EX-13 6 exhibit1301.txt EXHIBIT 13.01 FAMILY STEAK HOUSES OF FLORIDA, INC. CORPORATE PROFILE About The Company Family Steak Houses of Florida, Inc. (the "Company") is an operator of eighteen restaurants in the state of Florida. The Company's first restaurant was opened in Jacksonville, Florida in May 1982. The Company's stock trades on the Over the Counter Bulletin Board under the symbol RYFL. Until December 2003, the Company was the sole franchisee for Ryan's Family Steak House restaurants in the state of Florida. In December 2003, the Company made an agreement to convert all of its restaurants to a different name and concept by June 2005. The restaurants will be converted to one of two concepts, either "Whistle Junction" or "Florida Buffet", based on a variety of factors. The operations of the restaurants will maintain the buffet format, but with enhancements to the buildings, service and menus. The Company's restaurants are family-oriented buffet restaurants serving high-quality, reasonably priced food in a casual atmosphere with server-assisted service. The restaurants feature self-service scatter bars with a variety of over 100 fruit, vegetable and meat entree items, bakery and dessert bar, drink refills and table service. Several restaurants feature a display cooking area, where guests can have grilled-to-order steaks, chicken, pork chops and other items, all of which is included in the price of the all-you-can-eat buffet. Restaurant Locations: Jacksonville (1) St. Cloud (1) Gainesville (1) Ocala (1) Winter Haven (1) Tampa (3) Tallahassee (1) Daytona Beach (1) Orlando (1) Melbourne (1) Titusville (1) Lake City (1) Brooksville (1) Deland (1) Lakeland (2) To Our Shareholders: 2003 was a year of significant change for the Company. After years of struggling to make the Company profitable and build shareholder value with the Ryan's concept, we made the decision to break our ties with Ryan's, and take the Company in a new direction. This new direction creates opportunities which we think can return the Company to profitability and growth. Beginning in January 2004, we began the process of converting all of our restaurants to a new name and concept. Most of the restaurants will be converted to a concept and brand called the Whistle Junction. The concept was developed with help from the Brown Group, noted for their experience in creating unique restaurant concepts. It involves conversion of the restaurants to a train station design. The building will have prominent icons and imagery that include a water tower, whistle tower and clock tower, all reminiscent decor of the train station platform on the exterior. Inside the restaurant, branding will be reinforced with other train station memorabilia, including operating model railroads. The idea for these conversions was partially based on outstanding results experienced by our franchisor, Ryan's Inc. of South Carolina, and another local competitor, both of whom remodeled and renamed old Ryan's locations. The franchisor converted several of their Ryan's locations and opened them with a new name, and has experienced significant sales increases. A local competitor in Florida also purchased some old Ryan's locations and completed similar remodels, experiencing sales increases as high as 400% compared to their results as Ryan's. We are convinced that the success of these remodeled restaurants is a good indication that the brand is a little "tired", and it is time to make changes. We believe we have taken these ideas and improved upon them with the Whistle Junction concept. Once the customers come inside the exciting new Whistle Junction building to give it a try, we are going to do everything we can to impress them and retain their business. The operational concept will still be a family-oriented buffet, but numerous enhancements will be made to the food and service. We believe customers will still perceive the Whistle Junction as the best value in town. The overall dining experience will be improved by adding an element of fun and nostalgia, along with even better food and service value than we have provided in the past. Obviously, a lot of work must be done to complete the transformation of all of our restaurants by June 2005. Already, 2 we have one location being remodeled as our first Whistle Junction, with a second remodel scheduled to begin soon. Also, we have our first new store under construction as a Whistle Junction in a prime location in Orlando, Florida. We expect to have three Whistle Junctions operating by early May 2004. As a part of the Company's transformation, we identified a few locations for which the conversion to Whistle Junction would not make sense, for a variety of reasons. Accordingly, these locations have already been converted to a new concept named Florida Buffet. The Florida Buffet conversions are not as extensive as Whistle Junction, but allowed us to stop paying the franchise fee on those locations immediately. These feature a "Florida-look" theme, and also include food and service enhancements. We are heading into 2004 with some momentum. We had positive same-store sales of 2.2% in the fourth quarter of 2003, our first positive quarter since the first quarter of 2001. Average unit sales for the fourth quarter were up 10.7%, due to our successful closure and disposal of several under-performing units in 2003. During the first two months of 2004, the same- store sales gains have increased significantly. The combination of these sales increases, even before the anticipated positive impact of Whistle Junction conversions, and the gradual elimination of franchise fees bodes well for the Company in 2004. By June 2005, we will save $1.5 million per year in franchise fees, and use these savings to strengthen the Company. We hope you will be as excited as management about these changes. Whistle Junction gives the Company a vehicle for growth, free of the fees and restrictions associated with the old franchise agreement. It puts us "back on track" to building shareholder value. All aboard! Thanks for your continuing support. Sincerely, Edward B. Alexander President 3 FAMILY STEAK HOUSES OF FLORIDA, INC. Five Year Financial Summary
------------------------------------------------------------------------------- 2003 2002 2001 2000 (1) 1999 ------------------------------------------------------------------------------- Selected Income Statement Data: (in thousands, except per share data) Revenues: Sales $37,384 $42,050 $42,054 $39,960 $38,905 Vending income 208 192 210 232 198 ------- ------- ------- ------- ------- 37,592 42,242 42,264 40,192 39,103 Cost and expenses: Food and beverage 14,252 15,696 15,938 15,469 15,161 Payroll and benefits 11,678 12,713 12,582 11,306 11,416 Depreciation and amortization 1,991 2,205 2,148 2,061 1,966 Other operating expenses 6,252 6,826 6,754 6,217 6,252 General and administrative expenses 2,317 2,396 2,540 2,445 2,515 Change in control payments -- -- -- -- 908 Franchise fees 1,494 1,682 1,260 1,198 1,165 Asset valuation charge 63 988 -- 190 -- Loss on store closings and disposition of equipment 171 258 214 149 140 ------- ------- ------- ------- ------- 38,218 42,764 41,437 39,035 39,523 ------- ------- ------- ------- ------- Earnings (loss) from operations (626) (522) 827 1,157 (420) Gain (loss) on sale of property 38 -- -- 62 (18) Investment (loss) income (331) 17 (487) 487 28 Interest and other income 254 168 100 157 149 Interest expense (1,736) (1,763) (1,726) (1,910) (1,721) ------- ------- ------- ------- ------- Loss before income taxes (2,401) (2,100) (1,286) (47) (1,982) Income taxes -- -- -- -- -- ------- ------- ------- ------- ------- Net loss $(2,401) $(2,100) $(1,286) $(47) $(1,982) ======= ======== ======= ======= ======= Basic loss per share $(0.65) $(0.59) $(0.49) $(0.02) $(0.82) ------- ------- ------- ------- ------- Diluted loss earnings per share $(0.65) $(0.59) $(0.49) $(0.02) $(0.82) ======= ======== ======= ======= ======= Selected Balance Sheet Data: Land and net property and equipment $24,352 $28,347 $29,582 $26,356 $25,261 Total assets 30,807 33,667 34,261 31,627 30,759 Long-term debt 17,471 19,523 19,903 17,869 17,336 Current portion of long-term debt 718 725 663 566 381 Shareholders' equity 3,761 6,145 7,843 7,770 8,335 Selected Operating Data : Current ratio 0.6 0.7 0.2 0.4 0.4 Working capital (deficit) $(2,274) $(1,208) $(4,528) $(2,781) $(2,491) Cash provided by operating activities 309 822 1,293 1,937 130 Property and equipment additions 937 2,006 5,716 3,648 3,855 -------------------------------------------------------------
(1) Fifty-three week period. 4 Family Steak Houses of Florida, Inc.
