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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 25, 2000 Commission File Number: 0-18668
MAIN STREET AND MAIN INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 11-2948370
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5050 NORTH 40TH STREET
SUITE 200, PHOENIX, ARIZONA 85018
(Address of principal executive offices) (Zip Code)
(602) 852-9000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 20, 2001, there were outstanding 14,045,601 shares of the registrant's
common stock, $.001 par value. The aggregate market value of common stock held
by nonaffiliates of the registrant (8,479,601 shares) based on the closing sale
price of the common stock as reported on the Nasdaq National Market on March 20,
2001, was $25,438,803. For purposes of this computation, all officers,
directors, and 10% beneficial owners of the registrant are deemed to be
affiliates. Such determination should not be deemed an admission that such
officers, directors, or 10% beneficial owners are, in fact, affiliates of the
registrant.
Documents incorporated by reference: Portions of the registrant's Proxy
Statement for the 2001 Annual Meeting of Stockholders are incorporated by
reference into Part III.
MAIN STREET AND MAIN INCORPORATED
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 25, 2000
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 22
ITEM 3. LEGAL PROCEEDINGS............................................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE......................... 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 31
ITEM 11. EXECUTIVE COMPENSATION........................................ 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................. 32
SIGNATURES ................................................................. 35
------------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF APPLICABLE
SECURITIES LAWS. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING OUR
"EXPECTATIONS," "ANTICIPATION," "INTENTIONS," "BELIEFS," OR "STRATEGIES"
REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS ALSO INCLUDE STATEMENTS
REGARDING REVENUE, MARGINS, EXPENSES, AND EARNINGS ANALYSIS FOR FISCAL 2001 AND
THEREAFTER; FUTURE RESTAURANT OPERATIONS AND NEW RESTAURANT ACQUISITIONS OR
DEVELOPMENT; THE RESTAURANT INDUSTRY IN GENERAL; AND LIQUIDITY AND ANTICIPATED
CASH NEEDS AND AVAILABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
REPORT ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE FILING DATE OF THIS
REPORT, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS IN THIS REPORT. A VARIETY OF FACTORS COULD CAUSE OUR ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, INCLUDING THE FACTORS
DISCUSSED IN ITEM 1, "BUSINESS - SPECIAL CONSIDERATIONS."
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PART I
ITEM 1. BUSINESS
We are the world's largest franchisee of T.G.I. Friday's restaurants,
currently owning 56 and managing six T.G.I. Friday's restaurants. We also own
six Redfish Seafood Grill and Bar restaurants and two Bamboo Club restaurants.
On July 21, 2000, we acquired the concept, name, business, and substantially all
of the assets of the Bamboo Club.
T.G.I. Friday's restaurants are full-service, casual dining establishments
featuring a wide selection of freshly prepared, popular foods and beverages
served by well-trained, friendly employees in relaxed settings. Redfish Seafood
Grill and Bar restaurants are full-service, casual dining restaurants that
feature a broad selection of New Orleans style fresh seafood, Creole and Cajun
cuisine, and traditional southern dishes, as well as a "Voodoo" style lounge,
all under one roof. Bamboo Club restaurants are full-service, fine dining,
upscale restaurants that feature an extensive and diverse menu of innovative and
tantalizing Pacific Rim cuisine.
We own the exclusive rights to develop additional T.G.I. Friday's
restaurants in several territories in the western United States. We have
co-development privileges with Carlson Restaurants Worldwide to develop
additional T.G.I. Friday's restaurants in California. We plan to develop
additional T.G.I. Friday's restaurants in our existing development territories.
Our strategy is to
* capitalize on the brand-name recognition and goodwill associated with
T.G.I. Friday's restaurants;
* expand our restaurant operations through
- the development of additional T.G.I. Friday's restaurants in our
existing development territories,
- the development of additional Redfish and Bamboo Club
restaurants, and
- the acquisition or development of restaurants operating under
other restaurant concepts; and
* increase our profitability by continuing to enhance the dining
experience of our guests and improving operating efficiency.
We may explore opportunities to franchise the Redfish and Bamboo Club concepts
to third parties in the future.
We were incorporated in December 1988. We maintain our principal executive
offices at 5050 North 40th Street, Suite 200, Phoenix, Arizona 85018, and our
telephone number is (602) 852-9000. Our Web site, which is not a part of this
Report, is located at www.mainandmain.com. As used in this Report, the terms
"we," "our," "us," or "Main Street" refers to Main Street and Main Incorporated
and its subsidiaries and operating divisions.
OUR BUSINESS
OUR T.G.I. FRIDAY'S RESTAURANTS
THE T.G.I. FRIDAY'S CONCEPT
The T.G.I. Friday's concept is franchised by Carlson Restaurants Worldwide,
Inc. (formerly TGI Friday's Inc.), a wholly owned subsidiary of Carlson
Companies Inc., which is a diversified company with business interests in the
restaurant and hospitality industries. The first T.G.I. Friday's restaurant was
opened in 1965 in New York City. Carlson Restaurants Worldwide, Inc. and its
predecessors, has conducted a business since 1972 that is substantially similar
to the business currently conducted by its franchisees. As of December 25, 2000,
Carlson Restaurants Worldwide had 222 franchisor-operated and 425 franchised
T.G.I. Friday's restaurants operating worldwide. Carlson Restaurants Worldwide
currently owns approximately 1.9% of our outstanding common stock. Holders of
our common stock do not have any financial interest in Carlson Restaurants
Worldwide, and Carlson Restaurants Worldwide has no responsibility for the
contents of this Report.
1
T.G.I. Friday's restaurants are full-service, casual dining establishments
featuring a wide selection of high- quality, freshly prepared popular foods and
beverages, including a number of innovative and distinctive menu items, such as
menu items featuring "Jack Daniel's" sauces. The restaurants feature quick,
efficient, and friendly table service designed to minimize customer waiting time
and facilitate table turnover. Service personnel dress in traditional style
red-and-white striped knit shirts and casual slacks and are encouraged to
individualize their outfits with decorative pins and headwear, also known as
"flair", which enhance the T.G.I. Friday's theme and entertaining dining
atmosphere. Our restaurants generally are open seven days a week between the
hours of approximately 11:00 a.m. and 1:00 a.m. We believe that the design and
operational consistency of all T.G.I. Friday's restaurants enable us to benefit
significantly from the name recognition and goodwill associated with T.G.I.
Friday's restaurants.
MENU
We attempt to capitalize on the innovative and distinctive menu items that
have been an important attribute of T.G.I. Friday's restaurants. The menu
consists of more than 100 food items, including
* appetizers, such as mushrooms, jalapeno poppers, buffalo wings,
stuffed potato skins, quesadillas, fried onion rings, and pot
stickers;
* a variety of soups, salads, sandwiches, burgers, and pasta;
* southwestern, oriental, and American specialty items;
* beef, seafood, and chicken entrees, including Jack Daniels(TM) grill
items;
* a children's menu; and
* desserts.
Beverages include a full bar featuring wines, beers, classic and specialty
cocktails, after dinner drinks, soft drinks, milk, milk shakes, malts, hot
chocolate, coffee, tea, frozen fruit drinks known as Friday's Smoothies(TM), and
sparkling fruit juice combinations known as Friday's Flings(R).
