-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GrwvCIJ0D+ORYUg8lmQ9meUdLfQnxuLoQJJnNVrA4XJSzn3wwWh1mQWYqZL9bO46 Cq2Mp2h6X4/PaIGiUYsqzQ== 0000891554-98-000472.txt : 19980430 0000891554-98-000472.hdr.sgml : 19980430 ACCESSION NUMBER: 0000891554-98-000472 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980428 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAMILY STEAK HOUSES OF FLORIDA INC CENTRAL INDEX KEY: 0000784539 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 592597349 STATE OF INCORPORATION: FL FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-14311 FILM NUMBER: 98602427 BUSINESS ADDRESS: STREET 1: 2113 FLORIDA BLVD STREET 2: STE A CITY: NEPTUNE BEACH STATE: FL ZIP: 32266 BUSINESS PHONE: 9042494197 MAIL ADDRESS: STREET 1: 2113 FLORIDA BLVD STE A STREET 2: 2113 FLORIDA BLVD STE A CITY: NEPTUNE BEACH STATE: FL ZIP: 32266 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-14311 FAMILY STEAK HOUSES OF FLORIDA, INC. (exact name of registrant as specified in its charter) Florida No. 59-2597349 (State of Incorporation) (I.R.S. Employer Identification) 2113 Florida Boulevard Neptune Beach, Florida 32266 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (904) 249-4197 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES [ ] NO [X] As of March 5, 1998, 2,367,768 shares of Common Stock of the registrant were outstanding. The aggregate market value of such voting Common Stock (based upon the closing sale price of the registrant's Common Stock on the NASDAQ National Market System on March 5, 1998, as reported in The Wall Street Journal) held by non-affiliates of the registrant was approximately $3,462,823. Documents Incorporated by Reference Portions of the registrant's 1997 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Proxy Statement for the registrant's 1998 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I ITEM 1. BUSINESS General Family Steak Houses of Florida, Inc. ("Family" or the "Company"), is the sole franchisee of Ryan's Family Steak House restaurants ("Ryan's restaurants") in the State of Florida. The Company's first Ryan's restaurant was opened in Jacksonville, Florida, in May 1982. As of December 31, 1997, the Company operated 25 Ryan's restaurants in Florida, including nine in north Florida and sixteen in central and west Florida. A Ryan's restaurant is a family-oriented restaurant serving high-quality, reasonably-priced food in a casual atmosphere with server-assisted service. Ryan's restaurants serve lunch and dinner seven days a week and offer a variety of charbroiled entrees, including various cuts of beef, chicken, and seafood. Most of the restaurants serve a brunch on weekends only. Each restaurant features a diverse selection of items from either a series of "scatter bars" or a 65-foot, self-service, all-you-can-eat Mega Bartm, and a separate fresh bakery and dessert bar. In addition to traditional salad bar items, the scatter bars or Mega Barstm offer hot meats, pre-made salads, soups, baked potatoes with toppings, cheeses and a variety of vegetables. The Company believes that its operating strategy of selling top-quality meals at reasonable prices, at food costs to the Company which are higher than the industry average, creates a perception of value to its customers. The Company operates its Ryan's restaurants under a Franchise Agreement with Ryan's Family Steak Houses, Inc., ("Ryan's", or the "Franchisor") which grants the Company the exclusive right to operate Ryan's Family Steak House restaurants throughout North and Central Florida. Company History The Company was formed by the combination, effective February 1986, of six limited partnerships, each of which owned and operated a Ryan's restaurant franchise. In April 1986, the Company issued 4,266,000 shares of its common stock in exchange for the assets and liabilities of the predecessor partnerships and 1,134,000 shares of its common stock to Eddie L. Ervin, Jr., in consideration for Mr. Ervin assigning to the Company all of his rights under the -2- Franchise Agreement, as defined below. The Company completed its initial public offering of 4,500,000 shares of its common stock in 1986 resulting in net proceeds to the Company of approximately $4,145,000. Franchise Agreement The Company operates its Ryan's restaurants under a Franchise Agreement between the Company and the Franchisor dated as of September 16, 1987, which Franchise Agreement 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 fully and faithfully performed its obligations under the Franchise Agreement during its original term. Under the terms of the Franchise Agreement, the Company has the right to use the registered mark "Ryan's Family Steak House" and the right to use the Franchisor's techniques in the operation of Ryan's Family Steak House restaurants. In 1996, the Company and the Franchisor amended the Franchise Agreement. The amended agreement requires the Company to pay a royalty fee of 3.0% through December 2001 and 4.0% thereafter on the gross receipts of each Ryan's Family Steak House restaurant. Total royalty fee expenses were $1,108,400, $1,138,600, and $1,263,200, for the fiscal years ended December 31, 1997, January 1, 1997, and January 3, 1996, respectively. The Franchise Agreement requires the Company to operate a minimum number of Ryan's restaurants on December 31 of each year. The Company has listed six restaurants for sale. Failure to operate the minimum number of restaurants could result in the loss of exclusivity rights to the Ryan's concept in the Company's north and central Florida territory. The following schedule outlines the number of Ryan's restaurants required to be operated by the Company on December 31 of each year under the Franchise Agreement: Number of Restaurants Required to End of Fiscal Year be in Operation - ------------------ --------------- 1997 25 1998 26 1999 27 2000 28 2001 and subsequent years Increases by one each year -3- Prior to July 1994, the Company held exclusive franchise rights to build Ryan's restaurants in the State of Florida, with the exception of Panama City, Florida and Escambia County, Florida, where the Franchisor has the right to operate Ryan's restaurants. In July 1994 the Company relinquished the franchise rights to most counties in northwest Florida and south Florida in exchange for forgiveness of $500,000 in past due royalty fees. The Company has the right to repurchase the exclusive franchise rights to these counties for $500,000 at any time prior to June 30, 1998. In addition, the Franchisor agreed not to develop any Ryan's restaurants in the south Florida territory prior to June 30, 1996. Ryan's has not developed any restaurants in Florida as of March 13, 1998. 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 may result in the disruption, and possibly the discontinuance, 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, as amended. Operations of Ryan's Restaurants Format. As of March 5, 1998, 24 of the Company's Ryan's restaurants are located in free-standing buildings which vary in size from 7,500 to 12,000 square feet. One of the Company's Ryan's restaurants is located in a mall. Each restaurant is constructed of brick or stucco walls, interior and exterior, with exposed woodwork. The interior of each Ryan's restaurant contains a dining room, a customer ordering area, and a kitchen. The dining rooms seat a total of between 270 and 500 persons and highlight centrally located, illuminated scatter bars or Mega Barstm and a fresh bakery bar. Each Ryan's restaurant has parking for approximately 100 to 175 cars on lots of overall size of approximately 50,000 to 70,000 square feet. The Ryan's restaurants operate seven days a week. Typical hours of operation are from 11:00 a.m. to 9:00 p.m., Sunday through Thursday, and from 11:00 a.m. to 10:00 p.m., -4- Friday and Saturday. Restaurants that serve brunch open at 8:00 a.m. Saturday and Sunday. In a Ryan's restaurant, the customer enters the restaurant, orders from the menu, and then enters the dining room. Beverages are brought to the table by servers. Entrees are cooked to order. The customer ordering the salad bar is given unlimited access to the scatter bars or Mega Barstm and the bakery dessert bar. Customers receive table service of the entree and beverage refills. For the fiscal year ended December 31, 1997, the average weekly customer count per restaurant was approximately 4,730 and the average meal price (including beverage) was approximately $6.00. Restaurant Management and Supervision. The Company manages the Ryan's restaurants pursuant to a standardized operating and control system together with comprehensive recruiting and training of personnel to maintain food and service quality. In each Ryan's restaurant, the management group consists of a general manager, a manager and one to three assistant managers, depending on sales volume. The Company requires at least two members of the management group on duty during all peak serving periods. Management-level personnel usually begin employment at the manager trainee or assistant manager level, depending on prior restaurant management experience. All new management-level personnel must complete the Company's six-week training period prior to being placed in a management position. Each restaurant management group reports to a supervisor. Presently, the supervisors each oversee the operations of six to seven restaurants. The supervisors report directly to the Director of Operations. Communication and support from all departments in the Company are designed to assist the supervisors in responding promptly to local problems and opportunities. All restaurant managers and supervisors participate in incentive programs based upon the profitability of their restaurants and upon the achievement of certain pre-set goals. The Company believes these incentive programs enable it to operate more efficiently and to attract qualified managers. Purchasing, Quality and Cost Control. The Company has a centralized purchase control program which is designed to ensure uniform product quality in all restaurants. The program also helps to maintain reduced food, beverage, and supply costs. The Company purchases approximately 95% of the products used by the Company's restaurants through the centralized purchase control program. USDA choice grain-fed beef, the Company's primary commodity, is closely monitored by the Company for advantageous purchasing and quality control. The Company purchases beef through various producers and brokers both on a contract basis and on a spot -5- basis. Beef and other products are generally delivered directly to the restaurants three times weekly, except for fresh produce, which is delivered three to five times per week. The Company believes that satisfactory sources of supply are available for all the items it regularly uses. The Franchise Agreement requires that all suppliers to Ryan's restaurants are subject to approval by the Franchisor. Through its relationship with the Franchisor, the Company has obtained favorable pricing on the purchase of food products from several suppliers. In June 1995, the Company renewed its agreement with Kraft Foodservice, Inc. to serve as its primary supplier. Kraft was subsequently purchased by Alliant Foodservice, Inc. The Alliant agreement has a five-year term and is cancellable at any time with 60 days notice. The Company maintains centralized financial and accounting controls for its restaurants. On a daily basis, restaurant managers forward customer counts, sales information and supplier invoices to Company headquarters. On a weekly basis, restaurant managers forward summarized sales reports and payroll data. Physical inventories of all food and supply items are taken weekly, and meat is inventoried daily. Development General. The Company operated 25 Ryan's restaurants as of March 17, 1998. Site Location and Construction. The Company considers the specific location of a restaurant to be important to its long-term success. The site selection process focuses on a variety of factors, including trade area demographics (such as population density and household income level), an evaluation of site characteristics (such as visibility, accessibility, and traffic volume), and an analysis of the potential competition. In addition, site selection is influenced by the general proximity of a site to other Ryan's restaurants in order to improve the efficiency of the Company's field supervisors and potential marketing programs. The Company generally locates its restaurants near or adjacent to residential areas in an effort to capitalize on repeat business from such areas as opposed to transient business. The Company generally constructs its Ryan's restaurants using its contracting subsidiary. -6- believes that by performing site selection and restaurant construction internally or through the Franchisor, the Company can maintain better control of site selection, real estate cost and construction performance. While the Company has not required performance and payment bonds, it undertakes to closely supervise and monitor all construction and confirm payment of subcontractors and suppliers. New Ryan's restaurants generally are