Management's Discussion and Analysis of Financial Condition and Results Shown for the years indicated are (i) items in the statements of operations as a percent of total sales, (ii) operating expense items in the statements of operations as a percent of sales and (iii) the number of restaurants open at the end of each year. Percentage Change Versus Prior Year ------------------------ 2003 2002 vs vs 2003 2002 2001 2002 2001 ----------- ----------- ----------- ------------------------- Sales $37,384,000 $42,050,300 $42,053,500 (11.1%) 0.0% =========== =========== =========== ========== ========= Net Change In Percentage ------------------------- 2003 2002 Percent of Sales vs vs 2003 2002 2001 2002 2001 ----------------------------------- ------------------------- Vending Revenue 0.6% 0.5% 0.5% 0.1% 0.0% -------- ------- ------- --------- -------- Costs and expenses: Operating expenses 91.3% 89.0% 89.0% 2.3 0.0 General and administrative expenses 6.2 5.7 6.0 0.5 (0.3) Franchise fees 4.0 4.0 3.0 0.0 1.0 Asset Valuation Charge 0.2 2.4 --- (2.2) 2.4 Loss on store closings and disposition of equipment 0.5 0.6 0.5 (0.1) 0.1 -------- ------- ------- --------- -------- 102.2 101.7 98.5 0.5 3.2 -------- ------- ------- --------- -------- Earnings (loss) from operations (1.7) (1.2) 2.0 (0.5) (3.2) Investment (loss) income (0.9) --- (1.2) (0.9) 1.2 Interest and other income 0.7 0.4 0.2 0.3 0.2 Interest expense (4.6) (4.2) (4.1) (0.4) (0.1) -------- ------- ------- --------- -------- Loss before income taxes (6.4) (5.0) (3.1) (1.4) (1.9) Income tax benefit --- --- --- --- --- -------- ------- ------- --------- -------- Net Loss (6.4)% (5.0)% (3.1)% (1.4) (1.9)% ======== ======= ======= ========= ======== Operating expenses: Food and beverage 38.1% 37.4% 37.9% 0.7% (0.5)% Payroll and benefits 31.2 30.2 29.9 1.0 0.3 Depreciation and amortization 5.3 5.2 5.1 0.1 0.1 Other operating expenses 16.7 16.2 16.1 0.5 0.1 -------- ------- ------- --------- -------- 91.3% 89.0% 89.0% 2.3% (0.0)% ======== ======= ======= ========= ======== Restaurants open at end of year 18 22 23 ======== ======= =======
5 RESULTS OF OPERATIONS 2003 Compared to 2002 Total sales decreased by 11.1%, to $37,384,000 in 2003 from $42,050,300 in 2002. The decrease was due to the closure of three under-performing restaurants in 2003, and to a decrease in same store sales of 5.3% discussed below. Same store sales for 2003 decreased 5.3% from the same period in 2002, compared to a decrease of 6.1% from 2002 as compared to 2001. The decrease in same store sales was primarily due to declines at certain restaurants which faced new competition in their markets in 2003. Management is seeking to improve sales trends by remodeling and converting most of its restaurants to a new name and format (see Recent Developments). In conjunction with these conversions, service enhancements will be added, including additional staffing to improve food and service. Check average is also expected to increase as a result of price increases and reduced discounting promotions. Based on results of similar conversions by the Company's franchisor, Ryan's Family Steak Houses, Inc. ("the Franchisor"), and other competitors, management believes that significant sales increases can be achieved by these conversions. The operating expenses of the Company's restaurants include food and beverage, payroll and benefits, depreciation and amortization, and other operating expenses, which include repairs, maintenance, utilities, supplies, advertising, insurance, property taxes, rents and licenses. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 91.3% in 2003 from 89.0% in 2002. Food and beverage costs as a percentage of sales increased to 38.1% in 2003 from 37.4% in 2002, primarily due to menu enhancements implemented and higher beef prices in 2003. Payroll and benefits as a percentage of sales increased to 31.2% in 2003 from 30.2% in 2002, primarily due to increases in workers' compensation expense, based on the results of an actuarial review of the Company's claim liability. Other operating expenses as a percentage of sales increased to 16.7% in 2003 from 16.2% in 2002, primarily due to increased property insurance and utilities costs. Depreciation and amortization increased as a percentage of sales to 5.3% in 2003 from 5.2% in 2002. General and administrative expenses as a percentage of sales increased to 6.2% in 2003 from 5.7% in 2002, primarily due to the decline in same-store sales and the addition of a district supervisor position in 2003. 6 The Company recognized an asset impairment charge of $63,100 in 2003 in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144"), "Accounting for the Impairment of or Disposal of Long-Lived Assets". The charge was based upon a financial review of all Company-owned restaurants and applied to one closed restaurant, for which the Company entered into a sales contract in February 2004. The Company recognized asset impairment charges of $987,700 in 2002. 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. A primary investment strategy used by the Company in 2003 consisted of short-selling of securities, which results in obligations to purchase securities at a later date. As of December 31, 2003, the Company's total obligation for these securities sold not yet purchased was $1,187,400, compared to $19,200 at January 1, 2003. The results for the year 2003 include realized losses from the sale of marketable securities of $330,600, compared to realized gains of $17,300 in 2002. Interest expense decreased to $1,735,800 in 2003 from $1,763,400 during 2002, due to lower outstanding debt balances. The Company capitalized interest costs of $0 in 2003 and $3,900 in 2002. The effective income tax rate for the years ended December 31, 2003 and January 2, 2002 was 0.0%. An increase in the valuation allowance in deferred tax assets for 2003 and 2002 resulted in the lower than statutory effective rates for those years. Net loss for 2003 was $2,401,100, compared to $2,100,300 in 2002. Loss per share was $.65 for 2003, compared to $.59 in 2002. 7 2002 Compared to 2001 Total sales decreased to $42,050,300 in 2002 from $42,053,500 in 2001. Incremental sales from restaurants opened in 2000, 2001 and 2002 (new-store sales not included in same-store sales) amounted to $7,452,200. These increases were offset by the decrease in same-store sales of 6.1% discussed below and by the closure of one restaurant in April 2002. 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) for 2002 decreased 6.1% from the same period in 2001, compared to a decrease of 2.0% from 2001 as compared to 2000. The decrease in same-store sales was primarily due to significant sales declines at several restaurants which faced new competition or road construction, and a continuing slow economy compared to 2001. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales were 89.0% in 2002 and in 2001. Food and beverage costs as a percentage of sales decreased to 37.4% in 2002 from 37.9% in 2001, primarily due to menu price increases implemented by the Company. Payroll and benefits as a percentage of sales increased to 30.2% in 2002 from 29.9% in 2001, primarily due to increased workers' compensation expense. Other operating expenses as a percentage of sales increased to 16.2% in 2002 from 16.1% in 2001, primarily due to increased property insurance and building rent costs. Depreciation and amortization increased as a percentage of sales to 5.2% in 2002 from 5.1% in 2001. General and administrative expenses decreased to 5.7% of sales in 2002 from 6.0% in 2001 due to implementation of expense control initiatives. The Company recognized asset impairment charges of $987,700 in 2002 in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of or Disposal of Long-Lived Assets". The charges were based upon a financial review of all Company-owned restaurants and applied to two closed restaurants held for sale and leasehold improvements from an operating restaurant. No such charges were considered necessary in 2001. The results for 2002 included net realized gains of $17,300 from the sale of marketable securities, compared to net realized losses of $486,700 in 2001. During 2002 and 2001, the Company 8 maintained an online brokerage account for investing excess cash. As of the end of 2002, most of the excess cash has been invested in the Company's operations. Interest expense increased to $1,763,400 in 2002 from $1,726,100 during 2001, due primarily to the write-off of approximately $43,000 in loan fees as a result of refinancing of debt during the year. The Company capitalized interest costs of approximately $3,900 in 2002 and $53,400 in 2001. The effective income tax rate for the years ended January 1, 2003 and January 2, 2002 was 0.0%. An increase in the valuation allowance in deferred tax assets for 2002 and 2001 resulted in the lower than statutory effective rates for those years. Net loss for 2002 was $2,100,300, compared to $1,285,800 in 2001. Loss per share was $.59 for 2002, compared to $.49 in 2001. Critical Accounting Policy The Company's accounting policy for the recognition of impairment losses on long-lived assets is considered critical. The Company's policy is to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of the impairment review, assets are grouped on a restaurant-by-restaurant basis. The recoverability of the assets is measured by a comparison of the carrying value of each restaurant's assets to future net cash flows expected to be generated by such restaurant's assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. 