Menu prices range from $6 to $17 for beef, chicken, and seafood entrees; $6
to $10 for pasta and oriental and southwestern specialty items; $4 to $9 for
salads, sandwiches, and burgers; and $3 to $10 for appetizers and soups. Each
restaurant offers a separate children's menu with food entrees ranging from $2
to $3. Alcoholic beverage sales currently account for approximately 24.4% of
total revenue.
RESTAURANT LAYOUT
Each of our T.G.I. Friday's restaurants is similar in terms of exterior and
interior design. Each restaurant features a distinctive decor accented by
red-and-white striped awnings, brass railings, stained glass, and eclectic
memorabilia. Each restaurant has interior dining areas and bar seating.
Most of our T.G.I. Friday's restaurants are located in freestanding
buildings. These restaurants normally contain between 5,500 and 9,000 square
feet of space and average approximately 7,500 square feet. Most of our recently
developed restaurants, however, contain 5,800 to 6,500 square feet of space. Our
T.G.I. Friday's restaurants contain an average of 60 dining tables, seating an
average of 210 guests, and a bar area seating an average of approximately 30
additional guests.
UNIT ECONOMICS
We estimate that our total cost of opening a new T.G.I. Friday's restaurant
currently ranges from $2,450,000 to $2,800,000, exclusive of annual operating
expenses and assuming that we obtain the underlying real estate under a lease
arrangement. These costs include approximately (a) $1,650,000 to $2,000,000 for
building, improvements, and permits, including liquor licenses, (b) $600,000 for
furniture, fixtures, and equipment, (c) $150,000 in pre-opening expenses,
including hiring expenses, wages for managers and hourly employees, and
supplies, and (d) $50,000 for the initial franchise fee. Actual costs, however,
may vary significantly depending upon a variety of factors, including the site
and size of the restaurant and conditions in the local real estate and
employment markets. Our T.G.I. Friday's restaurants open during all of fiscal
2000 generated an average of approximately $3,304,000 in annual revenue.
2
OUR REDFISH SEAFOOD GRILL AND BAR RESTAURANTS
THE REDFISH CONCEPT
Redfish Seafood Grill and Bar restaurants are full-service, casual dining
restaurants that feature a broad selection of New Orleans style fresh seafood,
Creole and Cajun cuisine, and traditional southern dishes, as well as a "Voodoo"
style lounge, all under one roof. The restaurants offer unique, freshly prepared
food that is served quickly and efficiently in a fun-filled New Orleans
atmosphere. Each Redfish restaurant's Voodoo lounge features a unique atmosphere
decorated with an eclectic collection of authentic New Orleans artifacts, signs,
and antiques. Local bands and, occasionally, national touring acts present live
rhythm and blues music on weekends. Redfish restaurants are open for lunch and
dinner seven days a week from 11:00 a.m. until 2:00 a.m.
MENU
We have developed a menu of more than 50 items for our Redfish restaurants.
Signature dishes include blackened redfish, Bourbon Street jambalaya,
hickory-smoked prime rib, asiago encrusted salmon, southern fried catfish,
crawfish etoufee, and marinated and grilled pork chops. The menu also features a
selection of appetizers, including Looziana egg rolls, dungeness crabcakes,
"Alligator Bites," buffalo crawfish tails, and crab & artichoke dip. Our Redfish
menu also features a variety of delicious pastas, fresh seasonal salads,
sandwiches, and tempting desserts, such as bananas foster, chocolate bread
pudding, and our signature key lime pie. The spacious Voodoo lounge offers a
wide selection of the finest beers on tap, a full wine list, and an extensive
specialty drink list.
Menu prices range from $7.00 to $25.00 for an entree and $5.00 to $11.00
for salads and appetizers. Alcohol sales currently account for approximately 20%
of total revenue.
RESTAURANT LAYOUT
We developed the Redfish restaurant layout to provide a refined southern
roadhouse atmosphere. Each of our Redfish restaurants is decorated with
nostalgic momentos of the South, together with decorative elements that are
derived from the individual restaurant's locale. The decor generally creates a
tribute to the legends of American music who created the blues, as well as to
the regions that developed the classic Creole, Cajun, and American cuisine
served in our Redfish restaurants.
Most of our Redfish restaurants are located in high-traffic urban office
environments. These restaurants contain between 6,000 and 12,000 square feet of
space and average approximately 8,500 square feet. Our Redfish restaurants
contain an average of 60 dining tables, seating an average of 250 guests, and a
bar area seating an average of approximately 25 additional guests. We have
developed a prototype for use in developing Redfish restaurants in the future.
We constructed our first restaurant using this prototype in Scottsdale, Arizona.
This restaurant opened on February 8, 2001. We plan to use this prototype
whenever possible in order to standardize the construction process and to reduce
costs.
UNIT ECONOMICS
We estimate that our total cost of opening a new Redfish restaurant
currently ranges from $2,400,000 to $2,600,000, exclusive of annual operating
expenses and assuming that we obtain the underlying real estate under a lease
arrangement. These costs include approximately (a) $1,650,000 to $1,850,000 for
building, improvements, and permits, including liquor licenses, (b) $600,000 for
furniture, fixtures, and equipment, (c) $150,000 in pre-opening expenses,
including hiring expenses, wages for managers and hourly employees, and
supplies. Actual costs, however, may vary significantly depending upon a variety
of factors, including the site and size of the restaurant and conditions in the
local real estate and employment markets. Our Redfish restaurants open during
all of fiscal 2000 generated an average of approximately $2,300,000 in annual
revenue.
OUR BAMBOO CLUB RESTAURANTS
THE BAMBOO CLUB CONCEPT
Bamboo Club restaurants are full-service, fine dining restaurants that
feature an extensive and diverse menu of innovative and tantalizing Pacific Rim
cuisine. Bamboo Club restaurants use fresh ingredients and premium herbs and
3
spices in creative combinations to serve high-quality food and beverages that
deliver a unique combination of delicious taste, eye-appealing color, appetizing
aroma, and delightful texture. The entire Bamboo Club concept has been designed
to deliver a consistent and enjoyable dining experience to each guest in an
elegant, upscale atmosphere. The restaurants feature a modern decor that
provides a dramatic yet comfortable impression, with food and beverages prepared
and served by a highly trained and skilled staff.
Bamboo Club restaurants are open for lunch and dinner, with hours of 11:30
a.m. to midnight Sunday through Thursday and 11:30 a.m. to 1:00 a.m. on Friday
and Saturday. The kitchen remains open until 11:00 p.m. Sunday through Thursday
and until midnight on Friday and Saturday to accommodate guests who prefer to
dine late. Bamboo Club restaurants take reservations and can serve large parties
or groups.
MENU
Bamboo Club restaurants feature a menu of more than 80 items inspired by
the diverse and exotic cuisines found in locations such as Bangkok, Canton,
Singapore, Seoul, Hong Kong, Indonesia, Hawaii, and other Pacific Rim cities and
provinces. Each Bamboo Club restaurant also features a full-service bar that
serves a variety of popular drinks and liquors, such as martinis and tropical
drinks, as well as traditional mixed beverages, fine wines, a wide selection of
popular Asian and domestic beers, and fine cigars.
Menu prices range from $6 to $10 for salads; $5 to $10 for appetizers; and
$10 to $29 for entrees. The average guest check is approximately $25 per person.
Alcoholic beverage sales account for approximately 20% of total revenue.
Take-out orders represent approximately 5% of total revenue. In addition, sales
through a third-party delivery service represent approximately 3% of total
revenue.
