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