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 the repayment of debt, working capital requirements for continuing operations are not significant. At December 31, 2003, the Company had a working capital deficit of $2,274,400 compared to a working capital deficit of $1,207,800 at January 1, 2003. The increase in the working capital deficit in 2003 was primarily due to operating losses and investment losses incurred in 2003. 9 Cash provided by operating activities decreased to $308,600 in 2003 from $822,300 in 2002, primarily due to differences in the payments of accounts payable, workers' compensation and accrued liabilities. Cash provided by operating activities decreased to $822,300 in 2002 from $1,293,200 in 2001, due to timing differences in the payments of accounts payable, workers' compensation and accrued liabilities. The Company spent $938,000 in 2003, $2,006,000 in 2002 and $5,716,400 in 2001 for land, new restaurant construction, restaurant remodeling and equipment. Capital expenditures for 2004, based on present costs and plans for capital improvements, are estimated to be $3.8 million. This amount is based on budgeted expenditures for leasehold improvements and equipment for one new restaurant in 2004, remodeling of twelve restaurants to the Company's new concept and normal recurring equipment purchases and minor building improvements ("Capital Maintenance Items"). The Company believes it has sufficient funds for the construction of one new restaurant expected to open in 2004 and five of the twelve remodels to the new concepts. However, the Company's ability to fund construction of the remodels of the remaining seven restaurants will be dependent on its ability to raise additional capital. Should the Company not be able to raise the necessary capital for remodeling these seven restaurants, it would still be required to change the name and signs of these restaurants, in accordance with the amended Franchise Agreement (see Note 4 to the Financial Statements), but capital requirements for such changes would be minimal. Management estimates the cost of opening any future new restaurants to be approximately $2,900,000. To the extent the Company decides to open new restaurants or remodel its existing restaurants to its new concept 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 identify 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 April 2002, the Company completed a private placement with Bisco for 435,000 shares at $0.92 per share, which was based on the average closing price of the Company's common stock on the 10 ten trading days prior to the sale. The Company used the $400,200 proceeds from this sale to fund remodels of several restaurants in 2002. 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. 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 plans to use the proceeds of the transaction to fund a portion of the construction of a new restaurant in 2004. The Company has entered into a series of loan agreements with GE Capital. As of January 1, 2003, the outstanding balance due under the Company's various loans with GE Capital was $18,189,200. The weighted average interest rate for the GE Capital loans is 7.37%. In 2003, the Company paid franchise fees of 4% of gross sales. Total franchise fees paid in 2003 were $1,494,400. As the Company converts each restaurant from Ryan's to its new concepts, no franchise fees are paid on those converted restaurants, which will improve the Company's cash flow. The Company sold two restaurants and one land parcel in 2003, resulting in total proceeds of $2.1 million. The Company used these proceeds to pay off mortgages on the two restaurants totaling approximately $1,366,000. Total net gains on sales of property in 2003 were $38,000. As of March 10, 2004, the Company had contracts for sale of three additional closed restaurants, all of which we expected to be sold in the second quarter of 2004. If all three restaurants are sold, net cash proceeds of approximately $1 million will be realized. 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; 11 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. Contractual Financial Obligations In addition to using cash flow from operations, the Company finances its operations through the issuance of debt and by entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result that some are recorded as liabilities in the Balance Sheet while others are required to be disclosed in the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis. The following schedule summarizes contractual obligations and other contractual commitments as of December 31, 2003:
Payments due by Period Contractual Obligations Total 2004 2005-2006 2007-2008 Thereafter ------------------------ ----------- ---------- ---------- ---------- ----------- Long-term debt $18,189,200 $718,400 $1,615,300 $1,871,500 $13,984,000 Capital leases 2,310,700 274,400 554,000 594,400 3,630,400 Operating leases 6,364,100 599,500 1,051,600 892,800 3,820,200 ----------- ---------- ---------- ---------- ----------- Total contractual cash obligations $26,864,000 $1,592,300 $3,220,900 $3,358,700 $21,434,600 =========== ========== ========== ========== ===========
Recent Developments In December 2003, the Company entered into an amendment to its franchise agreement with Ryan's Family Steak Houses, Inc. (the "Franchisor") to terminate the franchise agreement between the two Companies by June 2005. This amendment requires the Company to convert a specific number of its Ryan's restaurants each quarter to a new name beginning the first quarter of 2004, and requires all of the Company's restaurants to be renamed by June 2005. As soon as each restaurant is converted, franchise fees are no longer payable to the Franchisor. (See Note 4 to the Financial Statements for further details.) 12 The Company plans to convert most of its restaurants to a new concept called "Whistle Junction". These conversions entail a substantial remodel of the restaurant buildings designed to look like an old train station on the exterior. The interior of the restaurant will also feature the train theme, including an operating model railroad running through the dining room. The operation of the converted restaurants will continue to be a buffet format with an upgraded menu and improved service levels. The first Whistle Junction remodel is scheduled to open in March 2004, and a newly built Whistle Junction is scheduled to open in April 2004. Certain of the Company's restaurants will be converted to an alternate concept called the "Florida Buffet", based on various factors including their location. As of February 2004, three restaurants have been converted to the Florida Buffet. The Florida Buffet conversions include interior and exterior changes to the building designed to incorporate a "Florida look" theme, although the changes are not as extensive as those for the Whistle Junction. Menu and service enhancements are also included in the Florida Buffet locations, designed to attract and maintain increased customer volumes. IMPACT OF INFLATION Costs of food, beverage, and labor are the expenses most affected by inflation in the Company's business. Although inflation in recent years has been low and accordingly has not had a significant impact on the Company, there can be no assurance that inflation will not increase and impact the Company in the future. A significant portion of the Company's employees are paid by the federally established statutory minimum wage. Although no minimum wage increases have been signed into law, various proposals are presently being considered in the United States Congress. The Company is typically able to increase its menu prices to cover most of the payroll rate increases; however, there can be no assurance that menu price increases will be able to offset labor cost increases in the future. Such changes in the federal minimum wage would impact the Company's payroll and benefits costs. Annual sales price increases have consistently ranged from 1.0% to 3.0%. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK The Company is exposed to market risk from changes in interest rates. For its cash and cash equivalents, investments and mortgages receivables, a change in interest rates affects the amount of interest income that can be earned. For its debt 13 instruments, a change in interest rates affects the amount of interest expense incurred. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates.