RESTAURANT LAYOUT AND STAFFING
Bamboo Club restaurants have been designed to create a dramatic impression
in an atmosphere that is both spacious and intimate. The restaurants' decor
features artful lighting, dramatic murals, an eclectic mix of background music,
and a general color theme of black, copper, and bamboo to create a "hip," exotic
feeling of warmth and color.
The restaurants also feature an "exhibition kitchen" adjacent to the
seating area, where diners can watch highly skilled wok chefs prepare and serve
the restaurants' appetizers and entrees. Most dishes are prepared and served
within five to ten minutes from the time when the order is placed.
The two existing Bamboo Club restaurants are located in high-traffic retail
shopping environments. Each restaurant contains approximately 5,400 square feet
of space in leased facilities, excluding patio areas. Each of these restaurants
feature indoor seating and bar area seating for a total of approximately 200
guests, which does not include outdoor patio seating.
Bamboo Club restaurants have developed an extensive program to train and
motivate restaurant employees. The Bamboo Club serving staff are professional,
friendly, highly skilled, and knowledgeable about the restaurant's cuisine and
menu selections. Servers are trained to make suggestions or recommendations for
new or different menu items or combinations that patrons might try, which helps
each guest to enjoy a memorable dining experience.
UNIT ECONOMICS
Although we have not completed construction or equipped the Tempe location,
we anticipate that our total cost of opening will be approximately $1,075,000,
exclusive of annual operating expenses. These costs will include approximately
(a) $550,000, net of a reduction for landlord's contribution, for building
improvements and permits, including liquor licenses, (b) $400,000 for furniture,
fixtures, and equipment, and (c) $125,000 in pre-opening expenses, including
hiring expenses, wages for managers and hourly employees, and supplies. We
anticipate that our total costs of opening the Tampa location will be
approximately $1,264,000, exclusive of annual operating expenses. These costs
will include approximately (a) $649,000, net of a reduction for landlord's
contribution, for building improvements and permits, including liquor licenses,
(b) $490,000 for furniture, fixtures, and equipment, and (c) $125,000 in
pre-opening expenses, including hiring expenses, wages for managers and hourly
employees, and supplies. We anticipate that our total costs of opening the West
Palm Beach location will be approximately $1,060,000, exclusive of annual
operating expenses. These costs will include approximately (a) $535,000, net of
4
a reduction for landlord's contribution, for building improvements and permits,
including liquor licenses, (b) $400,000 for furniture, fixtures, and equipment,
and (c) $125,000 in pre-opening expenses, including hiring expenses, wages for
managers and hourly employees, and supplies. Actual costs may very significantly
depending on a variety of factors, especially since we have not yet developed a
Bamboo Club restaurant.
SITE SELECTION
When evaluating whether and where to seek expansion of our restaurant
operations, we analyze a restaurant's profit potential. We consider the location
of a restaurant to be one of the most critical elements of the restaurant's
long-term success. Accordingly, we expend significant time and effort in
investigating and evaluating potential restaurant sites. In conducting the site
selection process, we obtain and examine detailed demographic information (such
as population characteristics, density, and household income levels), evaluate
site characteristics (such as visibility, accessibility, and traffic volume),
consider the proposed restaurant's proximity to demand generators (such as
shopping malls, lodging, and office complexes), and analyze potential
competition. Our senior corporate management evaluates and approves each
restaurant site prior to acquisition after extensive consultation with all
levels of our operations group. Carlson Restaurants Worldwide provides site
selection guidelines and criteria as well as site selection counseling and
assistance for our T.G.I. Friday's restaurant sites. We also must obtain Carlson
Restaurants Worldwide's consent before we enter into definitive agreements for a
T.G.I. Friday's restaurant site.
CURRENT RESTAURANTS
The following table sets forth information relating to each restaurant we
own or manage as of March 20, 2001.
IN
SQUARE SEATING OPERATION OPERATED BY OUR
LOCATION FOOTAGE CAPACITY SINCE COMPANY SINCE
- -------- ------- -------- ----- -------------
ACQUIRED T.G.I. FRIDAY'S RESTAURANTS (OWNED)
Phoenix, Arizona.............................. 9,396 298 1985 1990
Mesa, Arizona................................. 9,396 298 1985 1990
Tucson, Arizona............................... 7,798 290 1982 1990
Las Vegas, Nevada............................. 9,194 298 1982 1990
Kansas City, Missouri......................... 8,500 270 1983 1993
Overland Park, Kansas......................... 6,000 220 1992 1993
San Diego, California......................... 8,002 234 1979 1993
Costa Mesa, California........................ 8,345 232 1980 1993
Woodland Hills, California.................... 8,358 283 1980 1993
Valencia, California.......................... 6,500 232 1993 1993
Torrance, California.......................... 8,923 237 1982 1993
La Jolla, California.......................... 9,396 225 1984 1993
Palm Desert, California....................... 9,194 235 1983 1993
West Covina, California....................... 9,396 232 1984 1993
North Orange, California...................... 9,194 213 1983 1993
Ontario, California........................... 5,700 190 1993 1993
Laguna Niguel, California..................... 6,730 205 1990 1993
San Bernardino, California.................... 9,396 236 1986 1993
Brea, California.............................. 6,500 195 1991 1993
Riverside, California......................... 6,500 172 1991 1993
Pleasanton, California........................ 8,000 255 1995 1998
Salinas, California........................... 6,500 240 1994 1998
Oakland, California........................... 5,966 230 1994 1998
Sacramento, California........................ 6,200 230 1979 1998
Citrus Heights, California.................... 8,500 270 1982 1998
Fresno, California............................ 5,950 230 1978 1998
5
IN
SQUARE SEATING OPERATION OPERATED BY OUR
LOCATION FOOTAGE CAPACITY SINCE COMPANY SINCE
- -------- ------- -------- ----- -------------
DEVELOPED T.G.I. FRIDAY'S RESTAURANTS (OWNED)
Glendale, Arizona............................. 5,200 230 1993 1993
Albuquerque, New Mexico....................... 5,975 270 1993 1993
Reno, Nevada.................................. 6,500 263 1994 1994
Oxnard, California............................ 6,500 252 1994 1994
Carmel Mountain, California................... 6,500 252 1995 1995
Rancho Santa Margarita, California............ 6,548 252 1995 1995
Cerritos, California.......................... 6,250 223 1996 1996
Las Vegas, Nevada............................. 6,700 251 1997 1997
E1 Paso, Texas #2............................. 5,491 206 1998 1998
Superstition Springs (Mesa), Arizona.......... 6,250 240 1998 1998
Puente Hills, California...................... 5,800 272 1999 1999
San Diego, California......................... 6,800 277 1999 1999
Independence, Missouri........................ 5,800 240 1999 1999
Rancho San Diego, California.................. 5,800 240 1999 1999
Yorba Linda, California....................... 5,800 240 1999 1999
Simi Valley, California....................... 5,800 240 1999 1999
Tucson, Arizona............................... 5,800 240 1999 1999
Henderson, Nevada............................. 5,800 240 1999 1999
Carlsbad, California.......................... 8,146 302 1999 1999
Temecula, California.......................... 6,400 278 1999 1999
Chandler, Arizona............................. 6,000 240 1999 1999
Goodyear, Arizona............................. 6,000 207 2000 2000
Shawnee, Kansas............................... 6,400 245 2000 2000
Thousand Oaks, California..................... 6,400 249 2000 2000
Union City - San Francisco.................... 6,400 240 2000 2000
Leawood, Kansas............................... 7,248 240 2000 2000
N. Long Beach, California..................... 7,177 291 2000 2000
Scottsdale, Arizona........................... 7,100 263 2000 2000
Albuquerque, New Mexico....................... 6,426 241 2001 2001
MANAGED T.G.I. FRIDAY'S RESTAURANTS
San Bruno, California......................... 8,345 200 1980 1993
San Francisco, California..................... 4,748 161 1989 1993
San Jose, California.......................... 8,002 228 1977 1993
San Mateo, California......................... 9,396 252 1984 1993
San Ramon, California......................... 6,000 182 1990 1993
El Paso, Texas #1............................. 4,800 198 1997 1997
DEVELOPED REDFISH RESTAURANTS
Denver, Colorado.............................. 7,925 321 1997 1997
Chicago, Illinois............................. 6,200 214 1996 1997
Cincinnati, Ohio.............................. 7,133 239 1997 1997
San Diego, California......................... 11,994 347 1999 1999
Cleveland, Ohio............................... 10,964 328 1999 1999
Scottsdale, Arizona........................... 7,285 218 2001 2001
ACQUIRED BAMBOO CLUB RESTAURANTS
Phoenix, Arizona.............................. 5,400 200 1995 2000
Scottsdale, Arizona........................... 5,400 200 1997 2000
6
The average size of our acquired T.G.I. Friday's restaurants is
approximately 8,000 square feet, and the average size of our developed T.G.I.
