (1) a person's (or group's) acquisition of 25% of the Company's common stock (other than a person who owned 15% of the Company's common stock as of December 15, 1998), (2) turnover during any consecutive 12-month period of more than a majority of the Company's board of directors unless the new directors are approved by a two-thirds vote of the directors then still in office who either were directors at the beginning of the 12-month period or whose election or nomination for election was previously so approved; and (3) the Company's or any affiliates' ownership, engagement 16 in or interest in the operation of any other family-oriented steak house restaurant. The Franchise Agreement contains provisions relating to the operation of the Company's Ryan's restaurants. Upon the Company's failure to comply with such provisions, the Franchisor may terminate the Franchise Agreement if such default is not cured within 30 days of notice from the Franchisor. Termination of the Franchise Agreement would result in the loss of the Company's right to use the "Ryan's Family Steak House" name and concept and could result in the sale of the physical assets of the Company to the Franchisor pursuant to a right of first refusal. Termination of the Company's rights under the Franchise Agreement could result in the disruption of the Company's operations. The Company believes that it has operated and maintained each of its Ryan's Family Steak House restaurants in accordance with the operational procedures and standards set forth in the Franchise Agreement. Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK There have been no significant changes in the Company's exposure to market risk during the first nine months of 2003. For discussion of the Company's exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2003 which is incorporated herein by reference. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman (who serves as the principal executive officer), President (who serves as the principal operating officer), Director of Finance (who serves as the principal financial and accounting officer) and another member of the Board of Directors. Based upon that evaluation, the Company's Chairman, President and Director of Finance have concluded that the Company's disclosure controls and procedures are effective 17 in alerting them to material information regarding the Company's financial statement and disclosure obligation in order to allow the Company to meet its reporting requirements under the Exchange Act in a timely manner. (b) Changes in internal control. There have been no changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to, or threatened with, litigation from time to time, in the normal course of its business. Management, after reviewing all pending and threatened legal proceedings, considers that the aggregate liability or loss, if any, resulting from the final outcome of these proceedings will not have a material effect on the financial position or operation of the Company. The Company will, from time to time when appropriate in management's estimation, record adequate reserves in the Company's financial statements for pending litigation. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of the report on Form 10-Q. No. Exhibit 3i. Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibits 3.01, 3.03, 3.04, 3.06, 3.07 to the Company's Annual Report on Form 10-K filed with the 18 Commission on March 21, 2003 are hereby incorporated by reference.) 3ii. Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.02, 3.05, 3.08 to the Company's Annual Report on Form 10-K filed with the Commission on March 21, 2003 are hereby incorporated by reference.) 11.1 Table detailing number of shares and common stock equivalents used in the computation of basic and diluted (loss) earnings per share. 13. Annual Report to Shareholders of Family Steak Houses of Florida, Inc. on Form 10-K filed with the Commission on March 21, 2003 is hereby incorporated by reference. 31.1 Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 99.1 Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K A report on Form 8-K, dated November 12, 2003, reporting under Item 9, Regulation FD Disclosure, and Item 12, Results of Operation and Financial Condition, the issuance by the Company of a press release reporting its financial results for the quarter and nine months ended October 1, 2003. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FAMILY STEAK HOUSES OF FLORIDA, INC. (Registrant) /s/ Glen F. Ceiley Date: November 14, 2003 Glen F. Ceiley Chairman of the Board /s/ Edward B. Alexander Date: November 14, 2003 Edward B. Alexander President / COO 20 Exhibit 31.1 CERTIFICATIONS I, Glen F. Ceiley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Family Steak Houses of Florida, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f) for the registrant and have; a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and 21 c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14, 2003 /s/ Glen F. Ceiley Glen F. Ceiley Chairman of the Board Principal Executive Officer 22 Exhibit 31.2 I, Edward B. Alexander, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Family Steak Houses of Florida, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f) for the registrant and have; a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 23 fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: November 14, 2003 /s/ Edward B. Alexander Edward B. Alexander President Chief Operating Officer 24 Exhibit 11.1 The table below details the number of shares and common stock equivalents used in the computation of basic and diluted earnings per share: Three Months Ended Nine Months 10/1/03 10/2/02 10/1/03 10/2/02 Basic: Weighted average common shares outstanding used in computing basic loss per share 3,706,200 3,706,200 3,706,200 3,521,700 ========= ========= ========= ========= Basic loss per share $ (.21) $ (.18) $ (.33) $ (.12) ========= ========== ========= ========= Diluted: Weighted average common shares outstanding 3,706,200 3,706,200 3,706,200 3,521,700 --------- ---------- ---------- -------- Shares used in computing diluted loss per share 3,706,200 3,706,200 3,706,200 3,521,700 ========= ========= ========= ========= Diluted loss per share $ (.21) $ (.18) $ (.33) $ (.12) ========= ========= ======== =========
25 Exhibit 99.1: Certification of Periodic Reports CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Family Steak Houses of Florida, Inc.'s (the "Company") Quarterly Report on Form 10-Q for the period ending October 1, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Glen F. Ceiley, Principal Executive Officer/Chairman of the Board of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,: (1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2003 By: /s/ Glen F. Ceiley Glen F. Ceiley Principal Executive Officer/ Chairman of the Board 26 Exhibit 99.2: Certification of Periodic Reports CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Family Steak Houses of Florida, Inc.'s (the "Company") Quarterly Report on Form 10-Q for the period ending October 1, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward B. Alexander, President/ Chief Operating Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,: (1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2003 By: /s/ Edward B. Alexander Edward B. Alexander President/COO 27