completed within three months of the date on which construction is commenced. Management of New Restaurants. When a new Ryan's restaurant is opened, the principal restaurant management positions are staffed with personnel who have prior experience in a management position at another of the Company's restaurants and who have undergone special training. Prior to opening, all staff personnel at the new location undergo one week of intensive training conducted by a training team. Such training includes preopening drills in which test meals are served to the invited public. Both the staff at the new location and personnel experienced in store openings at other locations participate in the training and drills. Joint Venture In December 1994, the Company formed a new subsidiary, Family Steak JV, Inc. which aquired a 50% ownership in a Florida limited liability company, Cross Creek Barbeqe, L.C. ("Cross Creek"), for the purpose of opening a new restaurant. The Company contributed certain furnishings, fixtures, and equipment owned by its Wrangler's Roadhouse, Inc. subsidiary ("Wrangler's") to Cross Creek and the other 50% owner of Cross Creek contributed the cash necessary to remodel and open the new Cross Creek restaurant. As a result of unsatisfactory operational performance, the Company sold its interest in the Cross Creek restaurant in July 1995. Wrangler's leased the land and building to Cross Creek until May 1996, when it sold them at a gain of approximately $5,000. Proprietary Trade Marks The name "Ryan's Family Steak House," along with all ancillary signs, building design and other symbols used in conjunction with the name, and the name "Mega Bar", are the primary trademarks and service marks of the Franchisor. Such marks are registered in the United States. All of these registrations and the goodwill associated with the Franchisor's trademarks are of material importance to the Company's business and are licensed to the Company under the Franchise Agreement. -7- Competition The food service business in Florida is highly competitive and is often affected by changes in the taste and eating habits of the public, economic conditions affecting spending habits, local demographics, traffic patterns and local and national economic conditions. The principal bases of competition in the industry are the quality and price of the food products offered. Location, speed of service and attractiveness of the facilities are also important factors. The Company's restaurants are in competition with restaurants operated or franchised by national, regional and local restaurant companies offering a similar menu, many of which have greater resources than the Company. The Company also is in competition with specialty food outlets and other vendors of food. The amount of new competition near Company restaurants increased significantly in 1997. The increased competition had a significant negative impact on sales in 1997. Management has developed a plan to attempt to reduce the negative impact on sales from new competition, but there can be no assurance that sales trends will improve. In addition, the Franchisor has the right to operate restaurants in several other west Florida and south Florida counties. Employees As of December 31, 1997, the Company employed approximately 1,300 persons, of whom approximately 50% are considered by management as part-time employees. No labor unions currently represent any of the Company's employees. The Company has not experienced any work stoppages attributable to labor disputes and considers employee relations to be good. Executive Officers The following persons were executive officers of the Company effective December 31, 1997: Lewis E. Christman, Jr., age 78, has been President and Chief Executive Officer of the Company since April 1994. Mr. Christman was hired as a consultant to oversee and direct the Company's purchasing program in January 1994 and has been a Director of the Company since May 1993. In addition, Mr. Christman serves as President of each of the Company's subsidiaries. Mr. Christman has been a partner in East Coast Marketing since 1990. From 1979 to 1989, Mr. Christman served as Chairman of the Board of Neptune Marketing, Inc., a food brokerage company. Edward B. Alexander, age 39, has been Vice President of Finance since December 1996, and was Secretary and Treasurer -8- of the Company from November 1990 to December 1996. In addition, Mr. Alexander was appointed to the Board of Directors in May 1996, and serves as Secretary of each of the Company's subsidiaries. Mr. Alexander served as controller of the Company from January 1989 to April 1990. From April 1985 until December 1988, Mr. Alexander was employed as controller for Mac Papers, Inc., a wholesale paper products distributor. Prior to April 1985, Mr. Alexander served as a senior accountant for the accounting firm of Touche Ross & Co. Government Regulation The Company is subject to the Fair Labor Standards Act which governs such matters as minimum wage requirements, overtime and other working conditions. A large number of the Company's restaurant personnel are paid at or slightly above the federal minimum wage level and, accordingly, any change in such minimum wage will affect the Company's labor costs. The Company is also subject to the Equal Employment Opportunity Act and a variety of federal and state statutes and regulations. The Company's restaurants are constructed to meet local and state building requirements and are operated in accordance with state and local regulations relating to the preparation and service of food. The Company believes that it is in substantial compliance with all applicable federal, state and local statutes, regulations and ordinances and that compliance has had no material effect on the Company's capital expenditures, earnings or competitive position, and such compliance is not expected to have a material adverse effect upon the Company's operations. The Company, however, cannot predict the impact of possible future legislation or regulation on its operations. Sources and Availability of Raw Materials The Company procures its food and other products from a variety of suppliers, and follows a policy of obtaining its food and products from several major suppliers under competitive terms. A substantial portion of the beef used by the Company is obtained from one supplier, although the Company believes comparable beef meeting its specifications is available in adequate quantities from other suppliers. To ensure against interruption in the flow of food supplies due to unforeseen or catastrophic events, to take advantage of favorable purchasing opportunities, and to insure that meat received by the Company is properly aged, the Company maintains a two to six week supply of beef. -9- Working Capital Requirements Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are converted rapidly to cash. The Company does not maintain significant receivables and inventories. Therefore, with the exception of debt service, working capital requirements for continuing operations are not significant. In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA totaling $14,681,400 at December 31, 1997. Each note is secured by a mortgage on a Company restaurant property. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. In November 1997, the Company prepaid one of the Notes in full in the amount of approximately $440,000. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the Promissory Notes to retire its notes with Cerberus Partners, L.P. ("Cerberus") and its loan with the Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500 net of income taxes, was accounted for in 1996 as an extraordinary item. In addition, the Company retired warrants for 210,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the Company's common stock at an exercise price of $2.00 per share. Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000. This additional financing would be evidenced by four additional Promissory Notes secured by mortgage on four Company restaurant properties. The terms and interest rate of this loan agreement are identical to the loan agreement described above. The Company borrowed $1,290,000 under this agreement in February 1998, secured by a mortgage on one restaurant property. The availability of new borrowings under this agreement is currently scheduled to expire in June 1998. Seasonality 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. -10- Research The Company relies primarily on the Franchisor to maintain ongoing research programs relating to the development of new products and evaluation of marketing activities. Although research and development activities are important to the Company, no expenditures for research and development have been incurred by the Company. Customers No material part of the Company's business is dependent upon a single customer or a few customers. Information as to Classes of Similar Products or Services The Company operates in only one industry segment. All significant revenues and pre-tax earnings relate to retail sales of food to the general public through restaurants owned and operated by the Company. The Company has no operations outside the continental United States. ITEM 2. PROPERTIES Location Date Opened -------- ----------- Jacksonville May 1982 Jacksonville May 1983 Jacksonville November 1983 Orange Park May 1984 Jacksonville May 1985 Jacksonville July 1985 Ocala September 1986 Neptune Beach November 1986 Lakeland February 1987 Lakeland March 1987 Winter Haven August 1987 Apopka September 1987 Gainesville December 1987 Hudson February 1988 New Port Richey May 1988 -11- Tampa June 1988 Tallahassee August 1988 Daytona Beach September 1988 Tampa November 1988 Orlando January 1989 Orlando February 1989 Clearwater August 1989 Melbourne November 1989 Lake City March 1991 Brooksville January 1997 In January 1998, the Company entered into a lease agreement for a new restaurant expected to be opened in June 1998. As of March 17, 1998, the Company operated 25 Ryan's restaurants. The specific rate at which the Company is able to open new restaurants will be determined by its ability to locate suitable sites on satisfactory terms, raise the necessary capital, secure appropriate governmental permits and approvals and recruit and train management personnel. As of December 31, 1997, the Company owned the real property on which 22 of its restaurants were located. Seventeen of these properties were subject to mortgages securing the FFCA notes. The Company leases the real property on which three of its restaurants are located. Those restaurants are located in Jacksonville, Clearwater and Brooksville, Florida. The Company also leases two buildings in Jacksonville, Florida for its executive offices. On May 13, 1997, the Company received notice from Aetna Life Insurance Company, the mortgage holder of the mall property at which the Company's Clearwater, Florida restaurant is located, that Aetna intended to foreclose on the property due to a default by the landlord on the mortgage. In September 1997, Aetna was granted a Motion for -12- Summary Judgement of Foreclosure by the Circuit Court of the Sixth Judicial Court in Pinellas County. This Motion indicates that Aetna's rights under the mortgage are superior to the Company's leasehold interest. It is uncertain whether this action could allow Aetna to evict the Company from the Clearwater location. An eviction would result in a write-off of approximately $350,000 of leasehold improvements. The Company intends to vigorously defend its interest in this matter. However, there can be no assurance that the Company will be successful in this defense. PART II -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Shareholders is incorporated herein by reference. -14- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)1. The financial statements listed below are filed with this report on Form 10-K or are incorporated herein by reference from the Company's 1997 Annual Report to Shareholders. With the exception of the pages listed below, the 1997 Annual Report to Shareholders is not deemed "filed" as a part of this report on Form 10-K. Page Reference ---------------------- Form 1997 10-K Annual Report ---- ------------- Consent of Independent Certified Public Accountants F-1 Independent Auditors Report 27 Consolidated Statements of Operations 10 Consolidated Balance Sheets 11 -15- Consolidated Statements of Share- holders' Equity 12 Consolidated Statements of Cash Flows 13 Notes to Consolidated Financial Statements 14 (a)2. No financial statement schedules have been included since the required information is not applicable or the information required is included in the financial statements or the notes thereto. (a)3. The following exhibits are filed as part of this report on Form 10-K, and this list comprises the Exhibit Index. No. Exhibit --- ------- 3.01 Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.01 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.02 Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.02 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.03 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.04 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.05 Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to the Company's Form 8-A, filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.06 Shareholder Rights Agreement, dated March 19, 1997, by and between Family Steak Houses of Florida, Inc. and Chase Mellon Shareholder Services, LLC (Exhibit 1 to the Company's Form 8-A, filed with the Commission on March 19, 1997, is incorporated herein by reference.) -16- 3.07 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3 to the Company's Form 8-A filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.08 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the Company's Form 10-K filed with the Commission on March 31, 1998 is incorporated by reference.) 