Friday's restaurants is approximately 6,100 square feet. The Redfish restaurants
average 8,600 square feet, and the existing Bamboo Club restaurants average
5,400 square feet.
RESTAURANT OPERATIONS
THE T.G.I. FRIDAY'S SYSTEM
T.G.I. Friday's restaurants are developed and operated pursuant to a
specified system. Carlson Restaurants Worldwide maintains detailed standards,
specifications, procedures, and operating policies to facilitate the success and
consistency of all T.G.I. Friday's restaurants. To ensure that the highest
degree of quality and service is maintained, each franchisee of Carlson
Restaurants Worldwide, including our company, must operate each T.G.I. Friday's
restaurant in strict conformity with these methods, standards, and
specifications. The T.G.I. Friday's system includes
* distinctive exterior and interior design, decor, color scheme, and
furnishings;
* uniform specifications and procedures for operations;
* standardized menus featuring special recipes and menu items;
* procedures for inventory and management control;
* formal training and assistance programs;
* advertising and promotional programs;
* requirements for quality and uniformity of products and services
offered;
* requirements that franchisees purchase or lease from approved
suppliers equipment, fixtures, furnishings, signs, inventory, recorded
music, ingredients, and other products and materials that conform with
the standards and specifications of Carlson Restaurants Worldwide; and
* standards for the maintenance, improvement, and modernization of
restaurants, equipment, furnishings, and decor.
Carlson Restaurants Worldwide has committed to its franchisees to continue
to improve and further develop the T.G.I. Friday's system and to provide such
new information and techniques to the franchisees by means of confidential
franchise operating manuals. The T.G.I. Friday's system is identified by means
of certain trade names, service marks, trademarks, logos, and emblems, including
the marks T.G.I. Friday's(R) and Friday's(R). We believe the support as well as
the standards, specifications, and operating procedures of Carlson Restaurants
Worldwide are important elements to our restaurant operations. Our policy is to
execute these specifications, procedures, and policies to the highest level of
the standards of Carlson Restaurants Worldwide.
Once a restaurant is integrated into our operations, we provide a variety
of corporate services to assure the proper execution of the T.G.I. Friday's
system and the operational success of the restaurant. Our executive management
* continually monitors restaurant operations;
* maintains management controls;
* inspects individual restaurants to assure the quality of products and
services and the maintenance of facilities;
* develops employee programs for efficient staffing, motivation,
compensation, and career advancement;
* institutes procedures to enhance efficiency and reduce costs; and
* provides centralized support systems.
We also maintain quality assurance procedures designed to assure compliance
with the high quality of products and services mandated by our company and
Carlson Restaurants Worldwide. We respond to and investigate inquiries and
complaints, initiate on-site resolution of deficiencies, and consult with each
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restaurant's staff to assure that proper action is taken to correct any
deficiency. Our personnel and contracted third-party quality assurance
professionals make unannounced visits to restaurants to evaluate the facilities,
products, and services. We believe that our quality review program and executive
oversight enhance restaurant operations, reduce operating costs, improve
customer satisfaction, and facilitate the highest level of compliance with the
T.G.I. Friday's system.
RESTAURANT MANAGEMENT
Our regional and restaurant management personnel are responsible for
complying with Carlson Restaurants Worldwide's and our operational standards.
Our six regional managers are responsible for between 5 and 12 of our
restaurants within their region. These regional managers and two Directors of
Operations report to our Vice President of Restaurant Operations. The Vice
President of Restaurant Operations and two other Directors of Operations report
to our Executive Vice President of Operations and Chief Operating Officer, who
has responsibility for our operations. Restaurant managers are responsible for
day-to-day restaurant operations, including customer relations, food preparation
and service, cost control, restaurant maintenance, and personnel relations. We
typically staff our restaurants with an on-site general manager, two or three
assistant managers, a kitchen manager, and approximately 90 hourly employees.
We recently established a program of appointing multi-location general
managers in geographic areas having locations close enough to each other to
support this concept. In addition to improving efficiency, this program allows
us to promote and compensate key general managers and create a position that
improves our ability to retain key employees in our company. We currently have
three employees in these positions.
RECRUITMENT AND TRAINING
We attempt to hire employees who are committed to the standards maintained
by our company and Carlson Restaurants Worldwide. We also believe that our high
unit sales volume, the image and atmosphere of the T.G.I. Friday's, Redfish, and
Bamboo Club concepts, and our career advancement and employee benefit programs
enable us to attract high quality management and restaurant personnel.
Our T.G.I. Friday's restaurant personnel participate in continuing training
programs maintained by Carlson Restaurants Worldwide and our company. In
addition, we supplement those programs by hiring personnel devoted solely to
employee training. Each restaurant general and assistant manager completes a
formal training program conducted by our company and Carlson Restaurants
Worldwide. This program provides our T.G.I. Friday's restaurant managers between
10 and 15 weeks of training, depending on the trainee's prior experience and
ability. The training covers all aspects of management philosophy and overall
restaurant operations, including supervisory skills, operating and performance
standards, accounting procedures, and employee selection and training necessary
for restaurant operations.
Our Redfish and Bamboo Club restaurant managers and personnel participate
in extensive training programs consistent with our operating standards. Many of
our Redfish restaurant managers are experienced T.G.I. Friday's managers who
have accepted positions in our Redfish operations.
We believe that our incentive, motivation, and training and re-training
programs enhance employee performance, result in better customer service, and
increase restaurant efficiency. We have implemented incentive programs that
reward restaurant managers when the restaurant's operating results surpass
designated goals and a reward and recognition program for outstanding
achievements by employees.
MAINTENANCE AND IMPROVEMENT OF RESTAURANTS
We maintain our restaurants and all associated fixtures, furnishings, and
equipment in conformity with the T.G.I. Friday's system or standards we have
developed for our Redfish and Bamboo Club restaurants. We also make necessary
additions, alterations, repairs, and replacements to our restaurants as required
by Carlson Restaurants Worldwide, including periodic repainting or replacement
of obsolete signs, furnishings, equipment, and decor. We may be required,
subject to certain limitations, to modernize our restaurants to the then-current
standards and specifications of Carlson Restaurants Worldwide. One Bamboo Club
restaurant lease requires us to periodically refurbish the location.