2004 2005 2006 2007 2008 Thereafter Total ------------------------------------------------------------------------------- Assets Certificates of deposit at fixed interest rates $10,000 $10,000 Weighted average interest rate 1.0% Liabilities Notes payable at variable interest rate $718,400 $777,700 $837,600 $902,200 $969,300 $13,984,000 $18,189,200 Weighted average interest rate 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% Long-term capital leases at fixed interest rate $30,900 $34,400 $42,200 $65,400 $81,800 $2,056,000 $2,310,700 Weighted average interest rate 10.9% 10.9% 10.9% 10.9% 10.9% 10.9%
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in and disagreements with accountants on accounting and financial disclosure. 14 Family Steak Houses of Florida, Inc. Consolidated Statements of Operations
For The Years Ended ------------------------------------ December31, January 1, January 2, 2003 2003 2002 ------------------------------------------------------------------------------- Revenues: Sales $37,384,000 $42,050,300 $42,053,500 Vending revenue 208,100 192,200 210,500 ----------- ----------- ----------- Total revenues 37,592,100 42,242,500 42,264,000 ----------- ----------- ----------- Costs and expenses: Food and beverage 14,251,900 15,696,500 15,938,200 Payroll and benefits 11,678,100 12,712,800 12,582,000 Depreciation and amortization 1,990,500 2,205,300 2,148,400 Other operating expenses 6,252,100 6,826,600 6,753,800 General and administrative expenses 2,317,300 2,396,000 2,539,900 Franchise fees 1,494,400 1,681,600 1,260,300 Asset valuation charge 63,100 987,700 -- Loss on store closings and disposition of equipment 171,000 257,600 214,300 ----------- ----------- ----------- Total costs and expenses 38,218,400 42,764,100 41,436,900 ----------- ----------- ----------- (Loss) earnings from operations (626,300) (521,600) 827,100 Investment (loss) income (330,600) 17,300 (486,700) Interest and other income 253,700 167,400 99,900 Gain on sale of property 38,000 -- -- Interest expense (1,735,800) (1,763,400) (1,726,100) ----------- ----------- ----------- Loss before income taxes (2,401,000) (2,100,300) (1,285,800) Income tax benefit -- -- -- ----------- ----------- ----------- Net loss ($2,401,000) ($2,100,300) (1,285,800) =========== =========== =========== Basic loss per share ($0.65) ($0.59) ($0.49) =========== =========== =========== Diluted loss per share ($0.65) ($0.59) ($0.49) =========== =========== ===========
See accompanying notes to consolidated financial statements. 15 Family Steak Houses of Florida, Inc. Consolidated Balance Sheets
December 31, January 1, 2003 2003 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $2,287,800 $1,679,600 Investments-available for sale 32,600 58,100 Receivables 110,600 105,400 Current portion of mortgages receivable -- 342,000 Inventories 300,400 236,400 Prepaid and other current assets 500,500 372,900 ----------- ------------ Total current assets 3,231,900 2,794,400 Certificate of deposit-held to maturity 10,000 10,000 Property and equipment: Land 7,310,000 8,703,800 Buildings and improvements 22,858,000 25,496,600 Equipment 11,509,200 12,826,600 Construction in progress 388,300 60,800 ----------- ------------ 42,065,500 47,087,800 Accumulated depreciation (17,713,500) (18,741,200) ----------- ------------ Net property and equipment 24,352,000 28,346,600 Property held for sale 2,288,800 1,504,800 Other assets, principally deferred financing costs, net of accumulated amortization 924,000 1,011,600 ----------- ------------ $30,806,700 $33,667,400 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,121,900 $1,346,200 Securities sold, not yet purchased 1,187,400 19,200 Accrued liabilities 1,801,700 1,383,400 Current portion of workers compensation liability 646,000 501,000 Current portion of long-term debt 718,400 724,600 Current portion of obligation under capital lease 30,900 27,800 ---------- ---------- Total current liabilities 5,506,300 4,002,200 Deferred rent 47,500 15,800 Deposit liability 31,300 14,800 Workers compensation benefit liability 469,800 345,200 Long-term debt 17,470,700 19,523,000 Deferred gain 1,240,300 1,311,100 Obligations under capital lease 2,279,800 2,310,800 ---------- ---------- Total liabilities 27,045,700 27,522,900 Commitments and contingencies (Notes 4, 11) 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 37,100 37,100 Additional paid-in capital 9,869,600 9,869,600 Accumulated deficit (6,159,100) (3,758,100) Accumulated other comprehensive income (loss) 13,400 (4,100) ----------- ------------ Total shareholders' equity 3,761,000 6,144,500 ----------- ----------- $30,806,700 $33,667,400 =========== ===========
See accompanying notes to consolidated financial statements. 16 FAMILY STEAK HOUSES OF FLORIDA, INC.
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 2003, January 1, 2003 and January 2, 2002 Additional Accumulated Other Common Stock Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income (loss) Total Balance, January 3, 2001 2,416,231 $24,200 $8,631,400 ($372,000) ($513,900) $7,769,700 Exercise of stock options 7,200 100 100 Directors' fees in the form of stock options 5,300 5,300 Proceeds from rights offering 827,583 8,200 829,900 838,100 Comprehensive loss: Net loss (1,285,800) (1,285,800) Other comprehensive income: Unrealized losses on securities: Net unrealized holding losses arising during the period 28,500 28,500 Less: reclassification adjustment for net losses included in net loss 486,700 486,700 ---------- Total comprehensive loss (770,600) --------- ------- ---------- ----------- ---------- ---------- Balance, January 2, 2002 3,251,014 32,500 9,466,600 (1,657,800) 1,300 7,842,600 Exercise of stock options 20,204 200 200 Directors' fees in the form of stock options 20,000 20,000 Proceeds from private placement 435,000 4,400 383,000 387,400 Comprehensive loss: Net loss (2,100,300) (2,100,300) Other comprehensive income: Unrealized losses on securities: Net unrealized holding gains arising during the period 11,900 11,900 Less: reclassification adjustment for net losses included in net loss (17,300) (17,300) ---------- Total comprehensive loss (2,105,700) --------- ------- ---------- ----------- ---------- ---------- Balance, January 1, 2003 3,706,218 37,100 9,869,600 (3,758,100) (4,100) 6,144,500 Comprehensive loss: Net loss (2,401,000) (2,401,100) Other comprehensive income: Unrealized losses on securities: Net unrealized holding losses arising during the period 17,500 17,500 Less: reclassification adjustment for net losses included in net loss -- ---------- Total comprehensive loss (2,383,500) ----------------------------------------------------------------------------------- Balance, December 31, 2003 3,706,218 $37,100 $9,869,600 ($6,159,100) $13,400 $3,761,000 ========= ======= ========== =========== ========== ==========
See accompanying notes to consolidated financial statements. 17 Family Steak Houses of Florida, Inc. Consolidated Statements of Cash Flows
For the Years Ended December 31,January 1, January 2, 2003 2003 2002 Operating activities: Net loss ($2,401,000) ($2,100,300) ($1,285,800) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,000,000 2,205,400 2,148,400 Asset impairment charge 63,100 987,700 -- Directors' fees in the form of stock options -- 20,000 5,300 Investment loss (gain) 330,600 (17,300) 486,700 Amortization of loan fees 58,300 82,500 36,700 Amortization of deferred gain (70,800) (106,400) Loss on disposition of equipment 17,200 67,300 93,900 Decrease (increase) in: Receivables (5,200) 54,400 (66,800) Inventories (64,000) 83,400 (63,400) Prepaids and other current assets (127,600) (88,500) (104,800) Other assets (3,800) (38,200) (58,600) Increase (decrease) in: Accounts payable (224,300) (225,100) 200,400 Accrued liabilities 418,300 (264,700) (221,900) Deferred revenue 70,900 -- -- Deferred rent 31,700 15,800 -- Deposit liability 16,500 14,800 -- Workers compensation liability 269,600 131,500 123,100 ---------- ---------- ---------- Net cash provided by operating activities 308,600 822,300 1,293,200 ---------- ---------- ---------- Investing activities: Principal receipts on mortgages receivable 342,000 13,400 172,000 Purchases of investments (378,900) (343,300) (332,800) Proceeds from sales of investments 272,000 134,600 1,198,900 Proceeds from securities sold not yet purchased 988,600 24,300 135,800 Proceeds from sale of property 1,796,000 -- -- Proceeds from sale of property held for sale 304,300 32,600 3,000 Capital expenditures (938,000) (2,006,000) (5,716,400) ---------- ---------- ---------- Net cash provided by (used in) investing activities 2,386,000 (2,144,400) (4,539,500) ---------- ---------- ---------- Financing activities: Payments on long-term debt and obligation under capital lease (2,086,400) (3,533,200) (754,700) Proceeds from issuance of long-term debt -- 3,190,000 2,879,500 Payment of debt issuance costs -- (74,500) -- Proceeds from sale - leaseback -- 3,000,000 -- Payment of sale - leaseback cost -- (151,300) -- Proceeds from rights offering, net -- -- 838,100 Proceeds from investment margin debt -- -- (165,100) Proceeds from the issuance of common stock -- 387,600 100 --------- ---------- ---------- Net cash (used in ) provided by financing activities (2,086,400) 2,818,600 2,797,900 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 608,200 1,496,500 (448,400) Cash and cash equivalents - beginning of year 1,679,600 183,100 631,500 ---------- ---------- ---------- Cash and cash equivalents - end of year $2,287,800 $1,679,600 $183,100 ========== ========== ========== Noncash investing and financing activities: Net change in unrealized gain (loss) $17,500 ($18,200) $515,200 ========== ========== ========== Transfer from assets held for sale to property $0 $361,600 $0 ========== ========== ========== Transfer to assets held for sale from property $1,136,700 $0 $0 ========== ========== ========== Capital lease under sale - leaseback refinance $0 $1,320,000 $0 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest $1,682,200 $1,564,300 $1,814,000 ========== ========== ========== Cash paid during the year for income taxes $0 $0 $0 ========== ========== ==========
See accompanying notes to consolidated financial statements. 18 FAMILY STEAK HOUSES OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization The Company was organized under the laws of the State of Florida in September l985. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Steak House Construction. All significant intercompany transactions and balances have been eliminated. Fiscal Year The fiscal year consists of a fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. Fiscal years 2003, 2002 and 2001 consisted of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates. Cash and Cash Equivalents The Company has a cash management program that provides for the investment of excess cash balances in short-term investments. These investments are stated at cost which approximates market value and consist of money market instruments and have maturities of three months or less. 19 Investments Available for Sale The Company classifies its existing marketable equity securities as available for sale in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities are carried at fair market value, with unrealized gains and losses reported in shareholders' equity as a component of other comprehensive income (loss). Gains or losses on securities sold are based on the specific identification method. Proceeds from sales of these investments were $82,400, $134,600 and $1,198,900 in 2003, 2002 and 2001, respectively. Gross gains of $33,400, $17,100 and $74,000 and gross losses of $7,300, $27,500 and $537,000 were realized on these sales in 2003, 2002 and 2001 respectively. Securities Sold, Not Yet Purchased A primary investment strategy used by the Company in 2003 consisted of short-selling of securities, which results in obligations to purchase securities at a later date. As of December 31, 2003, the Company's total obligation for these securities sold not yet purchased was $1,187,400, compared to $19,200 at January 1, 2003. Certificate of Deposit Certificates of deposit are stated at cost. Inventories Inventories are stated at the lower of cost (first-in, first- out) or market and consist of food items, ingredients and supplies. Property and Equipment Property and equipment are stated at cost. Maintenance, repairs and betterments which do not enhance the value of or increase the life of the assets are expensed as incurred. Depreciation is provided for financial reporting purposes principally on the straight-line method over the following estimated lives: buildings and improvements - 25 years, land improvements - 25 years and equipment - 3 to 8 years. Leasehold improvements are amortized over the life of the related lease, or the life of the asset, whichever is less. Interest expense from the GE Capital loans is capitalized to the extent that such proceeds are used for the construction of new 20 restaurants. Interest costs of approximately $0, $3,900 and $53,400 were capitalized in 2003, 2002 and 2001, respectively. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purpose of the impairment review, assets are grouped on a restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of each restaurant's assets to future net cash flows expected to be generated by such restaurant's assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Property Held for Sale Property held for sale at December 31, 2003 and January 1, 2003 consisted of three restaurant properties stated at the lower of cost or estimated net realizable value, and two restaurant properties and an outparcel respectively stated at the lower of cost or estimated net realizable value. 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 for 2003 and 2002, 18 months beginning in 2004. The gross carrying amount of the deferred financing costs was $924,000 and $931,200 as of December 31, 2003 and January 1, 2003, respectively. Accumulated amortization related to financing costs was $216,500 and $168,900 as of December 31, 2003 and January 1, 2003, respectively. Amortization expense was $58,300 and $39,500 for 2003 and 2002, respectively. Amortization expense for each of the next five years is expected to be $48,100. The gross carrying amount of the initial franchise rights was $354,700 and $384,700 as of December 31, 2003 and January 1, 2003, respectively. Accumulated amortization related to initial franchise rights was $179,800 and $186,700 as of December 31, 2003 and January 1, 2003, respectively. Amortization expense was $23,500 and $10,900 for 2003 and 2002, respectively. The Company will amortize the remaining franchise rights asset over 21 the eighteen month conversion period allowed by the Amended Franchise Agreement (see Note 4 to the Financial Statements). Income Taxes Deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of the Company's assets and liabilities using presently enacted income tax rates. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain. Earnings Per Share Basic earnings per share for fiscal years 2003, 2002 and 2001 were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those years 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 respective year. Dilutive shares are represented by shares under option and stock warrants. Due to the Company's net losses in fiscal years 2003, 2002 and 2001, all potentially dilutive securities are antidilutive and have been excluded from the computation of diluted earnings per share. 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 grant. Options vest in one-quarter increments over a four-year period starting on the date of grant. An option's maximum term is 10 years. See Note 9 - Common Shareholders' Equity for additional information regarding the Company's stock options. 22 In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". Pursuance to the disclosure requirements of SFAS 148, the following table provides an expanded reconciliation for all periods presented:
2003 2002 2001 ------------ ----------- ------------ Net loss, as reported $(2,401,000) $(2,100,300) $(1,285,800) 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 (12,400) (12,400) (14,800) ------------ ------------ --------- Pro forma net loss $(2,413,400) $(2,112,700) $(1,300,600) ============ ============ ========= Earnings per share - basic and diluted As reported $ (0.65) $ (0.59) $ (0.49) Pro forma $ (0.65) $ (0.59) $ (0.49)