4.01 Specimen Stock Certificate for shares of the Company's Common Stock (Exhibit 4.01 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 10.01 Amended Franchise Agreement between Family Steak Houses of Florida, Inc. and Ryan's Family Steak Houses, Inc., dated September 16, 1987. (Exhibit 10.01 to the Company's Registration Statement on Form S-1, filed with the Commission on October 2, 1987, Registration No. 33-17620, is incorporated herein by reference.) 10.02 Lease regarding the restaurant located at 3549 Blanding Boulevard, Jacksonville, Florida (Exhibit 10.03 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 10.03 Lease, dated May 18, 1989, between the Company and Stoneybrook Associates, Ltd., for a restaurant located in Clearwater, Florida. (Exhibit 10.25 to the Company's Registration Statement on Form S-1, filed with the Commission on September 29, 1989, Registration No. 33-17620, is incorporated herein by reference.) 10.04 Amended and Restated Warrant to Purchase Shares of Common Stock, void after October 1, 2003, which represents warrants issued to The Phoenix Insurance Company, The Travelers Indemnity Company, and The Travelers Insurance Company, (subsequently transferred to Cerberus Partners, L.P.) (Exhibit 10.07 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.05 Warrant to Purchase Shares of Common Stock, void after October 1, 2003, which represents warrants issued to The Phoenix Insurance Company, The Travelers Indemnity Company, and The Travelers Insurance Company. (subsequently transferred to -17- Cerberus Partners, L.P.) (Exhibit 10.08 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.06 Amendment of Franchise Agreement between Ryan's Family Steak Houses, Inc. and the Company dated July 11, 1994. (Exhibit 10.17 to the Company's Annual Report on Form 10-K, filed with the Commission on March 28, 1995, is incorporated herein by reference). 10.07 Agreement between the Company and Kraft Foodservice, Inc., as the Company's primary food product distribution. (Exhibit 10.06 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on August 9, 1995, is incorporated herein by reference). 10.08 Lease Agreement between the Company and CNL American Properties Fund, Inc., dated as of September 18, 1996. (Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996 is hereby incorporated by reference). 10.09 Rent Addendum to Lease Agreement between the Company and CNL American Properties Fund, Inc., dated as of September 18, 1996. (Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 18, 1996 is hereby incorporated by reference). 10.10 Amendment of Franchise Agreement between the Company and Ryan's Family Steak Houses, Inc. dated October 3, 1996. (Exhibit 10.15 to the Company's Annual Report on Form 10-K, filed with the Commission on April 1, 1997 is hereby incorporated by reference). 10.11 $15.36m Loan Agreement, between the Company and FFCA Mortgage Corporation, dated December 18, 1996. (Exhibit 10.18 to the Company's Annual Report on Form 10-K, filed with the Commission on April 1, 1997 is hereby incorporated by reference). 10.12 $4.64m Loan Agreement, between the Company and FFCA Mortgage Corporation, dated December 18, 1996. (Exhibit 10.19 to the Company's Annual Report on Form 10-K, filed with the Commission on April 1, 1997 is hereby incorporated by reference). -18- 10.13 Form of Promissory Note between the Company and FFCA Mortgage Corporation, dated December 18, 1996. (Exhibit 10.20 to the Company's Annual Report on Form 10-K, filed with the Commission on April 1, 1997 is hereby incorporated by reference). 10.14 Form of Mortgage between the Company and FFCA Mortgage Corporation, dated December 18, 1996 (Exhibit 5 to the Company's Schedule 14D-9, filed with the Commission on March 19, 1997 is hereby incorporated by reference). 10.15 Form of Mortgage between the Company and FFCA Mortgage Corporation, dated March 18, 1996. (Exhibit 10.22 to the Company's Annual Report on Form 10-K, filed with the Commission on April 1, 1997 is hereby incorporated by reference). 10.16 Employment agreement between the Company and Edward B. Alexander, dated as of January 26, 1998. (Exhibit 10.16 to the Company's Annual Report on Form 10-K, filed with the Commission on March 31, 1998 is hereby incorporated by reference.) 10.17 Employment agreement between the Company and Lewis E. Christman, Jr., dated as of January 26, 1998. (Exhibit 10.17 to the Company's Annual Report on Form 10-K, filed with the Commission on March 31, 1998 is hereby incorporated by reference.) 10.18 Standstill and Settlement Agreement between the Company and Bisco Industries, Inc. (and affiliates) dated February 24, 1998. (The Company's Form 8-K filed with the Commission on March 6, 1998 is hereby incorporated by reference). 10.19 Lease agreement dated January 29, 1998 between the Company and Excel Realty Trust, Inc. for a new restaurant scheduled to be opened in 1998. (Exhibit 10.19 to the Company's Annual Report on Form 10-K, filed with the Commission on March 31, 1998 is hereby incorporated by reference.) 10.20 Contract dated April 29, 1997 between the Company and sellers for purchase of land for a new restaurant scheduled to be opened in 1998. (Exhibit 10.20 to the Company's Annual Report on Form 10-K, filed with the Commission on March 31, 1998 is hereby incorporated by reference.) 13.01 1997 Annual Report to Shareholders. 21.01 Family Rustic Investments, Inc., a Florida corporation, Steak House Construction Corporation, a Florida corporation, Wrangler's Roadhouse, Inc., a Florida corporation and Steak House Realty Corporation, a Florida corporation, are wholly owned subsidiaries of the Company. 23.0l Consent of Independent Certified Public Accountants - Deloitte & Touche LLP. 27.00 Financial data schedules (electronic filing only). -19- (b) None. (c) See (a)3. above for a list of all exhibits filed herewith and the Exhibit Index. (d) None. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT We consent to the incorporation by reference in this Annual Report of Family Steak Houses of Florida, Inc. on Form 10-K of our report dated March 6, 1998, appearing in the 1997 Annual Report to Shareholders of Family Steak Houses of Florida, Inc. We additionally consent to the incorporation by reference in Registration Statement No. 33-11684 pertaining to the 1986 Employee Incentive Stock Option Plan of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated March 6, 1998 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended December 31, 1997. We further consent to the incorporation by reference in Registration Statement No. 33-12556 pertaining to the 1986 Stock Option Plan for Non-Employee Directors of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated March 6, 1998 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended December 31, 1997. We further consent to the incorporation by reference in Registration Statement No. 33-62101 pertaining to the 1996 Long Term Incentive Plan of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated March 6, 1998 appearing in and incorporated by reference in this Annual Report on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended December 31, 1997. Deloitte & Touche LLP Jacksonville, Florida April 28, 1998 F-1 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to its annual report to be signed on its behalf by the undersigned, thereunto duly authorized. FAMILY STEAK HOUSES OF FLORIDA, INC. Date: April 28, 1998 BY: /s/ Lewis E. Christman, Jr. --------------------------- Lewis E. Christman, Jr., President EX-13.01 2 ANNUAL REPORT FAMILY STEAK HOUSES OF FLORIDA, INC. CORPORATE PROFILE About The Company Family Steak Houses of Florida, Inc. is the sole franchisee of Ryan's Family Steak House restaurants in the state of Florida. The Company's first restaurant was opened in Jacksonville, Florida in May 1982. The Company presently operates 25 Ryan's restaurants in Florida, including seven in the Jacksonville area. A Ryan's Family Steak House restaurant is a family-oriented restaurant serving high-quality, reasonably priced food in a casual atmosphere with server-assisted service. The restaurants feature scatter bars or a self-service Mega BarTM, bakery dessert bars, and table service of meals and drink refills. Each restaurant serves cuts of charbroiled steaks and hamburgers, seafood and various chicken entrees. In addition to traditional salad bar items, the scatter bars or Mega BarsTM include a variety of hot meats and vegetables, as well as a variety of pre-made salads and cheeses. The bakery bar consists of fresh baked products such as hot yeast rolls, a variety of muffins, sweet rolls, brownies and cookies. Other selections include cobblers, fresh fruit, candy, cheesecake, pudding, ice cream, lowfat yogurt and a wide variety of dessert toppings. The bakery bar is included in the customer's meal price, and items can also be purchased for take-home. Ryan's Locations: Jacksonville (6) Lakeland (2) Gainesville (1) Orange Park (1) Apopka (1) Hudson (1) Ocala (1) Winter Haven (1) New Port Richey(1) Tampa (2) Tallahassee (1) Daytona Beach (1) Orlando (2) Melbourne (1) Clearwater (1) Lake City (1) Brooksville (1) Ryan's ================================================================================ 1 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- [THIS PAGE INTENTIONALLY LEFT BLANK] Ryan's ================================================================================ 2 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Dear Shareholders: Family Steak Houses of Florida, Inc. survived a difficult year in which we were beset with problems; an unsolicited tender offer by Bisco Industries, exceptionally high store management turnover, severe competition from our competitors with new and attractive facilities and new regulations by Nasdaq that required us to effect a reverse split of 1-for-5 shares in order to remain listed on Nasdaq. We also made the decision to write-down the book value of our under-performing store located on Orange Blossom Trail in Orlando, Florida, by $550,000. This, of course, is included as a charge on the Company's profit and loss statement. We are pleased to tell you that in spite of our problems, we believe we are poised for a successful 1998! The problems with Bisco Industries have been resolved by the execution of a Standstill and Settlement Agreement for a one-year term. Mr. Glen Ceiley, President of Bisco, will join the Company's Board of Directors, along with Mr. Jay Conzen. We are pleased to have the opportunity to use the experience of these new board members to move our Company forward. We are implementing a 5-day workweek for our restaurant managers in an effort to improve quality of life, and by so doing have reduced the turnover in these ranks. Turnover in these management positions adversely affects the profit and loss statements for the restaurants in which the turnover occurs. We hired a number of new managers in order to implement this program. Additionally, the improved quality of life we now offer to our restaurant managers affords us an opportunity to recruit and employ highly professional managers. The entire management team in the restaurants and the corporate office have committed to raising our standards by increasing efforts to afford our customers the very best quality of food available. We are also committed and dedicated to improving service to our customers, which is already second to none. We are continuing to remodel our restaurants, and we have enjoyed outstanding success in the restaurants we have recently remodeled. The remodeled restaurants have recorded more than a 20% gain so far over the prior year's sales. We are in the process of opening a new restaurant in Leesburg, Florida, which we plan to open by June 1998. The Company is continuing to market under-performing restaurants, and as these are sold we plan to replace them with new restaurants on sites that offer much higher volume and profit potential. Ryan's, Inc. has been invaluable with their assistance in locating new and viable sites for the Company's new restaurants. The Company is also marketing all land held for sale. We currently have a contract on a parcel located in Titusville, Florida, and plan to make good use of the funds that have been lying fallow in property unsuited for our restaurants. Finally, the Company has engaged J.H. Chapman Group LLC, an investment banking firm, to explore all strategic opportunities that will increase shareholder