8
MANAGEMENT INFORMATION SYSTEMS
We have devoted considerable resources to develop and implement management
information systems that improve the quality and flow of information throughout
our company. These systems include systems that complement proprietary systems
developed and maintained by Carlson Restaurants Worldwide as well as systems we
have developed for our Redfish and Bamboo Club restaurants. Inventory control
and transaction processing are accomplished by means of a computerized sales
system, which is integrated into data processing systems we utilize for
financial and management control, centralized accounting, and management
information systems.
We use five to seven touch-screen computer registers located conveniently
throughout each of our restaurants. Servers enter guest orders by touching the
appropriate sections of the register's computer screen, which transfers the
information electronically to the kitchen and bar for preparation. These
registers also are connected to a personal computer in the restaurant office and
to our corporate information system via modem. Management receives detailed
comparative reports on each restaurant's sales and expense performance daily,
weekly, and monthly. Our existing in-store accounting system in the TGI Friday's
we own and manage is currently supported by Carlson Restaurants Worldwide. We
have been notified that its support will cease in the middle of 2002. We plan to
replace this system with a new system that will work in all three of our
restaurant concepts. We currently are in the design phase of this project. This
systems replacement will be a major effort for us during the next year.
We believe that our management information systems enable us to increase
the speed and accuracy of order taking and pricing, to better assess guest
preferences, to efficiently schedule labor to better serve guests, to quickly
and accurately monitor food and labor costs, to promptly access financial and
operating data, and to improve the accuracy and efficiency of store-level
information and reporting.
EQUIPMENT, FOOD PRODUCTS, AND OTHER SUPPLIES
We lease or purchase all fixtures, furnishings, equipment, signs, recorded
music, food products, supplies, inventory, and other products and materials
required for the development and operation of our T.G.I. Friday's restaurants
from suppliers approved by Carlson Restaurants Worldwide. In order to be
approved as a supplier, a prospective supplier must demonstrate to the
reasonable satisfaction of Carlson Restaurants Worldwide its ability to meet the
then-current standards and specifications of Carlson Restaurants Worldwide for
such items, possess adequate quality controls, and have the capacity to provide
supplies promptly and reliably. We are not required to purchase supplies from
any specified suppliers, but the purchase or lease of any items from an
unapproved supplier requires the prior approval of Carlson Restaurants
Worldwide.
Carlson Restaurants Worldwide maintains a list of approved suppliers and a
set of the T.G.I. Friday's system standards and specifications. Carlson
Restaurants Worldwide receives no commissions on direct sales to its
franchisees, but may receive rebates and promotional discounts from
manufacturers and suppliers, some of which are passed on proportionately to our
company. Carlson Restaurants Worldwide is an approved supplier of various
kitchen equipment and store fixtures, decorative memorabilia, and various paper
goods, such as menus and in-store advertising materials and items. We are not,
however, required to purchase such items from Carlson Restaurants Worldwide. If
we elect to purchase such items from Carlson Restaurants Worldwide, Carlson
Restaurants Worldwide may derive revenue as a result of such purchases.
Each of our restaurants purchases perishable produce, dairy products, and
breads from approved local suppliers. In prior years and until the fourth
quarter of fiscal 1999, we purchased most of our key food products, as well as
many of our other restaurant supplies, from a single national food distributor.
Carlson Restaurants Worldwide and all of its other franchisees also purchased
from this distributor, which is not affiliated with our company or Carlson
Restaurants Worldwide. In November 1999, this distributor announced that it was
phasing out its distribution services to the casual dining industry. This
decision had an immediate and substantial negative impact on the distributor's
deliveries to our restaurants. As the level of service began to deteriorate, we
immediately entered into temporary back-up distribution arrangements with
alternate suppliers, generally at higher prices than we had previously obtained
from our primary supplier. In January 2000, this distributor filed for
protection under Chapter 11 of the U. S. Bankruptcy Code. We asserted claims
against the supplier and the supplier asserted claims against us, all of which
have been resolved. See Item 3, "Legal Proceedings" included elsewhere in this
Report.
9
In January 2000, we entered into an agreement with U.S. Foodservice, a
company with which we had an existing relationship, to serve substantially all
of our restaurants in California, Arizona, and Nevada. During the second quarter
of fiscal 2000, we completed the transition to U.S. Foodservice in California,
Arizona, and Nevada and to Performance Food Group in Missouri, Kansas, Texas,
and New Mexico for all our T.G.I. Friday's and Redfish restaurants. Our two
acquired Bamboo Clubs restaurants currently utilize the distribution operations
that were in place when we acquired those restaurants, and those distribution
operations will be evaluated after we open the Tempe location.
Our restaurants utilize a simple bar code system for daily ordering of
their primary food and merchandise items. Orders are sent electronically to the
supplier. Our suppliers have comprehensive warehouse and delivery outlets
servicing each of our markets.
We believe that our purchases from our primary suppliers will enable us to
* maintain a high level of quality consistent with our T.G.I. Friday's,
Redfish, and Bamboo Club restaurants;
* realize convenience and dependability in the receipt of our supplies;
* avoid the costs of maintaining a large purchasing department, large
inventories, and product warehouses; and
* attain cost advantages as the result of volume purchases.
We believe, however, that all essential products are available from other
national suppliers as well as from local suppliers in the cities in which our
restaurants are located in the event we determine to purchase our supplies from
other suppliers.
ADVERTISING AND MARKETING
T.G.I. FRIDAY'S RESTAURANTS
We participate in the national marketing and advertising programs conducted
by Carlson Restaurants Worldwide. The programs use network and cable television
and national publications and feature new menu innovations and various
promotional programs. In addition, from time to time, we supplement the
marketing and advertising programs conducted by Carlson Restaurants Worldwide
through local radio, newspaper, and magazine advertising media and sponsorship
of community events. In conjunction with Carlson Restaurants Worldwide, we
maintain a "frequent diner" program that includes awards of food, merchandise,
and travel to frequent diners based upon points accumulated through purchases.
As a franchisee of Carlson Restaurants Worldwide, we are able to utilize
the trade names, service marks, trademarks, emblems, and indicia of origin of
Carlson Restaurants Worldwide, including the marks T.G.I. Friday's(R) and
Friday's(R). We advertise in various media utilizing these marks to attract new
customers to our restaurants.
REDFISH AND BAMBOO CLUB RESTAURANTS
Our in-house marketing department develops advertising and marketing
programs for our Redfish and Bamboo Club restaurants. We develop these programs
with an emphasis on building awareness of the "Redfish" and "Bamboo Club" brand
in the communities in which we operate Redfish and Bamboo Club restaurants and
generating sales for those restaurants. Advertising and marketing campaigns have
included radio and print advertising, as well as point-of-sale marketing
promotions. We conduct a comprehensive advertising and public relations campaign
in advance of each Redfish and Bamboo Club restaurant grand opening.
EXPANSION OF OPERATIONS
Between 1990 and 2000, we acquired 31 existing T.G.I. Friday's restaurants
as well as the exclusive and co-development rights to develop restaurants in
specified territories. The acquisitions include 25 restaurants in California,
three in Arizona, and one in each of Kansas, Missouri, and Nevada. We
subsequently sold five of the restaurants we had previously acquired in
10
California, which we continue to manage. Between 1990 and 2000, we also have
developed 30 new T.G.I. Friday's restaurants, including seven during 2000. These
include 15 in California, six in Arizona, three in Nevada, two in each of New
Mexico and Kansas, and one in each of Missouri and Texas.