Reclassifications Certain items in the prior year financial statements have been reclassified to conform to the 2003 presentation. New Accounting Standards In June 2001, the FASB issued 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 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 June 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 was effective for disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a significant impact on its 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 23 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 intrinsic value method under APB 25 to account for stock-based compensation as allowed by SFAS 140. 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 December 31, 2003, the Company does not have any significant guarantees. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended January 1, 2003, and the recognition provisions effective January 2, 2003. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", primarily to clarify the meaning of an initial net investment and the meaning of underlying as used in SFAS 133. The Statement also describes characteristics of a derivative that contains financing components. SFAS No. 149 is effective for contracts modified or entered into after June 30, 2003 and hedging relationships designated after June 30, 2003. The Company adopted the standard on July 1, 2003. There was no impact on the Company's financial condition, results of operations or cash flows resulting from adoption. 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, but if none, is effective at the beginning 24 of the first interim period beginning after June 15, 2003. The Company has not entered into or modified any financial instruments with characteristics outlined in the statement. The Company adopted the standard on July 3, 2003. There has been no impact on the Company's financial condition, results of operations or cash flows upon adoption. NOTE 2. CLOSED RESTAURANT COSTS The Company closed a restaurant in Apopka, Florida in October 2003 and listed it for sale. As of December 31, 2003, the Company had three closed restaurants. The total book value of the three closed restaurants as of December 31, 2003 was $2,288,800, which is included in property held for sale. As of January 1, 2003, the Company had two closed restaurants with a book value of $1,504,800 included in property held for sale. Costs incurred to close restaurants and continuing losses incurred to maintain the closed restaurants in 2003, 2002 and 2001 were $105,600, $190,300 and $141,200, respectively. NOTE 3. ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, the Company recognized asset impairment charges of $63,100, $987,700 and $0 in 2003, 2002 and 2001, respectively. The charges in 2003 resulted from a review of the estimated disposal value of one closed restaurant. The charges in 2002 related to two closed restaurants and a third restaurant where the Company sub-leased the restaurant to another restaurant operator. NOTE 4. FRANCHISE AGREEMENT The Company operates its Ryan's restaurants under a franchise agreement between the Company and the Franchisor dated September 16, 1987, which amended and consolidated all previous franchise agreements (as amended, the "Franchise Agreement"). In December 2003, the Company entered into an amendment (the "Amendment") to the Franchise Agreement to terminate the Franchise Agreement by June 2005. The Amendment requires the Company to convert a specific number of its Ryan's restaurants each quarter to a new name and logo, beginning the first quarter of 2004, and requires all of the Ryan's restaurants to be converted by June 2005. As soon as each Ryan's restaurant is converted, franchise fees are no longer payable to the Franchisor for that converted restaurant. The Amendment requires the Company to pay a monthly franchise fee of 4.0% of the gross receipts of each restaurant operating under the name of Ryan's. Total franchise fee expenses 25 were $1,494,400, $1,681,600 and $1,260,300 for fiscal years 2003, 2002 and 2001, respectively. The following schedule outlines the number of Ryan's restaurants required to be converted to another name by the Company at each quarter-end under the Amendment. Failure to convert the cumulative required number of restaurants at any quarter-end date results in a higher franchise fee on the restaurants still using the Ryan's name. Failure to convert all of the restaurants by June 30, 2005 is a default under the Franchise Agreement in the event of which the franchisor has the right to require the Company to cease using the Ryan's name immediately. Cumulated Number of Restaurants Required to End of Fiscal Quarter be Converted March 31, 2004 3 June 30, 2004 5 September 30, 2004 8 December 31, 2004 11 March 31, 2005 14 June 30, 2005 18 The Company is ahead of this schedule for the first quarter of 2004, having converted three restaurants by February 2004. However, the Company's ability to convert the remaining restaurants depends on factors that may be beyond management's control, such as its ability to raise capital for the Whistle Junction remodels, obtaining building permits, the operating results of the converted restaurants and the resulting impact on the Company's cash flow and other variable factors. Note 5. ACCRUED LIABILITIES Accrued liabilities are summarized as follows: December 31, January 1, 2003 2003 ---------- ---------- Property taxes $479,300 $41,800 Payroll and payroll taxes 577,900 602,300 Other 744,500 739,300 ---------- ---------- $1,801,700 $1,383,400 ========== ========== 26 Note 6. WORKERS' COMPENSATION LIABILITY The Company self-insures workers' compensation losses up to certain limits. The liability for workers' compensation claims represents an estimate of the ultimate cost of uninsured losses which are unpaid as of the balance sheet date. The estimate is continually reviewed and adjustments to the Company's estimated claim liability, if any, are reflected in current operations. The State of Florida Division of Workers' Compensation ("the Division") requires self-insured companies to pledge collateral in favor of the Division in an amount sufficient to cover the Company's projected outstanding liability. In compliance with this requirement, in July 2003 the Company provided a $1 million letter of credit to the Division with an expiration date of July 1, 2004. Based upon the Bank's evaluation of the Company's credit and to avoid collateratization requirements, the letter of credit is guaranteed on behalf of the Company by Bisco Industries, Inc. ("Bisco"). The Chairman of the Company's Board of Directors, Glen F. Ceiley, is the President of Bisco. Note 7. LONG-TERM DEBT Long-term debt is summarized as follows: December 31, January 1, 2003 2003 ----------- ------------- Collateralized notes payable to GE Capital Franchise Finance Corporation, monthly principal and interest payments totaling $185,300, interest at thirty-day LIBOR rate +3.75% (with various minimum interest rates ranging from 4.9% - 8.5%) $18,189,100 $20,247,600 Less current portion (718,400) (724,600) ------------ ------------ $17,470,700 $19,523,000 ============ ============
Total maturities of long-term debt are as follows: 2004 $ 718,400 2005 777,700 2006 837,600 2007 902,200 2008 969,300 Thereafter 13,983,900 ----------- $18,189,100 =========== 27 Beginning in December 1996, the Company entered into a series of loan agreements with FFCA Mortgage Corporation, (now known as GE Capital). The Company used the proceeds of the GE Capital loans primarily to refinance its debt and to fund construction of restaurants. As of December 31, 2003, the outstanding balance due under the Company's various loans with GE Capital was $18,189,100. The weighted average interest rate for the GE Capital loans is 7.37% at December 31, 2003. The GE Capital loan agreements contain various restrictions on fixed charge coverage ratios, determined both on aggregate and individual restaurant levels. As of December 31, 2003, the Company was not in compliance with the debt covenant related to the fixed charge coverage ratio requirement for one particular loan pool. The Company has obtained an agreement of forbearance from GE Capital that waives the fixed coverage ratio restriction at December 31, 2003. The Company is in compliance with all other debt covenants at December 31, 2003. NOTE 8. INCOME TAXES Income taxes for the years ended December 31, 2003, January 1, 2003 and January 2, 2002 differ from the amount computed by applying the federal statutory corporate rate to earnings before income taxes. The differences are reconciled as follows:
2003 2002 2001 ---------- ---------- ----------- Income tax benefit at statutory rate $(816,300) $(714,100) $(437,200) Increase (decrease) in taxes due to: State tax net of Federal benefit (87,200) (76,200) (46,600) Change in deferred tax asset valuation allowance 903,500 790,300 476,200 Other --- --- 7,600 ---------- ---------- ----------- Income tax benefit $ --- $ --- $ --- ========== ========== ===========