value. J.H. Chapman is located in Chicago, Illinois, and specializes in the restaurant industry nationally. We believe we are on course for a successful year in 1998, and we sincerely appreciate the support of our shareholders during a difficult year in 1997. Sincerely, /s/ Lewis E. Christman, Jr. Lewis E. Christman, Jr. President and Chief Executive Officer Ryan's ================================================================================ 3 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Five Year Financial Summary - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995(1) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Income Statement Data: (in thousands, except per share data) Sales $ 36,978 $ 37,978 $ 42,105 $ 44,849 $ 48,525 Cost and expenses: Food and beverage 14,642 15,090 16,591 18,174 19,534 Payroll and benefits 10,516 10,538 11,412 12,097 13,372 Depreciation and amortization 1,751 1,663 1,720 1,961 2,560 Other operating expenses 6,070 5,953 6,313 6,412 7,055 General and administrative expenses 2,681 2,220 2,452 2,899 2,159 Franchise fees 1,108 1,139 1,263 1,561 2,207 Asset valuation charge 550 -- -- -- -- (Income) costs from closed restaurants -- -- (303) 1,392 2,557 Loss on disposition of equipment 146 57 198 86 21 -------- -------- -------- -------- -------- 37,464 36,660 39,646 44,582 49,465 (Loss) earnings from operations (486) 1,318 2,459 267 (940) Interest and other income 438 465 536 123 79 Gain on sale of restaurant -- -- 159 -- -- Gain on sale of property held for sale -- -- 31 -- -- Write-down of properly held for sale -- -- -- (465) (91) Interest expense (1,577) (1,516) (1,694) (1,980) (2,110) -------- -------- -------- -------- -------- (Loss) earnings before income taxes, and extraordinary item (1,625) 267 1,491 (2,055) (3,062) (Benefit) provision for income taxes (201) 53 147 (274) (978) -------- -------- -------- -------- -------- Net (loss) earnings before extraordinary item (1,424) 214 1,344 (1,781) (2,084) Extraordinary item - gain on early extinguishment of debt, net of income taxes of $88,700 -- 348 -- -- -- -------- -------- -------- -------- -------- Net (loss) earnings $ (1,424) $ 562 $ 1,344 $ (1,781) $ (2,084) ======== ======== ======== ======== ======== Basic earnings per share: (2) (Loss) earnings before extraordinary item $ (0.65) $ 0.10 $ 0.62 $ 0.83 $ (0.98) Extraordinary item - gain on early extinguishment of debt -- 0.16 -- -- -- -------- -------- -------- -------- -------- Net (loss) earnings $ (0.65) $ 0.26 $ 0.62 $ 0.83 $ (0.98) ======== ======== ======== ======== ======== Diluted earnings per share: (2) (Loss) earnings before extraordinary item $ (0.65) $ 0.09 $ 0.57 $ 0.83 $ (0.98) Extraordinary item - gain on early extinguishment of debt -- 0.15 -- -- -- -------- -------- -------- -------- -------- Net (loss) earnings $ (0.65) $ 0.24 $ 0.57 $ 0.83 $ (0.98) ======== ======== ======== ======== ======== Selected Balance Sheet Data: Land and net property and equipment $ 26,300 $ 26,350 $ 26,837 $ 26,896 $ 29,505 Total assets 30,333 32,803 31,260 32,809 35,095 Long-term debt 14,403 15,107 14,420 16,305 14 Current portion of long-term debt 279 333 1,580 851 17,269 Shareholders' equity 10,644 11,998 11,460 9,993 11,743 Selected Operating Data: Current ratio 0.6 0.9 0.4 0.6 0.1 Working capital (deficit) $ (1,795) $ (617) $ (3,285) $ (2,673) $(20,089) Cash provided by operating activities 626 1,645 2,135 3,096 3,979 Property and equipment additions 2,304 1,768 2,600 1,796 1,558
- ---------------- (1) Fifty-three week period. (2) Per share amounts have been retroactively adjusted to reflect a 1-for-5 reverse stock split effected in March, 1998. Ryan's ================================================================================ 4 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations Shown for the years indicated are (i) items in the statements of operations as a percent of 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 --------------- 1997 1996 vs vs 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Sales $36,977,800 $37,977,600 $42,105,400 (2.6)% (9.8)% =========== =========== =========== ==== ==== - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Net Change In Percentage --------------------- Percent of Sales 1997 1996 ----------------------------------- vs vs 1997 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Cost and expenses: Operating expenses 89.1% 87.6% 85.6% 1.5 2.0 General and administrative expenses 7.3 5.8 5.8 1.5 -- Asset valuation charge 1.5 -- -- 1.5 -- Franchise fees 3.0 3.0 3.0 -- -- Closed restaurant costs -- -- (0.7) -- 0.7 Loss on disposition of property and equipment 0.4 0.1 0.5 0.3 (0.4) ----- ----- ----- ----- ----- 101.3 96.5 94.2 4.8 2.3 ----- ----- ----- ----- ----- (Loss) earnings from operations (1.3) 3.5 5.8 (4.8) (2.3) Interest and other income 1.2 1.2 1.3 -- (0.1) Gain on sale of restaurant and property held for sale -- -- 0.5 -- (0.5) Interest expense (4.3) (4.0) (4.0) (0.3) -- ----- ----- ----- ----- ----- (Loss) earnings before income taxes and extraordinary item (4.4) 0.7 3.6 (5.1) (2.9) (Benefit) provision for income taxes (0.5) 0.1 0.4 (0.6) (0.3) ----- ----- ----- ----- ----- Net (loss) earnings before extraordinary item (3.9) 0.6 3.2 (4.5) (2.6) Extraordinary item - gain on early extinguishment of debt, net of income taxes of $88,700 -- 0.9 -- (0.9) 0.9 ----- ----- ----- ----- ----- Net (loss) earnings (3.9)% 1.5% 3.2% (5.4)% (1.7)% ===== ===== ===== ===== ===== Operating expenses: Food and beverage 39.6% 39.7% 39.4% (0.1)% 0.3% Payroll and benefits 28.4 27.8 27.1 0.6 0.7 Depreciation and amortization 4.7 4.4 4.1 0.3 0.3 Other operating expenses 16.4 15.7 15.0 0.7 0.7 ----- ----- ----- ----- ----- 89.1% 87.6% 85.6% 1.5 % 2.0% ===== ===== ===== ===== ===== Restaurants open at end of year 25 24 24 ===== ===== =====
Ryan's ================================================================================ 5 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS 1997 Compared to 1996 For the year ended December 31, 1997, total sales decreased 2.6% compared to 1996. The sales decline in 1997 compared to 1996 consisted of the following components: - -------------------------------------------------------------------------------- % Change from 1996 1997 1996 Change Total Sales - -------------------------------------------------------------------------------- Same-Store Sales $34,936,600 $37,977,600 $(3,041,000) (8.0%) New Restaurant 2,041,200 2,041,200 5.4% ----------- ----------- ----------- ---- Total Sales $36,977,800 $37,977,600 $ (999,800) (2.6%) =========== =========== =========== ==== Management believes that the decrease in same-store sales (sales in restaurants that have been open for at least 18 months during comparable weeks during the current and prior year) is primarily due to the effects of increasing competition, including several new restaurants opened by competitors in areas close to Company restaurants. Due primarily to the negative effects of increasing competition on the Company's sales and profitability, in March 1998 the Company announced that it had retained an investment banking firm specializing in the restaurant industry to assist the Company in identifying and evaluating strategic opportunities which would enhance shareholder value. The Company intends to evaluate any strategic opportunities recommended by the investment banking firm, and to pursue such strategies it deems appropriate. However, there can be no assurance that a restructuring or transaction will result from this process. Management plans to sell restaurants which are not meeting sales and profit expectations, and has listed six restaurants for sale. Proceeds from any sales of restaurants would be used either to build new restaurants with more competitive facilities in superior locations, or to reduce long-term debt. Management also plans to improve sales trends by focusing on improving restaurant operations and by remodeling certain restaurants. Three restaurants have been remodeled with new scatter bars since October 1997, and have resulted in same-store sales gains at these restaurants in excess of 20% since the remodeling. There can be no assurance, however, that this increase in sales will be maintained. Management is considering remodeling two additional restaurants in 1998 with scatter bars. Currently, 18 of the Company's 25 restaurants have scatter bars. In January 1998, the Company entered into a lease agreement for a new restaurant expected to be opened in June 1998. Management intends to continue to search for new restaurant sites and develop and open new restaurants, subject to available financing (see "Liquidity and Capital Resources"). 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. The Company's food, beverage, payroll and benefits costs are believed to be higher than the industry average as a percentage of sales as a result of the Company's philosophy of providing customers with high value of food and service for every dollar a customer spends. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 89.1% in 1997 from 87.6% in 1996, primarily due to the decline in same-store sales. Ryan's ================================================================================ 6 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Food and beverage costs as a percentage of sales decreased from 39.7% in 1996 to 39.6% in 1997. Payroll and benefits as a percentage of sales increased from 27.8% in 1996 to 28.4% in 1997. The Company experienced unusually high management turnover in 1997, resulting in higher than expected training costs for new manager hires, as well as operational difficulties. In an attempt to reduce turnover, management decided to increase the number of restaurant managers in order to provide the Company's managers with a five-day work week and a higher quality of life, and therefore improve management retention and customer service. This increase in number of restaurant managers contributed to higher payroll and benefits costs in 1997 as compared to 1996. In addition, the decline in same store sales resulted in an increase in payroll as a percentage of sales, since a significant amount of payroll cost is a fixed cost. Other operating expenses as a percentage of sales increased from 15.7% in 1996 to 16.4% in 1997, primarily due to increased fixed operating expenses (as a percentage of sales) resulting from the decline in same store sales. Depreciation and amortization increased as a percentage of sales in 1997 compared to 1996, as a result of additions to property and equipment over the last 24 months and to the decline in comparable store sales. General and administrative expenses as a percentage of sales increased to 7.3% in 1997 from 5.8% in 1996. The increase was primarily due to approximately $375,000 in costs associated with the Bisco takeover attempt (see Note 13 to the consolidated financial statements), sales tax expenses incurred and accrued for under a Florida sales tax audit, and the decline in same-store sales. The expenses incurred in opposing the Bisco takeover attempt relate to, among other things, the preparation and mailing of materials in opposition to the Bisco consent solicitation and tender offer and the Ceiley shareholder proposal, litigation filed by the Company against Bisco, and the attendant fees paid for legal advice and proxy solicitation. As discussed in Note 13, in February 1998, the Company entered into a Standstill and Settlement Agreement with Bisco. The Company recognized an asset valuation charge of $550,000 in 1997 in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The charge was based upon a financial review of all Company-owned restaurants and applied to one underperforming restaurant held for sale. Interest expense increased from $1,516,300 during 1996 to $1,576,700 in 1997. The increase was due to interest costs associated with a new restaurant opened in January 1997. The effective income tax rates for the year ended December 31, 1997 and January 1, 1997 were (12.4%) and 20.1%, respectively. The increase in the valuation allowance in deferred tax assets in 1997 and the use of certain deferred tax assets which had previously been reserved in 1996 resulted in the lower than statutory effective rates for those periods. In December 1996, the Company realized a gain on early extinguishment of debt of $348,500, net of income taxes. The gain was accounted for as an extraordinary item (see Note 6 to the consolidated financial statements). Net loss for 1997 was $1,423,900, compared to net earnings of $562,200 in 1996. Loss per share assuming dilution was $.65 for 1997, compared to net earnings per share assuming dilution of $.24 in 1996. Ryan's ================================================================================ 7 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS 1996 Compared to 1995 For the year ended January 1, 1997, total sales decreased 9.8% compared to 1995, due to declines in same-store sales and one less week in fiscal year 1996 compared to 1995. The sales decline in 1996 compared to 1995 consisted of the following components: - -------------------------------------------------------------------------------- % Change from 