In 1997, we acquired a 52% ownership interest and in 1999 we acquired the
remaining minority interest in Redfish America, LLC, which operated our four
original Redfish Seafood Grill and Bar restaurants. We opened two additional
Redfish restaurants in 1999 and closed one in 2000.
In July 2000, we acquired the business and substantially all of the assets
of two Bamboo Club restaurants. As part of the acquisition, we also acquired the
right, title, and interest under, in, and to the "Bamboo Club" name and
restaurant concept. The two Bamboo Club restaurants are located in Phoenix and
Scottsdale, Arizona. We plan to expand the Bamboo Club concept by opening
additional restaurants. We also may explore opportunities to franchise the
Bamboo Club concept to third parties in the future.
We plan to expand our restaurant operations through the development of
additional T.G.I. Friday's restaurants in our existing development territories
and the development of additional Redfish and Bamboo Club restaurants in
suitable locations. We opened two T.G.I. Friday's and one Redfish restaurant
during the first quarter of fiscal 2001. We plan to open an additional two
T.G.I. Friday's, one Redfish, and three Bamboo Club restaurants during the
remainder of 2001. We plan to open a new Bamboo Club restaurant in Tempe,
Arizona, during the summer of 2001, which is currently under construction in
6,700 square feet of leased space, exclusive of patio seating area. The Tempe
restaurant will contain seating for approximately 206 guests, exclusive of bar
and patio seating. In addition, we have entered into leases for Bamboo Club
restaurant locations in high-traffic shopping malls in Tampa and West Palm
Beach, Florida, and expect to commence construction so that we can open those
locations in the fall of 2001. The Tampa location contains 8,100 square feet and
the West Palm Beach location contains 6,317 square feet, both exclusive of patio
seating areas. The Tampa restaurant is planned to contain seating for
approximately 235 guests and the West Palm Beach restaurant is planned to
contain seating for approximately 180 guests, both exclusive of bar and patio
seating.
We are negotiating leases or purchase agreements for six additional
restaurants scheduled to be developed during 2002. We currently are considering
other sites for additional restaurants, but have not entered into leases or
purchase agreements for such sites. We do not know how many sites will
materialize, as that depends on a variety of factors and economic conditions.
The opening of new restaurants will depend on our ability to
* locate suitable sites in terms of favorable population
characteristics, density and household income levels, visibility,
accessibility, traffic volume, proximity to demand generators
(including shopping malls, lodging, and office complexes), and
proximity to potential competition;
* obtain financing for construction, tenant improvements, furniture,
fixtures, equipment, and other expenditures;
* negotiate acceptable leases or terms of purchase;
* secure zoning, environmental, health and similar regulatory approvals
and liquor licenses;
* recruit and train qualified personnel; and
* manage successfully the rate of expansion and expanded operations.
The opening of new restaurants also may be affected by increased
construction, utility, and labor costs, delays resulting from governmental
regulatory approvals, strikes, or work stoppages, adverse weather conditions,
and various acts of God. Newly opened restaurants may operate at a loss for a
period following their opening. The length of this period will depend upon a
number of factors, including the time of year the restaurant is opened, sales
volume, and operating costs.
The acquisition of existing restaurants will depend upon our ability to
identify and purchase restaurants that meet our criteria on satisfactory terms
and conditions. There can be no assurance that we will be successful in
achieving our expansion goals through the development or acquisition of
additional restaurants or that any additional restaurants that are developed or
acquired will be profitable. In addition, the opening of additional restaurants
11
in an existing market may have the effect of drawing customers from and reducing
the sales volume of our existing restaurants in those markets.
DEVELOPMENT AGREEMENTS
We are a party to four development agreements with Carlson Restaurants
Worldwide. Each development agreement grants us the right to develop additional
T.G.I. Friday's restaurants in a specified territory and obligates us to develop
additional T.G.I. Friday's restaurants in that territory in accordance with a
specified development schedule. We own the exclusive rights to develop
additional T.G.I. Friday's restaurants in territories encompassing most of the
states of Arizona, Nevada, and New Mexico, and the Kansas City, Kansas/Missouri
and E1 Paso, Texas metropolitan areas. We also have the non-exclusive right,
together with Carlson Restaurants Worldwide, to develop additional T.G.I.
Friday's restaurants in the state of California. We plan to develop additional
T.G.I. Friday's restaurants in our existing development territories.
In the past, we have successfully renegotiated our franchisee development
obligations for new T.G.I. Friday's locations, primarily in Northern California.
Our renegotiated development schedule has reduced our development obligation in
Northern California, extended the dates for new store development in all of
California, and increased to a lesser extent our development obligations in
other territories. As part of the new agreement, Carlson Restaurants Worldwide
now has the right to co-develop the California market. We currently do not
expect to meet the amended development agreements, but instead expect to
renegotiate the terms of those agreements with Carlson Restaurants Worldwide.
During the middle of 2000, we experienced difficulty finding sites,
particularly in Northern California, that we believed we could successfully
develop and operate. We commenced discussions with Carlson Restaurants Worldwide
to adjust and modify our development agreements. We reached substantial
agreement to reduce development obligations in certain areas and to alter some
area obligations. Before this agreement was finalized, increases in workers'
compensation, minimum wage, and energy costs made development in California,
especially Northern California, very problematic. As a result, we agreed with
Carlson Restaurants Worldwide not to enter into a modification of our
development agreements until we can fully assess the effects of these issues.
The following table sets forth information regarding our minimum
requirements to open new T.G.I. Friday's restaurants under our current
development agreements, absent the current moratorium, as well as the number of
existing restaurants in each of our development territories.
SOUTHERN NORTHERN
CALIFORNIA CALIFORNIA SOUTHWEST MIDWEST
YEAR TERRITORY(1) TERRITORY(1) TERRITORY(2) TERRITORY(3) TOTAL
- ---- ------------ ------------ ------------ ------------ -----
Carry-over................. -- 3 -- -- 3
2001 ...................... 4 6 1 1 12
2002 ...................... 4 4 1 1 10
2003 ...................... 3 3 (TBD) (TBD) 6
--- --- ---- ---- ---
Total................. 11 16 2 2 31
=== === ==== ==== ===
Existing Restaurants....... 29 6 (4) 16 (5) 5 56
- ----------
(1) Carlson Restaurants Worldwide also may develop restaurants in this
region.
(2) Includes the states of Arizona, Nevada, and New Mexico and the E1 Paso,
Texas metropolitan area.
(3) Includes metropolitan Kansas City, Kansas and Kansas City, Missouri.
(4) Does not include five restaurants managed in the Northern California
Territory.
(5) Does not include one restaurant managed in the Southwest Territory.
(TBD) To be determined by negotiation between Carlson Restaurants Worldwide and
the Company during 2002.
Each development agreement gives Carlson Restaurants Worldwide certain
remedies in the event that we fail to comply in a timely manner with our
schedule for restaurant development, if we otherwise default under the
12
development agreement or any franchise agreement relating to a restaurant within
that development territory as described above, or if our officers or directors
breach the confidentiality or noncompete provisions of the development
agreement. The remedies available to Carlson Restaurants Worldwide include (a)
the termination of our exclusive right to develop restaurants in the related
territory; (b) a reduction in the number of restaurants we may develop in the
related territory; (c) the termination of the development agreement; and (d) an
acceleration of the schedule for development of restaurants in the related
territory pursuant to the development agreement. None of these remedies would
affect adversely our ability to continue to operate our then-existing T.G.I.