28 The components of deferred taxes at December 31, 2003 and January 1, 2003 are summarized below:
December 31, 2003 January 1, 2003 ---------------- --------------- Deferred tax assets: Net operating loss $ 2,097,200 $ 1,373,500 Federal and state tax credits 589,100 589,200 Accruals not currently deductible 440,800 323,500 Excess tax over book basis: Asset valuation reserve 366,500 578,600 Property held for sale 0 167,300 Unrealized loss on investments 0 1,500 Capital loss carryforward 146,400 0 Unearned revenue, previously taxed 493,400 520,100 --------------- --------------- 4,133,400 3,553,700 Valuation allowance (3,116,700) (2,406,700) --------------- --------------- Total deferred tax assets 1,016,700 1,147,000 --------------- --------------- Deferred tax liabilities: Excess of tax over book depreciation and amortization 548,600 1,147,000 Excess of book over tax basis: Property held for sale 463,000 0 Unrealized gain on investments 5,100 0 -------------- -------------- Total deferred tax liabilities 1,016,700 1,147,000 --------------- --------------- Net deferred taxes $ --- $ --- =============== ===============
At December 31, 2003, the Company's federal and state tax credit was comprised of $49,000 in general business credits which expire in 2013 and alternative minimum tax credits of $540,200 which have no expiration date. Additionally, at December 31, 2003, the Company has Federal net operating losses of $5,427,000, which begin expiring in 2018 and State net operating losses of $6,938,600 which begin expiring in 2012. 29 NOTE 9. COMMON SHAREHOLDERS' EQUITY Earnings per Share The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net loss and net loss attributable to common shareholders:
2003 2002 2001 ---- ---- ---- Net Loss Shares Per Net Loss Shares Per Net Loss Shares Per (Numerator) (Denominator) Share (Numerator) (Denominator) Share (Numerator) (Denominator) Share ----------- ------------- ----- ------------ ------------- ----- ---------- ------------ ----- Basic EPS: Net loss available to common shareholders $(2,401,100) 3,706,200 $(0.65) $(2,100,300) 3,567,800 $(0.59) $(1,285,800) 2,631,700 $(0.49) ======= ======= ======= Effect of Dilutive Securities Stock Options Warrants Diluted EPS: Net loss available to common shareholders plus assumed conversions $(2,401,100) 3,706,200 $(0.65) $(2,100,300) 3,567,800 $(0.59) $(1,285,800) 2,631,700 $(0.49) ======= ======= =======
For the years ended December 31, 2003, January 1, 2003 and January 2, 2002, stock options totaling 0, 3,300 shares and 1,200 shares respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect. The Company also had an employee incentive stock option plan pursuant to which up to an aggregate of 108,000 shares of the common stock were authorized to be granted. All options expire ten years after the date of grant or 90 days after termination of employment. This plan expired as of November 30, 1995. Certain options outstanding under this plan as of November 30, 1995 remain exercisable pursuant to terms of the plan. In 1995, the Company's shareholders approved a new employee long-term incentive plan pursuant to which an additional 200,000 shares of common stock are authorized to be granted in the form of stock options or restricted stock. In 2002, the Company's shareholders approved a new employee long-term incentive plan pursuant to which an additional 200,000 shares of common stock are authorized to be granted in the form of stock options or restricted stock. All options granted under these plans expire no later than ten years after the date of grant or in most cases three months after termination of employment. The Company applies the intrinsic value method of APB 25 to account for its stock plans. Accordingly, the Company is 30 adopting the disclosure requirements of SFAS 148, effective for the fiscal year ending December 31, 2003, which requires presentation of pro forma net income and earnings per share information. See Stock-Based Compensation in NOTE 1 - Significant Accounting Policies. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. No employee stock options were granted in 2003, 2002 or 2001. The following table summarizes the changes in the total number of stock option shares outstanding during the three years ended December 31, 2003.
-------------------------------------------------------------------------------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------- Options Weighted Average Options Weighted Average Options Weighted Average Exercise Price Exercise Price Exercise Price -------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 157,490 $2.07 183,840 $2.11 241,940 $2.15 Options granted 0 20,204 .01 7,200 .01 Options exercised 0 (20,204) .01 (7,200) .01 Options forfeited (24,000) 2.36 (26,350) 2.35 (58,100) 2.27 -------- -------- ------- Options outstanding at end of year 133,490 2.02 157,490 2.07 183,840 2.11 ======== ======== ======= Options exercisable at end of year 129,915 2.04 142,340 2.15 151,640 2.28 ======== ======== ======= Weighted average fair value of options granted during the year $ --- $ --- --- Common shares reserved for future grants at end of year 200,000 268,900 87,389 ==============================================================================================================
The following table summarizes information about fixed stock options outstanding at December 31, 2003:
Weighted Average Year Exercise Options Options Remaining Life Granted Price Outstanding Exercisable (In years) 1994 1.25 8,850 8,850 1.0 1995 3.75 14,740 14,740 1.7 1995 2.00 7,500 7,500 1.7 1996 2.81 10,400 10,400 3.0 1997 3.28 12,600 12,600 4.0 1998 1.00 15,800 15,800 4.9 1999 2.00 25,000 25,000 5.8 1999 1.50 24,300 24,300 5.9 2000 1.06 14,300 10,725 7.0 _______ _______ 133,490 129,915 ======= =======
31 Remaining non-exercisable options as of December 31, 2003 become exercisable as follows: 2004 3,575 ====== The Company's Board of Directors is authorized to set the various rights and preferences for the Company's Preferred Stock, including voting, conversion, dividend and liquidation rights and preferences, at the time shares of Preferred Stock are issued. As of December 31, 2003, there were no shares of Preferred Stock issued. On October 1, 2001, the Company completed a Rights Offering ("the Offering") for its shareholders of record as of August 10, 2001. The Company raised $838,100 net of offering costs from the Offering, and issued 827,583 shares of common stock to shareholders exercising rights. In April 2002, the Company completed a private placement with Bisco for 435,000 shares at $0.92 per share, which was based on the average closing price of the Company's common stock on the ten trading days prior to the sale. The Company used the $387,600 proceeds net of issuance costs,from this sale to fund remodels of several restaurants in 2002. NOTE 10. PROFIT SHARING AND RETIREMENT PLAN Employees of the Company participate in a profit sharing and retirement plan covering substantially all full-time employees at least twenty-one years of age and with more than one year of service. The plan was established in August 1991. Contributions are made to the plan at the discretion of the Company's Board of Directors. No profit-sharing contributions have been made since the inception of the plan. The profit sharing plan includes a 40l(k) feature by which employees can contribute, by payroll deduction only, a portion of their annual compensation not to exceed $12,000 in 2003. The plan provides for a Company matching contribution of $.25 per dollar of the first 6% of employee contributions. The Company's matching contribution was $35,000 in 2003, $48,900 in 2002 and $45,000 in 2001. In 2003, employees vested in Company contributions based on the following schedule: 32 Years of Vesting Service Percentage -------- ---------- Less than 2 20% 3 40% 4 60% 5 80% 6 100% NOTE 11. COMMITMENTS AND CONTINGENCIES Lease Obligations At December 31, 2003, the Company is committed under the terms and conditions of real and personal property operating leases for minimum rentals aggregating $6,364,100 plus insurance, common area expenses and taxes. The Company has various renewal options on these leases covering periods of five to twenty years. In September 1996, the Company entered into a twenty-year lease agreement with two five-year renewal options for a restaurant building. The total net book value of the assets covered by the lease amounted to $758,600 at December 31, 2003. Interest is computed at an annual rate of 10.65%. In July 2002, the Company entered into a twenty-year lease agreement with two five-year renewal options for a restaurant building. The total net book value of the assets covered by the lease amounted to $1,221,000 at December 31, 2003. Interest is computed at an annual rate of 10.74%. In August 2002, the Company entered into a fifteen-year lease agreement with two ten-year renewal options for a restaurant building scheduled to open in April 2004. 33 Future minimum lease obligations under non-cancelable capital leases and operating leases consist of the following as of December 31, 2003: ------------------------------------------------------------------------------------------------