1995 1996 1995 Change Total Sales - -------------------------------------------------------------------------------- Same-Store Sales $37,977,600 $41,361,900 $(3,384,300) (8.0%) Extra Week Sales* 0 743,500 (743,500) (1.8%) ----------- ----------- ----------- ---- Total Sales $37,977,600 $42,105,400 $(4,127,800) (9.8%) =========== =========== =========== ==== - ---------- *1995 was a 53-week period, 1996 was a 52-week period. Food and beverage costs as a percentage of sales increased to 39.7% in 1996 from 39.4% in 1995, primarily due to higher produce and dairy product costs. Payroll and benefits as a percentage of sales increased from 27.1% in 1995 to 27.8% in 1996, primarily due to the decline in same-store sales. Other operating expenses as a percentage of sales increased from 15.0% in 1995 to 15.7% in 1996, primarily due to higher repair and maintenance costs and the decline in same-store sales. Depreciation and amortization increased as a percentage of sales in 1996 compared to 1995, as a result of the decline in same-store sales. General and administrative expenses as a percentage of sales were 5.8% in 1996 and 1995. Franchise fees were 3.0% of sales in 1996 and 1995 in accordance with the Company's amended Franchise Agreement with Ryan's Family Steak Houses, Inc. (the "Franchisor"). (See Note 4 to the consolidated financial statements.) In 1995, the Company recognized $303,200 in income from the favorable settlement of two closed restaurant leases. The remaining lease costs at the time of store closure were included in closed restaurant costs in 1993. No such events occurred in 1996. During the first week of fiscal 1995, the Company closed and sold a restaurant located in Jacksonville, Florida. The Company received approximately 20% of the purchase price in cash and recorded a mortgage receivable for the balance of the sale. The Company recognized a gain on this sale of approximately $152,000 in 1995. Total gains on sales of property were $159,000 in 1995. There were no significant sales of real estate in 1996. Interest expense decreased from $1,693,800 during 1995 to $1,516,300 in 1996. The decrease was due primarily to lower outstanding principal balances, resulting from principal payments made throughout 1996. The effective income tax rates for the year ended January 1, 1997 and January 3, 1996 were 20.1% and 9.9%, respectively. Certain deferred tax assets were utilized in both years, resulting in the lower than statutory effective rates for 1995 and 1996. In December 1996, the Company realized a gain on early extinguishment of debt of $348,500, net of income taxes. The gain was accounted for as an extraordinary item (see Note 6 to the consolidated financial statements). Net earnings for 1996 were $562,200 compared to $1,344,200 in 1995. Earnings per share assuming dilution were $.24 for 1996, compared to $.57 in 1995. Ryan's ================================================================================ 8 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- 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, 1997, the Company had a working capital deficit of $1,794,700 compared to a working capital deficit of $616,800 at January 1, 1997. The increase in the working capital deficit in 1997 was primarily due to the net loss incurred by the Company in 1997. Cash provided by operating activities decreased to $626,100 in 1997 from $1,645,000 in 1996, primarily due to the net loss in 1997, compared to net earnings in 1996. Cash provided by operating activities decreased from $2,135,300 in 1995 to $1,645,000 in 1996 due to lower earnings in 1996. The Company spent approximately $2,741,000 in 1997, $1,356,000 in 1996 and $2,600,000 in 1995 for new restaurant construction, restaurant remodeling and equipment. Capital expenditures for 1998, based on present costs and plans for capital improvements, are estimated to be $3,400,000. The Company projects that proceeds from the Company's financing agreements (described below), and cash generated from operations will be sufficient to fund these improvements. In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA totalling $14,681,400 at December 31, 1997. Each Promissory Note is secured by a mortgage on a Company restaurant property. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. In November 1997 the Company prepaid one of the Promissory Notes in full in the amount of approximately $440,000. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the FFCA loan to retire its Notes with Cerberus Partners, L.P. ("Cerberus") and its loan with the Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus Notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500, net of income taxes, was accounted for in 1996 as an extraordinary item. In addition, the Company retired warrants for 210,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the Company's common stock at an exercise price of $2.00 per share. Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000. This additional financing would be evidenced by four additional Promissory Notes secured by mortgages on four Company restaurant properties. The term and interest rate of this loan agreement are identical to the loan agreement described above. The Company borrowed $1,290,000 under this agreement in February 1998, secured by a mortgage on one restaurant property. The availability of new borrowings under this agreement is currently scheduled to expire in June 1998. Ryan's ================================================================================ 9 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- 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 in the past, 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. On August 8, 1996, President Clinton signed into law a bill which raised the federally mandated minimum wage by $.50 per hour on October 1, 1996, and by an additional $.40 per hour on September 1, 1997. Future changes in the federal minimum wage may impact the Company's payroll and benefits costs. The Company raised sales prices approximately 1.0% in 1997 in order to offset the effect of higher payroll and benefit costs. Sales prices were increased approximately 3.0% in 1996 and 2.5% in 1995. INFORMATION SYSTEMS AND THE YEAR 2000 The Company initiated the process of preparing its computer systems and applications for the year 2000 in January 1998. This process involves modifying or replacing certain hardware and software maintained by the Company as well as communicating with external service providers to ensure that they are taking the appropriate action to remedy their Year 2000 issues. Management expects to have substantially all of the system and application changes completed by the end of 1999 and believes that its level of preparedness is appropriate. The Company estimates that the total cumulative cost of the project could range as high as $500,000, which includes both internal and external personnel costs related to modifying the systems as well as the cost of purchasing or leasing certain hardware and software. Purchased hardware and software will be capitalized in accordance with normal policy. Personnel and all other costs related to the project are being expensed as incurred. The costs of the project and the expected completion dates are based on management's best estimates. Ryan's ================================================================================ 10 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Consolidated Statements of Operations
- --------------------------------------------------------------------------------------------------------------- For The Years Ended -------------------------------------------- December 31, January 1, January 3, 1997 1997 1996 - --------------------------------------------------------------------------------------------------------------- Sales $36,977,800 $37,977,600 $42,105,400 Cost and expenses: Food and beverage 14,642,500 15,089,500 16,591,300 Payroll and benefits 10,516,000 10,537,500 11,411,700 Depreciation and amortization 1,750,700 1,662,500 1,719,900 Other operating expenses 6,069,700 5,953,400 6,313,000 General and administrative expenses 2,680,900 2,220,200 2,452,300 Franchise fees 1,108,400 1,138,600 1,263,200 Asset valuation charge 550,000 -- -- Income from closed restaurants -- -- (303,200) Loss on disposition of equipment 146,200 57,400 197,800 ------------ ------------ ------------ 37,464,400 36,659,100 39,646,000 ------------ ------------ ------------ (Loss) earnings from operations (486,600) 1,318,500 2,459,400 Interest and other income 437,900 465,100 535,600 Gain on sale of restaurant -- -- 158,600 Gain on sale of property held for sale -- -- 31,500 Interest expense (1,576,700) (1,516,300) (1,693,800) ------------ ------------ ------------ (Loss) earnings before income taxes and extraordinary item (1,625,400) 267,300 1,491,300 (Benefit) provision for income taxes (201,500) 53,600 147,100 ------------ ------------ ------------ Net (loss) earnings before extraordinary item (1,423,900) 213,700 1,344,200 Extraordinary item - gain on early extinguishment of debt, net of income taxes of $88,700 -- 348,500 -- ------------ ------------ ------------ Net (loss) earnings ($1,423,900) $562,200 $1,344,200 ============ ============ ============ Basic earnings per share: Net (loss) earnings before extraordinary item ($0.65) $0.10 $0.61 Extraordinary item - gain on early extinguishment of debt -- $0.16 -- ------------ ------------ ------------ Net (loss) earnings ($0.65) $0.26 $0.61 ============ ============ ============ Diluted earnings per share: Net (loss) earnings before extraordinary item ($0.65) $0.09 $0.57 Extraordinary item - gain on early extinguishment of debt -- $0.15 -- ------------ ------------ ------------ Net (loss) earnings ($0.65) $0.24 $0.57 ============ ============ ============
See accompanying notes to consolidated financial statements. Ryan's ================================================================================ 11 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 January 1, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $696,000 $1,750,800 Investments 600,300 1,093,100 Receivables 93,200 566,100 Income taxes receivable 297,900 -- Current portion of mortgages receivable 124,900 120,600 Inventories 280,500 202,300 Prepaids and other current assets 311,200 247,200 ------------ ------------ Total current assets 2,404,000 3,980,100 Mortgages receivable 308,700 1,089,100 Property and equipment: Land 9,088,300 9,089,200 Buildings and improvements 19,908,900 19,676,500 Equipment 13,151,600 12,240,400 ------------ ------------ 42,148,800 41,006,100 Accumulated depreciation (15,848,500) (14,656,200) ------------ ------------ Net property and equipment 26,300,300 26,349,900 Property held for sale 552,800 552,800 Other assets, principally deferred charges, net of accumulated amortization 767,000 831,600 ------------ ------------ $30,332,800 $32,803,500 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,287,000 $1,183,000 Accounts payable - construction -- 411,800 Accrued liabilities 2,630,300 2,582,100 Income taxes payable -- 84,800 Current portion of long-term debt 278,900 332,700 Current portion of obligation under capital lease 2,500 2,500 ------------ ------------ Total current liabilities 4,198,700 4,596,900 Long-term debt 14,402,800 15,107,200 Obligation under capital lease 1,056,000 1,058,600 Deferred revenue 30,800 43,100 ------------ ------------ Total liabilities 19,688,300 20,805,800 Commitments and contingencies (Note 11) Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; none issued -- -- Common stock of $.01 par; authorized 4,000,000 shares; outstanding 2,216,200 in 1997 and 2,184,140 shares in 1996 22,200 21,800 Additional paid-in capital 8,256,100 8,185,800 Retained earnings 2,366,200 3,790,100 ------------ ------------ Total shareholders' equity 10,644,500 11,997,700 ------------ ------------ $30,332,800 $32,803,500 ============ ============
See accompanying notes to consolidated financial statements. Ryan's ================================================================================ 12 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity
For the Years ended December 31, 1997, January 1, 1997 and January 3, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Additional --------------------------- Paid-in Retained Shares Amount Capital Earnings Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 28, 1994 10,725,200 $107,300 $8,002,300 $1,883,700 $9,993,300 Net earnings 1,344,200 1,344,200 Exercise of stock options 119,800 1,200 1,200 Issuance of warrants 81,000 81,000 Directors' fees in the form of stock options 40,000 40,000 ----------- ----------- ----------- ----------- ----------- Balance, January 3, 1996 10,845,000 108,500 8,123,300 3,227,900 11,459,700 Net earnings 562,200 562,200 Exercise of stock options 75,700 700 18,100 18,800 Retirement of warrants (63,000) (63,000) Directors' fees in the form of stock options 20,000 20,000 ----------- ----------- ----------- ----------- ----------- Balance, January 1, 1997 10,920,700 109,200 8,098,400 3,790,100 11,997,700 Net loss (1,423,900) (1,423,900) Exercise of stock options 32,060 1,600 49,100 50,700 Common stock 1-for-5 reverse split (8,736,560) (88,600) 88,600 -- Directors' fees in the form of stock options 20,000 20,000 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 2,216,200 $22,200 $8,256,100 $2,366,200 $10,644,500 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. Ryan's ================================================================================ 13 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended ----------------------------------------------------- December 31, 1997 January 1, 1997 January 3, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Operating activities: Net (loss) earnings ($ 1,423,900) $ 562,200 $ 1,344,200 Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and amortization 1,750,700 1,662,500 1,719,900 Asset valuation charge 550,000 -- -- Directors' fees in the form of stock options 20,000 20,000 40,000 Amortization of loan fees 22,200 89,800 85,400 Loss on disposition of property and equipment 146,200 57,400 197,800 Amortization of loan discount -- 51,000 74,700 Gain on early extinguishment of debt -- (437,200) -- Gain on disposition of restaurants and property held for sale -- -- (493,300) Loss from joint venture -- -- 5,400 Decrease (increase) in: Receivables (3,200) (16,100) 27,800 Inventories (78,200) 45,100 63,100 Income taxes receivable (297,900) -- 332,200 Prepaid and other current assets (64,000) 9,400 218,900 Other assets (50,900) (492,500) (275,900) Increase (decrease) in: Accounts payable 104,000 (67,700) (212,200) Accrued liabilities 48,200 88,000 (794,000) Income taxes payable (84,800) 79,400 5,400 Deferred revenue (12,300) (6,300) (5,800) Other non-current liabilities -- -- (198,300) ------------ ------------ ------------ Net cash provided by operating activities 626,100 1,645,000 2,135,300 ------------ ------------ ------------ Investing activities: Capital expenditures (2,740,700) (1,356,400) (2,599,600) Principal receipts on notes receivable 776,100 208,700 84,400 Sale (purchase) of investments 492,800 (492,800) 110,400 Proceeds from sale of property and equipment 900 548,600 107,900 Proceeds from sale of property held for sale -- -- 518,000 ------------ ------------ ------------ Net cash used by investing activities (1,470,900) (1,091,900) (1,778,900) ------------ ------------ ------------ Financing activities: Payments on long-term debt and obligation under capital lease (760,800) (15,414,500) (1,249,300) Construction draw on building under capital lease 500,100 585,000 -- Proceeds from the exercise of stock options 50,700 18,800 1,200 Retirement of warrants -- (63,000) -- Proceeds from the issuance of long-term debt -- 15,360,000 -- ------------ ------------ ------------ Net cash provided (used) by financing activities (210,000) 486,300 (1,248,100) ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,054,800) 1,039,400 (891,700) Cash and cash equivalents-- beginning of year 1,750,800 711,400 1,603,100 ------------ ------------ ------------ Cash and cash equivalents-- end of year $ 696,000 $ 1,750,800 $ 711,400 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ 181,000 $ 63,000 $ 139,200 ============ ============ ============ Cash paid during the year for interest $ 1,323,100 $ 1,386,600 $ 1,670,800 ============ ============ ============ Noncash transactions: Notes receivable as partial proceeds $ -- $ -- $ 932,800 Interest forgiven in lieu of loan closing costs incurred -- -- 251,600 Warrants issued in connection with loan restructure -- -- 81,000 Accrued interest reclassed to long-term debt -- -- 100,000
See accompanying notes to consolidated financial statements. Ryan's ================================================================================ 14 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 and is the sole franchisee of Ryan's Family Steak House restaurants in the State of Florida. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Steak House Construction, Family Rustic Investments, Steak House Realty Corporation, and Wrangler's Roadhouse, Inc. 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 year 1995 consisted of fifty-three weeks. Fiscal years 1996 and 1997 consisted of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company has a cash management program which 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. Investments Investments represent certificates of deposit or bankers' acceptances with maturities of less than one year. These investments are pledged with various entities to support the Company's workers' compensation liability. Interest rates on the certificates vary from 4.83% to 5.50%. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of 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 charged to costs and expenses as incurred. Depreciation is provided for financial reporting purposes principally on the straight-line method over the following estimated lives: buildings - 25 years, land improvements - 25 years and equipment - 5-8 years. Leasehold improvements are amortized over the life of the related lease. Property Held For Sale Property held for sale consists of property parcels stated at the lower of cost or estimated net realizable value. Ryan's ================================================================================ 15 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Deferred Charges Certain costs incidental to the opening of a restaurant, consisting primarily of employee training costs, are capitalized for each store opened and are amortized over one year. Other deferred charges and related amortization periods are as follows: financing costs - term of the related loan, and initial franchise rights - 40 years. 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. New Accounting Standards In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share"(SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. The Company adopted the requirements of SFAS No. 128 in the year ended December 31, 1997 (Note 8). All periods presented have been restated to conform to this presentation. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after December 15, 1997. SFAS 130 requires all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires an entity to display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 requires an entity to classify items or other comprehensive income by their nature in a financial statement. In addition, the accumulated balance of other comprehensive income must be displayed separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The Company is in the process of determining the impact that the adoption of SFAS 130 will have on its financial statements. Reclassifications Certain items in the prior year financial statements have been reclassified to conform to the 1997 presentation. NOTE 2. CLOSED RESTAURANT COSTS In 1995, the Company recognized $303,200 in income from favorable settlements of two closed restaurant leases. These closed restaurant costs had been recorded in 1993, when the decision to close the respective restaurants was made. Ryan's ================================================================================ 16 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- NOTE 3. ASSET VALUATION CHARGE In accordance with SFAS No. 121, the Company recognized a $550,000 asset valuation charge in 1997. This charge was based upon a financial review of all Company-owned restaurants and applied to one underperforming unit, which the Company intends to sell in 1998. The charge was based on the difference between the unit's net book value and estimated fair value, which equaled the estimated proceeds from disposal as determined by management. Considerable management judgement is necessary to estimate proceeds from disposal and, accordingly, actual proceeds could vary significantly from such estimates. Management plans to actively market this restaurant, but currently cannot estimate its expected disposal date. For the year ended December 31, 1997, this unit had an after-tax loss of $116,500. NOTE 4. FRANCHISE AGREEMENT In October 1996, the Company amended its Franchise Agreement with Ryan's Family Steak Houses, Inc. The amended agreement requires the Company to pay a monthly royalty fee of 3.0% through December 2001, and 4.0% thereafter of the gross receipts of each Ryan's Family Steak House restaurant. Total royalty fee expenses were $1,108,400, $1,138,600 and $1,263,200 for the years ended December 31, 1997, January 1, 1997 and January 3, 1996. The Franchise Agreement requires the Company to operate a minimum number of Ryan's restaurants on December 31 of each year. The Company has listed six restaurants for sale. Failure to operate the minimum number could result in the loss of exclusive franchise rights to the Ryan's concept in North and Central Florida. The following schedule outlines the number of Ryan's restaurants required to be operated by the Company as of December 31 each year under the amended franchise agreement: - -------------------------------------------------------------------------------- Number of Restaurants Required to End of Fiscal Year be in Operation - -------------------------------------------------------------------------------- 1997 25 1998 26 1999 27 2000 28 2001 and subsequent years Increases by one each year Prior to July 1994 the Company held exclusive franchise rights to build Ryan's restaurants in the State of Florida, with the exception of Panama City, Florida and Escambia County, Florida, where the Franchisor has the right to operate Ryan's restaurants. Under the Franchise Agreement, as amended in July 1994, the Company relinquished the franchise rights to most counties in northwest Florida and south Florida to the Franchisor for $500,000 in forgiveness of past due royalty fees. The Company has the right to repurchase the exclusive franchise rights to those counties for $500,000 at any time prior to June 30, 1998. In conjunction with the execution of the July 1994 amendment to the Franchise Agreement, the Company executed and delivered a note to the Franchisor for payment of $800,000 in past due royalty fees. (See Note 6). Ryan's ================================================================================ 17 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- NOTE 5. ACCRUED LIABILITIES Accrued liabilities are summarized as follows: - -------------------------------------------------------------------------------- December 31, 1997 January 1, 1997 - -------------------------------------------------------------------------------- Payroll and payroll taxes $ 549,200 $ 561,500 Workers' compensation claims 1,260,500 1,427,000 Other 820,600 593,600 ---------- ---------- $2,630,300 $2,582,100 ========== ========== The Company self-insures workers' compensation losses up to certain limits. The estimated liability for workers' compensation claims represents an estimate for the ultimate cost of uninsured losses which are unpaid as of the balance sheet date. These estimates are continually reviewed and adjustments to the Company's estimated claim liabilities, if any, are reflected in current operations. NOTE 6. LONG-TERM DEBT Long-term debt is summarized as follows:
- ------------------------------------------------------------------------------------- December 31, 1997 January 1, 1997 - ------------------------------------------------------------------------------------- Secured notes payable to FFCA Mortgage Corporation, monthly principal and interest payments totaling $141,100 effective December 1997, interest at thirty day LIBOR rate +3.75% (9.44% at December 31, 1997) $ 14,681,400 $ 15,360,000 Unsecured note payable to Franchisor, monthly principal payments of $25,000, interest at 6.0% 75,000 Other 300 4,900 ------------ ------------ 14,681,700 15,439,900 Less current portion: (278,900) (332,700) ------------ ------------ $ 14,402,800 $ 15,107,200 ============ ============ Total maturities of long-term debt are as follows: 1998 $ 278,900 1999 307,300 2000 338,900 2001 373,600 2002 411,900 Thereafter 12,971,100 ----------- $14,681,700 ===========
Ryan's ================================================================================ 18 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA totalling $14,681,400 at December 31, 1997. Each Promissory Note is secured by a mortgage on a Company restaurant property. The Promissory Notes provide for a term of twenty years and an interest rate equal to the thirty-day LIBOR rate plus 3.75%, adjusted monthly. In November 1997 the Company prepaid one of the Promissory Notes in full in the amount of approximately $440,000. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. The Company used the proceeds of the FFCA loan to retire its Notes with Cerberus Partners, L.P. ("Cerberus") and its loans with the Daiwa Bank Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on the retirement of the Cerberus Notes, which was partially offset by unamortized debt issuance costs. The resulting gain of $348,500 net of income taxes, was accounted for in 1996 as an extraordinary item. In addition, the Company retired warrants for 210,000 shares of the Company's common stock previously held by Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the Company's common stock at an exercise price of $2.00 per share. Also in December 1996, the Company entered into a separate loan agreement with FFCA under which it may borrow up to an additional $4,640,000. This additional financing would be evidenced by four additional Promissory Notes secured by mortgages on four Company restaurant properties. The terms and interest rate of this loan agreement are identical to the loan agreement described above. The Company borrowed $1,290,000 under this agreement in February 1998, secured by a mortgage on one restaurant property. The availability of borrowings under this agreement is currently scheduled to expire in June 1998. NOTE 7. INCOME TAXES The (benefit) provision for income taxes is comprised of the following: - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Current: Federal $(201,500) $142,300 $147,100 ========= ======== ======== Income taxes for the years ended December 31, 1997, January 1, 1997 and January 3, 1996 differ from the amount computed by applying the federal statutory corporate rate to earnings before income taxes. The differences are reconciled as follows:
- ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Tax (benefit) provision at statutory rate $(568,900) $245,500 $522,000 Increase (decrease) in taxes due to: Effect of graduated tax rates 16,300 (7,000) (14,900) State tax net of federal benefit (59,000) 38,600 53,700 Change in deferred tax asset valuation allowance 377,900 (109,400) (426,000) Other 32,200 (25,400) 12,300 --------- -------- -------- (Benefit) provision for income taxes $(201,500) $142,300 $147,100 ========= ======== ========
Ryan's ================================================================================ 19 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- The components of deferred taxes at December 31, 1997 and January 1, 1997 are summarized below:
- -------------------------------------------------------------------------------------------------- December 31, 1997 January 1, 1997 - -------------------------------------------------------------------------------------------------- Deferred tax assets: Capital loss not currently deductible $ 46,100 $ 46,100 Excess tax over book basis: Property held for sale 164,700 164,700 Asset valuation reserve 207,000 -- Federal and state tax credits 562,500 375,100 Accruals not currently deductible 474,500 547,900 Unearned revenue, previously taxed 16,800 22,500 State net operating loss 44,900 -- ----------- ----------- Total deferred tax asset 1,516,500 1,156,300 Valuation Allowance (519,700) (141,800) ----------- ----------- 996,800 1,014,500 ----------- ----------- Deferred tax liability: Excess of tax over book depreciation and amortization 996,800 1,014,500 =========== =========== Net deferred taxes $ 0 $ 0 =========== ===========
At December 31, 1997 the Company's federal and state tax credit was comprised of $49,200 in general business credits which expire in 2012 and alternative minimum tax credits of $513,300 which have no expiration date. NOTE 8. COMMON SHAREHOLDERS' EQUITY Stock Split The Company effected a 1-for-5 reverse stock split of its common stock in March 1998, which was recorded by transferring the aggregate par value of the shares retired from common stock to additional paid in capital. Accordingly, the weighted average number of common and equivalent shares, per share amounts for net earnings, and stock option and warrant data have been retroactively adjusted to reflect the reverse stock split for all periods presented. Ryan's ================================================================================ 20 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Earnings per Share The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income and net income available to common shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------ ---------------------------------- -------------------------------- Income Shares Per Income Shares Per Income Shares Per (Numerator) (Denominator) Shares (Numerator) (Denominator) Shares (Numerator) (Denominator) Shares - --------------------------------------------------------------------------------------------------------------------------- Basic EPS: Net (loss) income available to common shareholders $(1,423,900) 2,206,000 $(0.65) $ 562,200 2,177,100 $0.26 $ 1,344,200 2,163,400 $0.62 ====== ===== ===== Effect of Dilutive Securities: Stock Options 49,800 59,100 Warrants 140,700 143,700 Diluted EPS: Net (loss) income available to common shareholders plus assumed conversions $(1,423,900) 2,206,000 $(0.65) $ 562,200 2,367,600 $0.24 $ 1,344,200 2,366,200 $0.57 ====== ===== =====
The Company has a stock option plan for non-employee directors pursuant to which up to an aggregate of 180,000 shares of the common stock are authorized to be granted. All options expire five years after the date of grant or one year after completion of term as a director. 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. All options granted under this plan expire no later than ten years after the date of grant or three months after termination of employment. If compensation cost for stock option grants had been determined based on the fair value at the grant dates for 1997, 1996, and 1995 consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below: - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net (Loss) Earnings As reported $(1,423,900) $562,200 $1,344,200 Pro forma (1,477,800) 490,262 1,256,435 Diluted (Loss) Earnings As reported $ (.65) $ .24 $ .57 Per Share Pro forma (.67) .21 .53 Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weight-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0 percent each year, expected volatility of 99, 134 and 128 percent, risk-free interest rates of 5.6, 6.5 and 5.6 percent, and expected lives of 10 years for each year. Ryan's ================================================================================ 21 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- The following table summarizes the changes in the total number of stock option shares outstanding during the three years ended December 31, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 --------------------------- ---------------------------- ---------------------------- Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Options outstanding at beginning of year 193,840 $3.00 262,040 $3.11 102,089 $4.03 Options granted 38,104 2.66 27,886 2.66 215,110 2.49 Options exercised (35,304) 1.99 (15,136) 1.25 (23,970) .05 Options forfeited (14,700) 4.23 (80,950) 3.57 (31,189) 3.54 ------- ------- ------- Options outstanding at end of year 181,940 3.08 193,840 3.00 262,040 3.11 ======= ======= ======= Options exercisable at end of year 103,670 3.20 89,810 3.50 94,570 3.55 ======= ======= ======= Weighted average fair value of options granted during the year $41,821 $36,163 $326,761 Common shares reserved for future grants at end of year 122,437 -- 153,289 -- 149,589 --
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
- --------------------------------------------------------------------------------------------------------------------------- Year Exercise Options Options Weighted Average Granted Price $ Outstanding Exercisable Remaining Life - --------------------------------------------------------------------------------------------------------------------------- 1988 $18.13 1,100 1,100 .1 1989 14.38 3,000 3,000 1.5 1991 4.06 11,800 11,800 3.3 1992 5.63 4,000 4,000 4.1 1993 3.13 7,400 7,400 5.3 1994 1.25 16,200 12,150 7.0 1995 3.75 30,640 15,320 7.7 1995 2.00 57,500 43,125 7.7 1996 2.81 23,100 5,775 9.0 1997 3.28 27,200 -- 10.0 ------- ------- 181,940 103,670 ======= =======
Remaining non-exercisable options as December 31, 1997 become exercisable as follows: 1998 38,660 1999 20,235 2000 12,575 2001 6,800 -------------------------- 78,270 ========================== Ryan's ================================================================================ 22 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Cerberus Partners, L.P., hold detachable warrants to purchase 140,000 shares of the Company's common stock at $2.00 per share at any time prior to October 1, 2003. The estimated fair value of the warrants retired as of December 18, 1996 (the date of the retirement of the Cerberus Notes) of $63,000 was recorded as a decrease to additional paid-in capital and included in the gain from early retirement of debt. 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, 1997 there were no shares of Preferred Stock issued. RIGHTS PLAN On March 18, 1997, the Company entered into a Rights Agreement (the "Rights Agreement") with ChaseMellon Shareholder Services, LLC and declared a dividend of rights to purchase Junior Participating Preferred Stock of the Company ("Rights") to shareholders of record as of March 19, 1997. Each Right will initially entitle the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Unit") of Junior Participating Preferred Stock of the Company ("Preferred Stock") at $5.00 per Unit, subject to adjustment (the "Purchase Price"). The description and terms of the Rights are contained in the Rights Agreement. As long as the Rights are attached to the common stock of the Company and in certain other circumstances specified in the Rights Agreement, five Rights (as such number may be adjusted pursuant to the provisions of the Rights Agreement) shall be deemed to be delivered with each share of the Company's common stock currently outstanding or issued or transferred by the Company in the future. The Rights will be exercisable and will trade separately from the Company's common stock upon the tenth business day after (i) the date of public announcement that a person or group have become the beneficial owners of 15% (other than Bisco and its affiliates, for which the threshold is 20%) or more of the outstanding shares of the Company's common stock (an "Acquiring Person"), or (ii) such later date determined by the Board of Directors after the first public announcement of a tender or exchange offer, which, upon consummation, would result in a person or a group being the beneficial owner of 15% (other than Bisco and its affiliates, for which the threshold is 20%) or more of the outstanding shares of common stock, or (iii) after a majority of the Board who are not officers of the Company have determined that a person is an Adverse Person (as defined in the Rights Agreement). If (i) a person becomes the beneficial owner of 15% (other than Bisco and its affiliates, for which the threshold is 20%) or more of the then outstanding shares of the Company's common stock or voting power (except pursuant to certain business combinations or an offer for all outstanding shares of the Company's common stock and all other voting securities which the independent and disinterested directors of the Company determine to be fair to and otherwise in the best interest of the Company and its shareholders) or (ii) any person is determined to be an Adverse Person, then each holder of a Right (with the exception of an Adverse or Acquiring Person) will thereafter have the right to receive, upon exercise, common stock having a value equal to no less than two times the exercise price of the Right, which is $5.00, subject to adjustment. The Company may redeem each Right for $0.001 at any time before the earliest of (i) ten business days after a person or group becomes an Acquiring Person, (ii) ten business days after the Board's determination that a person is an Adverse Person, or (iii) March 17, 2007. NOTE 9. 