Friday's restaurants.
FRANCHISE AGREEMENTS
We enter into or assume a separate franchise agreement with respect to each
T.G.I. Friday's restaurant that we acquire or develop pursuant to a development
agreement. Each franchise agreement grants us an exclusive license to operate a
T.G.I. Friday's restaurant within a designated geographic area, which generally
is a three-mile limit from each restaurant, and obligates us to operate such
restaurant in accordance with the requirements and specifications established by
Carlson Restaurants Worldwide relating to food preparation and quality of
service as well as general operating procedures, advertising, records
maintenance, and protection of trademarks. The franchise agreements restrict our
ability to transfer our interest in our T.G.I. Friday's restaurants without the
consent of Carlson Restaurants Worldwide.
Each franchise agreement requires us to pay Carlson Restaurants Worldwide
an initial franchise fee, generally in the amount of $50,000. In addition, we
are obligated to pay Carlson Restaurants Worldwide a royalty in the amount of 4%
of the gross revenue as defined in the franchise agreement for each restaurant.
Royalty payments under these agreements totaled $4,830,000 during fiscal 1999,
and $6,634,000 during fiscal 2000. Each franchise agreement also requires us to
spend at least 4% of gross sales on local marketing and to contribute to a
national marketing pool Carlson Restaurants Worldwide administers. All funds
contributed to the national advertising fund are credited against the local
advertising requirement. Carlson Restaurants Worldwide required us as well as
all other franchisees to contribute 2.1% of gross sales in fiscal 1999, 2000 and
2001 to the national marketing pool. Marketing expenses totaled $2,733,000
during fiscal 1999 and $4,163,000 during fiscal 2000.
A default under one of our franchise agreements will not constitute a
default under any of our other franchise agreements. A default under the
franchise agreement for a restaurant in a development territory may, however,
constitute a default under the development agreement for that development
territory.
GOVERNMENT REGULATION
Each of our restaurants is subject to licensing and regulation by state and
local departments and bureaus of alcohol control, health, sanitation, and fire
and to periodic review by the state and municipal authorities for areas in which
the restaurants are located. In addition, we are subject to local land use,
zoning, building, planning, and traffic ordinances and regulations in the
selection and acquisition of suitable sites for constructing new restaurants.
Delays in obtaining, or denials of, or revocation or temporary suspension of,
necessary licenses or approvals could have a material adverse impact on our
development of restaurants.
We also are subject to regulation under the Fair Labor Standards Act, which
governs such matters as working conditions and minimum wages. An increase in the
minimum wage rate or the cost of workers' compensation insurance, both of which
recently occurred in California, or changes in tip-credit provisions, employee
benefit costs (including costs associated with mandated health insurance
coverage), or other costs associated with employees could adversely affect our
company.
In addition, we are subject to the Americans with Disabilities Act of 1990.
That act may require us to make certain installations in new restaurants or
renovations to existing restaurants to meet federally mandated requirements. To
our knowledge, we are in compliance in all material respects with all applicable
federal, state, and local laws affecting our business.
COMPETITION
The restaurant business is highly competitive with respect to price,
service, food type, and quality. In addition, restaurants compete for the
availability of restaurant personnel and managers. Our restaurants compete with
13
a large number of other restaurants, including national and regional restaurant
chains and franchised restaurant systems, many of which have greater financial
resources, more experience, and longer operating histories than we possess. We
also compete with locally owned, independent restaurants.
Our casual dining business also competes with various types of food
businesses, as well as other businesses, for restaurant locations. We believe
that site selection is one of the most crucial decisions required in connection
with the development of restaurants. As the result of the presence of competing
restaurants in our development territories, our management devotes great
attention to obtaining what we believe will be premium locations for new
restaurants, although we can provide no assurance that we will be successful in
these efforts.
EMPLOYEES
We employ approximately 2,450 people on a full-time basis, of whom 65 are
corporate management and staff personnel and 2,385 are restaurant personnel. We
also employ approximately 4,100 part-time employees. Except for corporate and
management personnel, we generally pay our employees on an hourly basis. We
employ an average of approximately 90 full-time and part-time hourly employees
at each of our restaurants. None of our employees are covered by a collective
bargaining agreement with us. We have never experienced a major work stoppage,
strike, or labor dispute. We consider our relations with our employees to be
good.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive
officers:
NAME AGE POSITION
---- --- --------
Bart A. Brown, Jr...... 69 President, Chief Executive Officer, and Director
William G. Shrader..... 53 Executive Vice President, Chief Operating Officer,
and Director
Lawrence K. White...... 36 Vice President - Finance, Secretary and Treasurer
BART A. BROWN, JR. has served as our President and Chief Executive Officer
and as a director since December 1996. Mr. Brown was affiliated with Investcorp
International, N.A., and an international investment banking firm, from April
1996 until December 1996. Mr. Brown served as the Chairman and Chief Executive
Officer of Color Tile, Inc. at the request of Investcorp International, Inc.,
which owned all of that company's common stock, from September 1995 until March
1996. In January 1996, Color Tile filed for reorganization under Chapter 11 of
the United States Bankruptcy Code. Mr. Brown served as Chairman of the Board of
The Circle K Corporation from June 1990, shortly after that company filed for
reorganization under Chapter 11 of the United States Bankruptcy Code, until
September 1995. From September 1994 until September 1996, Mr. Brown served as
the Chairman and Chief Executive Officer of Spreckels Industries, Inc. Mr. Brown
engaged in the private practice of law from 1963 through 1990 after seven years
of employment with the Internal Revenue Service.
WILLIAM G. (BILL) SHRADER has served as our Executive Vice President and
Chief Operating Officer and as a director since March 1999. Prior to joining our
company, Mr. Shrader was Senior Vice President of Marketing for Tosco Marketing
Company from February 1997 to March 1999. From August 1992 to February 1997, Mr.
Shrader served in several capacities at Circle K Stores, Inc., including
President of the Arizona Region, President of the Petroleum Products/Services
Division, Vice President of Gasoline Operations, and Vice President of Gasoline
Marketing. Mr. Shrader began his career in 1976 at The Southland Corporation and
departed in 1992 as National Director of Gasoline Marketing.
LAWRENCE K. WHITE has served as our Vice President-Finance and Chief
Financial Officer since August 2000. Prior to joining our company, Mr. White
served as the Vice President of Accounting for the Arizona Diamondbacks of Major
League Baseball (MLB), the Phoenix Suns of the National Basketball Association
(NBA), Bank One Ballpark, and America West Arena. Mr. White began his career in
public accounting with the Boston offices of Price Waterhouse and Pannell Kerr
Forster from 1987 through 1992. Thereafter, he worked for two Boston area real
estate companies until his hiring by the Arizona Diamondbacks in early 1996.
14
SPECIAL CONSIDERATIONS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE
OTHER INFORMATION IN THIS REPORT, IN EVALUATING OUR COMPANY AND OUR BUSINESS.
WE DEPEND ON CARLSON RESTAURANTS WORLDWIDE, INC.