Capital Operating Leases Leases ------------------------------------------------------------------------------------------------ 2004 $274,400 $599,500 2005 274,400 528,800 2006 279,600 522,800 2007 297,200 498,100 2008 297,200 394,700 Future years 3,630,400 3,820,200 ---------- ---------- Total minimum lease payments 5,053,200 6,364,100 Amount representing interest (2,742,500) ---------- Present value of net minimum payments 2,310,700 Current portion (30,900) ---------- Long-term capital lease obligations $2,279,800 ==========
Rental expense for operating leases for the years ended December 31, 2003, January 1, 2003 and January 2, 2002 was $516,900, $488,400 and $550,500, respectively. The Company has entered into two lease agreements in which it is leasing or sub-leasing two of its restaurant locations to a third party. The following table shows the future minimum rentals receivable under non-cancelable operating leases in effect at year-end 2003: 2004 $ 131,100 2005 131,100 2006 131,100 2007 135,800 2008 140,400 Future years 554,300 ---------- $1,223,800 ========== Rental income from leases was $146,100 and $60,500 for 2003 and 2002, respectively. Legal Matters The Company, in the normal course of business, is subject to occasional legal proceedings. However, there are no material pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which any of their properties are subject; nor are there material proceedings known to be contemplated by any governmental authority; nor are there 34 material proceedings known to the Company, pending or contemplated, in which any director, officer, affiliate or any principal security holder of the Company or any associate of the foregoing is a party or has an interest adverse to the Company. NOTE 12. QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited) Following is a summary of the quarterly results of operations for the years ended December 31, 2003 and January 1, 2003: Fiscal Quarter $ In thousands, First Second Third Fourth Total except per share amounts: 2003: Sales $ 10,728 $ 9,567 $ 8,559 $ 8,529 $ 37,384 Earnings (loss) from operations 319 (3) (276) (592) (626) Net earnings (loss) (55) (394) (768) (1,183) (2,401) Basic earnings (loss) per share (.02) (.11) (.21) (.32) (.65) Diluted earnings (loss) per share (.02) (.11) (.21) (.32) (.65) 2002: Sales $ 12,535 $ 10,795 $ 9,526 $ 9,194 $ 42,050 Earnings (loss) from operations 893 97 (253) (1,259)(1) (522) Net earnings (loss) 514 (299) (654) (1,661) (2,100) Basic earnings (loss) per share .16 (.08) (.18) (.45) (.59) Diluted earnings (loss) per share .16 (.08) (.18) (.45) (.59) (1) During the quarter ended January 1, 2003, the Company recorded an asset impairment charge of $728,000 relating to one closed restaurant and one restaurant under lease. (2) During the quarter ended December 31, 2003, the Company recorded an asset impairment charge of $63,100 related to a closed restaurant. (3) During the quarter ended December 31, 2003, the Company increased it's workers' compensation liability by approximately $274,000. NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: 35 Cash and Cash Equivalents - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investments Available for Sale - The Company's investments available for sale consist of marketable securities which are valued at the quoted market price. Certificates of Deposit - The Company believes that the carrying amount is a reasonable estimate of the fair value of the certificates of deposit. Debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt instruments. The Company believes the carrying amount is a reasonable estimate of such fair value. NOTE 14. COMPANY LIQUIDITY The sufficiency of the Company's cash to fund operations and necessary capital maintenance items will depend on, among other things, improvements in same store sales results, the status of the Company's efforts to sell properties held for sale and the favorable results from remodels to the new concepts. The Company's ability to complete the remodels will be contingent on its ability to locate sufficient financing. It is estimated that financing will need to be secured for remodels of seven restaurants, at an average estimated cost of $225,000 each. 36 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Family Steak Houses of Florida, Inc. We have audited the accompanying consolidated balance sheets of Family Steak Houses of Florida, Inc. and subsidiary as of December 31, 2003 and January 1, 2003 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Family Steak Houses of Florida, Inc. and subsidiary as of December 31, 2003 and January 1, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Certified Public Accountants Jacksonville, Florida March 19, 2004 37 COMPANY'S REPORT ON FINANCIAL STATEMENTS Family Steak Houses of Florida, Inc. management has prepared and is responsible for the accompanying consolidated financial statements and related consolidated financial information included in this report. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and are appropriate under the circumstances. These consolidated financial statements necessarily include amounts determined using management's best judgements and estimates. Family Steak Houses of Florida, Inc. maintains accounting and other control systems which the Company believes provides reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company, although there are inherent limitations in all internal control structure elements, as well as cost/benefit considerations. 38 Family Steak Houses of Florida, Inc. Corporate Listing Corporate Officers and Directors Independent Certified Public Accountants Edward B. Alexander Deloitte & Touche LLP President, COO Suite 2801, Independent Square One Independent Drive Jacksonville, FL 32202-5034 Steve Catanzaro Director General Counsel McGuire Woods Glen F. Ceiley 50 North Laura Street, Suite 3300 Chairman of the Board P.O. Box 4099 President & CEO, Jacksonville, FL 32201 Bisco Industries, Inc. Jay Conzen Transfer Agent / Rights Agent Director Mellon Shareholder Services President, 200 Galleria Parkway Old Fashioned Kitchen, Inc. Suite 1900 Atlanta, GA 30339 William Means Director Executive Office Vice President of Family Steak Houses of Florida, Inc. Information Services, 2113 Florida Boulevard Bisco Industries, Inc. Neptune Beach, FL 32266 Patrick Fekula Form 10-K Vice President A copy of the Company's Annual Report on Form 10-K for fiscal 2003, as filed with the Securities and Exchange Commission, may be obtained without charge by writing to: Corporate Secretary Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266 39 Common Stock Data The Company's common stock is traded on the Over the Counter Bulletin Board ("OTCBB") under the trading symbol "RYFL". The Company's stock was delisted from the Nasdaq SmallCap Market in 2003. As of February 25, 2004, there were 2,200 shareholders of record, not including individuals holding shares in street names. The closing sale price for the Company's stock on February 25, 2004 was $.78. The Company has never paid cash dividends on its common stock and does not expect to pay any dividends in the next few years. Management of the Company presently intends to retain all available funds for expansion of the business. The quarterly high and low closing prices of the Company's common stock are as shown below: Market Price of Common Stock 2003 2002 Quarter High Low High Low First $.60 $.33 $1.02 $.90 Second .51 .30 1.08 .80 Third .69 .37 1.06 .83 Fourth .80 .56 .82 .48 40 {FLORIDA MAP} RYAN'S LOCATIONS H Headquarters * Brooksville (1) * Daytona Beach (1) * Deland (1) * Gainesville (1) * Jacksonville (1) * Lake City (1) * Lakeland (2) * Melbourne (1) * Ocala (1) * Orlando (1) * St. Cloud (1) * Tallahassee (1) * Tampa (3) * Titusville (1) * Winter Haven (1) 41