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 Ryan's ================================================================================ 23 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- 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 defer, by payroll deduction only, l% to l5% of their annual compensation not to exceed $9,500 in 1997. The plan provides for a Company matching contribution of $.25 per dollar of the first 6% of employee deferral. The Company's matching contribution was $29,211 in 1997, $32,050 in 1996 and $43,173 in 1995. Employees vest in Company contributions based on the following schedule: - -------------------------------------------------------------------------------- Years of Vesting Service Percentage - -------------------------------------------------------------------------------- Less than 3 0% 3 20% 4 40% 5 60% 6 80% 7 l00% NOTE 10. INVESTMENT IN JOINT VENTURES In December 1994, the Company formed a new subsidiary, Family Steak JV, Inc. which acquired a 50% ownership in a limited liability company, Cross Creek Barbeque, L.C. ("Cross Creek"), for the purpose of opening a new restaurant. The Company contributed the equipment to Cross Creek and the other 50% owner of Cross Creek contributed the cash necessary to remodel and open the new Cross Creek restaurant. As a result of unsatisfactory operating performance, the Company sold its interest in the Cross Creek restaurant in July 1995. A Company subsidiary leased the land and building to Cross Creek until May 1996, when it sold them at a gain of approximately $5,000. NOTE 11. COMMITMENTS AND CONTINGENCIES Lease Obligations At December 31, 1997, the Company is committed under the terms and conditions of real and personal property operating leases for minimum rentals aggregating $2,025,400 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 amount to $1,188,600 at December 31, 1997. Interest is computed at an annual rate of 10.65%. Ryan's ================================================================================ 24 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Future minimum lease obligations under noncancelable capital leases and operating leases consist of the following as of December 31, 1997: - -------------------------------------------------------------------------------- Capital Operating Leases Leases - -------------------------------------------------------------------------------- 1998 $ 115,400 $ 259,500 1999 115,400 209,900 2000 115,400 162,300 2001 115,400 113,100 2002 129,300 111,700 Future years 2,051,300 1,168,900 ----------- ---------- Total minimum lease payments 2,642,200 $2,025,400 ========== Amounts representing interest (1,583,700) ----------- Present value of net minimum payments 1,058,500 Current portion (2,500) ----------- Long-term capitalized lease obligations $ 1,056,000 =========== Rental expense for operating leases for the years ended December 31, 1997, January 1, 1997 and January 3, 1996 was approximately $477,700, $380,500 and $419,200, respectively. Contingent rental payments for the years ended December 31, 1997, January 1, 1997 and January 3, 1996 were $0, $0 and $5,500, respectively. On May 13, 1997, the Company received notice from Aetna Life Insurance Company, the mortgage holder of the mall property at which the Company's Clearwater, Florida restaurant is located, that Aetna intended to foreclose on the property due to a default by the landlord on the mortgage. In September 1997, Aetna was granted a Motion for Summary Judgement of Foreclosure by the Circuit Court of the Sixth Judicial Court in Pinellas County. This Motion indicates that Aetna's rights under the mortgage are superior to the Company's leasehold interest. It is uncertain whether this action could allow Aetna to evict the Company from the Clearwater location. An eviction would result in a write-off of approximately $350,000 of leasehold improvements. The Company intends to vigorously defend its interest in this matter. However, there can be no assurance that the Company will be successful in this defense. Due to the uncertainty of this matter, no provision for loss has been made in the accompanying consolidated financial statements. LEGAL MATTERS The Company, in the normal course of business, is subjected to claims and litigation with respect to store operations. In the opinion of management, based on the advice of legal counsel the ultimate disposition of these claims and litigation will not have a material effect on the financial position or results of operations of the Company. NOTE 12. 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: Cash and Cash Equivalents -- For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Ryan's ================================================================================ 25 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- Investments -- The Company's investments consist of certificates of deposit and bankers' acceptances for which the carrying amount is a reasonable estimate of fair value. Mortgage Receivables -- The fair value of mortgage receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The Company believes the carrying amount is a reasonable estimate of fair value. 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 13. SUBSEQUENT EVENTS Standstill and Settlement Agreement On February 24, 1998, the Company entered into a Standstill and Settlement Agreement with Bisco Industries and its affiliates ("Bisco"). In accordance with this agreement, Bisco agreed, among other things, to (i) support the Company's proposed reverse stock split and, for a period of one year, (ii) vote shares of the Company's stock owned by Bisco in favor of the Company's slate of Director nominees for the 1998 Annual Meeting of Shareholders, (iii) acquire no more than 19.9% of the total outstanding shares of the Company's common stock, (iv) not to initiate the solicitation of proxies or any shareholder vote with respect to the Company's common stock in opposition to the recommendations of the Board of Directors on any matter (except certain "anti-takeover" measures proposed by the Board of Directors), or (v) not initiate any legal action against the Company or its Directors. In accordance with the Standstill and Settlement Agreement, the Company agreed for a period of one year, among other things, to (i) appoint two Bisco nominees to the Company's Board of Directors and nominate and vote for such nominees for election at the 1998 Annual Meeting of Shareholders, (ii) dismiss without prejudice litigation claims previously filed against Bisco, (iii) amend the Company's Rights Agreement (as described above) to increase from 15% to 20% (with respect to Bisco only) the percentage of the Company's common stock which would trigger the distribution of Rights under the Rights Agreement, (iv) allow Bisco to acquire up to 19.9% of the Company's common stock through a purchase of 141,340 shares directly from the Company at the average closing price of the common stock over the ten trading days preceding the stock sale and (v) grant Bisco a limited release from claims, damages or actions arising from certain actions by Bisco prior to the date of the Standstill and Settlement Agreement subject to certain limitations. Possible Delisting of Securities from the Nasdaq Stock Market The Company's common stock is currently listed on the Nasdaq National Market. On August 22, 1997, the qualifications for continued listing on this market would require that (i) the Company maintain at least $4.0 million in net tangible assets, (ii) the minimum bid price of the common stock be $1.00 or more per share, (iii) there be at least 750,000 shares in the public float, valued at a minimum of $5.0 million or more, (iv) the common stock have at least two active market makers and (v) the common stock be held by at least 400 holders. On February 27, 1998, Nasdaq notified the Company that it was not in compliance with the $1.00 minimum bid price requirement, and had 90 days to regain compliance by initiating actions necessary to bring the price above $1.00 for 10 consecutive trading days. Ryan's ================================================================================ 26 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- In order to raise the Company's stock price above the minimum $1.00 bid price, in January 1998 the Company proposed to shareholders a one-for-five stock split. The reverse split was approved at a Special Meeting of Shareholders on February 24, 1998, and management implemented the reverse split effective March 4, 1998. Since March 4, 1998 the trading price of the Company's stock has been consistently above $1, thereby meeting the revised Nasdaq minimum bid price requirement for remaining on the National Market. Based on recent trading prices of the Company's stock, it is possible that it could fail to meet the new $5.0 million public float requirement. This could result in the stock dropping to the Nasdaq SmallCap Market. There are certain disadvantages to trading on the SmallCap Market as opposed to the National Market. Many local newspapers do not carry listings of SmallCap issues, which is where the majority of the Company's shareholders follow the stock. The Company would lose the automatic Blue Sky exemption it currently enjoys from being on a national market, which could result in additional expenses to the Company for future stock offerings of any kind, including distributions of the Rights. The stock would no longer be automatically marginable for most shareholders. Also, the Company would still be required to meet certain initial requirements for membership on the SmallCap Market, including payment of an entrance fee. Ryan's ================================================================================ 27 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 subsidiaries as of December 31, 1997 and January 1, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 subsidiaries as of December 31, 1997 and January 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Jacksonville, Florida March 6, 1998 Ryan's ================================================================================ 28 FAMILY STEAK HOUSES OF FLORIDA, INC. - -------------------------------------------------------------------------------- COMPANY'S REPORT ON FINANCIAL STATEMENTS Family Steak Houses of Florida, Inc. 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 generally accepted accounting principles and are appropriate in the circumstances. These consolidated financial statements necessarily include amounts determined using management's best judgments 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. Family Steak Houses of Florida, Inc.'s independent certified public accountants, Deloitte & Touche LLP, have audited the accompanying consolidated financial statements for 1997. The objective of their audit, performed in accordance with generally accepted auditing standards, is to express an opinion on the fairness, in all material respects, of the Company's consolidated financial position, results of its operations and its cash flows in accordance with generally accepted accounting principles. They consider the internal control structure to the extent considered necessary to determine the audit procedures required for the purpose of expressing their opinion on the consolidated financial statements. Ryan's ================================================================================ 29 FAMILY STEAK HOUSES OF FLORIDA, INC. - --------------------------------------------------------------------------------
Corporate Listing Family Steak Houses of Florida, Inc. Corporate Officer and Directors Independent Certified Public Accountants Lewis E. Christman, Jr. Deloitte & Touche LLP President, Chief Executive Officer, Director Suite 2801, Independent Square One Independent Drive Edward B. Alexander Jacksonville, FL 32202-5034 Chief Financial Officer and Director General Counsel Robert Martin Director McGuire Woods Battle & Boothe LLP Retiree, former Vice President 3300 Barnett Center of the Company 50 North Laura Street P.O. Box 4099 Jacksonville, FL 32201 Joseph M. Glickstein, Jr. Director Partner, Glickstein & Glickstein Transfer Agent / Rights Agent Richard M. Gray Director Chase Mellon Shareholder Services Partner, Gray & Kelley Four Station Square Third Floor Pittsburgh, PA 15219-1173 Glen F. Ceiley Director President & CEO, Bisco Industries, Inc. Executive Office Jay Conzen Family Steak Houses of Florida, Inc. Director 2113 Florida Boulevard Principal, Jay Conzen Investments Neptune Beach, Florida 32266 Form 10-K A copy of the Company's Annual Report on Form 10-K for fiscal 1997, as filed with the Securities and Exchange Commission, may be obtained by writing to: Corporate Secretary Family Steak Houses of Florida, Inc. 2113 Florida Boulevard Neptune Beach, FL 32266
Annual Meeting Form 10-K The annual meeting will be held at: Sea Turtle Inn One Ocean Boulevard Atlantic Beach, FL 32233 Ryan's ================================================================================ 30 Common Stock Data The Company's common stock is traded on the NASDAQ National Market System under the trading symbol "RYFL". As of March 3, 1998, prior to the reverse split, there were 2,598 shareholders of record, not including individuals holding shares in street names. The closing sale price for the Company's stock on March 3, 1998 was $2.03. The Company has never paid cash dividends on its common stock and is not allowed to pay dividends under its loan agreements. Management of the Company presently intends to retain all available funds for expansion of the business. The quarterly high and low closing prices (as adjusted for the reverse stock split) of the Company's common stock are as shown below: Market Price of Common Stock
- --------------------------------------------------------------------------------------------------------------------------- 1997 1996 Quarter High Low High Low - --------------------------------------------------------------------------------------------------------------------------- First 5 2 1/2 4 27/32 3 1/8 Second 4 3/8 3 7/16 4 17/32 2 13/16 Third 3 29/32 2 21/32 3 3/4 2 21/32 Fourth 3 19/32 2 31/32 3 19/32 2 3/16
Pursuant to the Standstill and Settlement with Bisco and its affiliates, on February 27, 1998, the Company sold 141,340 shares of its common stock to Bisco at a purchase price of $2.16, which was the average closing price of the Company's common stock for the ten trading days immediately preceding the date of the sale. The total price paid by Bisco to the Company was $305,312. These shares of common stock were sold without registration, since the sale did not involve a public offering within the meaning of Section 4(2) of the Securities Act of 1933. Ryan's ================================================================================ 31 -----END PRIVACY-ENHANCED MESSAGE-----