We currently operate 56 T.G.I. Friday's restaurants as a T.G.I. Friday's
franchisee. We also manage an additional six T.G.I. Friday's restaurants for
other franchisees. Carlson Restaurants Worldwide, Inc. (formerly TGI Friday's,
Inc.) is the franchisor of T.G.I. Friday's restaurants. As a result of the
nature of franchising and our franchise agreements with Carlson Restaurants
Worldwide, our long-term success depends, to a significant extent, on
* the continued vitality of the T.G.I. Friday's restaurant concept and
the overall success of the T.G.I. Friday's system;
* the ability of Carlson Restaurants Worldwide to identify and react to
new trends in the restaurant industry, including the development of
popular menu items;
* the ability of Carlson Restaurants Worldwide to develop and pursue
appropriate marketing strategies in order to maintain and enhance the
name recognition, reputation, and market perception of T.G.I. Friday's
restaurants;
* the goodwill associated with the T.G.I. Friday's trademark;
* the quality, consistency, and management of the overall T.G.I.
Friday's system; and
* the successful operation of T.G.I. Friday's restaurants owned by
Carlson Restaurants Worldwide and other T.G.I. Friday's franchisees.
We believe that the experience, reputation, financial strength, and
franchisee support of Carlson Restaurants Worldwide represent positive factors
for our business. We have no control, however, over the management or operation
of Carlson Restaurants Worldwide or other T.G.I. Friday's franchisees. A variety
of factors affecting Carlson Restaurants Worldwide or the T.G.I. Friday's
concept could have a material adverse effect on our business. These factors
include the following:
* any business reversals that Carlson Restaurants Worldwide may
encounter;
* a failure by Carlson Restaurants Worldwide to promote the T.G.I.
Friday's name or restaurant concept;
* the inability or failure of Carlson Restaurants Worldwide to support
its franchisees, including our company;
* the failure to operate successfully the T.G.I. Friday's restaurants
that Carlson Restaurants Worldwide itself owns; and
* negative publicity with respect to Carlson Restaurants Worldwide or
the T.G.I. Friday's name.
The future results of the operations of our restaurants will not necessarily
reflect the results achieved by Carlson Restaurants Worldwide or its other
franchisees, but will depend upon such factors as the effectiveness of our
management team, the locations of our restaurants, and the operating results of
those restaurants.
FRANCHISE AGREEMENTS IMPOSE RESTRICTIONS AND OBLIGATIONS ON OUR BUSINESS.
Our franchise agreement with Carlson Restaurants Worldwide for each T.G.I.
Friday's restaurant that we own generally requires us to
* pay an initial franchise fee of $50,000;
* pay royalties of 4% of the restaurant's gross sales; and
15
* spend up to 4% of the restaurant's gross sales on advertising, which
may include contributions to a national marketing pool administered by
Carlson Restaurants Worldwide.
During fiscal 2000, Carlson Restaurants Worldwide required us and its other
franchisees to contribute 2.1% of gross sales to the national marketing pool. We
must pay or accrue these amounts regardless of whether or not our restaurants
are profitable. In addition, the franchise agreements require us to operate our
T.G.I. Friday's restaurants in accordance with requirements and specifications
established by Carlson Restaurants Worldwide. These requirements and
specifications relate to a variety of factors, including the following:
* the exterior and interior design, decor, and furnishings of
restaurants;
* menu selection;
* the preparation of food products;
* quality of service;
* general operating procedures;
* advertising;
* maintenance of records; and
* protection of trademarks.
If we fail to satisfy these requirements or otherwise default under the
franchise agreements, we could be subject to potential damages for breach of
contract and could lose our franchise rights for some or all of our T.G.I.
Friday's restaurants. We also could lose our rights to develop additional T.G.I.
Friday's restaurants.
OUR DEVELOPMENT AGREEMENTS WITH CARLSON RESTAURANTS WORLDWIDE REQUIRE US TO OPEN
ADDITIONAL T.G.I. FRIDAY'S RESTAURANTS.
The acquisition of restaurants may not constitute the opening of new
restaurants under the development agreements. We may not be able to secure
sufficient restaurant sites that we believe are suitable or we may not be able
to develop restaurants on sites on terms and conditions that we consider
favorable in order to satisfy the requirements of the development agreements.
The development agreements give Carlson Restaurants Worldwide certain remedies
in the event that we fail to comply with the development schedule in a timely
manner or if we breach the confidentiality or noncompete provisions of the
development agreements. These remedies include, under certain circumstances, the
right to reduce the number of restaurants we may develop in the related
development territory or to terminate our exclusive right to develop restaurants
in the related development territory.
At our request, Carlson Restaurants Worldwide from time to time has agreed
to amend the development schedules to extend the time by which we were required
to develop new restaurants in certain development territories. We requested
those amendments because we were unable to secure sites that we believed to be
attractive on favorable terms and conditions. Carlson Restaurants Worldwide may
decline to extend the development schedule in the future if we experience any
difficulty in satisfying the schedule for any reason, including a shortage of
capital.
WE MAY NOT BE ABLE TO COMPLY WITH ALL OF THE REQUIREMENTS OF OUR DEVELOPMENT
AGREEMENTS.
At the beginning of 2001, our development agreements with Carlson
Restaurants Worldwide required us to open at least 31 additional T.G.I. Friday's
restaurants by December 31, 2003, including 15 by the end of 2001. We opened
seven new T.G.I. Friday's restaurants during fiscal 2000. One of these
restaurants fulfilled our development requirements for 1999. We do not expect to
meet our California and midwest obligations under our development agreements but
instead expect to renegotiate our obligations under those agreements.
16
WE FACE RISKS ASSOCIATED WITH THE ACQUISITION AND INTEGRATION OF REDFISH AND THE
BAMBOO CLUB AND ANY OTHER ACQUIRED RESTAURANTS WITH OUR EXISTING OPERATIONS.
We must integrate the operations of our Redfish and Bamboo Club restaurants
with our existing operations in order to enhance revenue, realize cost savings,
and achieve anticipated operating efficiencies. Because Redfish and Bamboo Club
restaurants feature diverse menus served in an upscale atmosphere, these
restaurants present operating requirements that differ from our existing T.G.I.
Friday's restaurants, which could result in unanticipated challenges to our
management team. We may wish to acquire other complementary restaurant
operations in the future. We may not be able to identify suitable acquisition
candidates or make acquisitions on commercially acceptable terms. We also cannot
provide assurance that we will be able to
* effectively complete the integration of the Redfish and Bamboo Club
operations or any future acquired businesses with our existing
operations;
* effectively manage the Redfish and Bamboo Club restaurants or the
combined operations of our different restaurant concepts;
* achieve our operating and growth strategies with respect to these
businesses;
* obtain increased revenue opportunities as a result of the anticipated
synergies created by the Redfish, Bamboo Club, and other acquisitions;
or
* reduce the overall selling, general, and administrative expenses
associated with acquired operations.
The integration of the management, personnel, restaurant operations, and
facilities of Redfish and Bamboo Club and any other businesses that we may
acquire in the future could involve unforeseen difficulties. These difficulties
could disrupt our ongoing business, distract our management and employees, and
increase our expenses, which could have a material adverse effect on our
business, financial condition, and operating results.
We conduct due diligence reviews of each acquired business, and we obtain
professional opinions regarding each acquired business. Unforeseen liabilities
and difficulties, however, can arise in connection with the operation of an
acquired business. Contractual or other remedies may not be sufficient to
compensate us in the event unforeseen liabilities or other difficulties arise.
We strive to take advantage of the opportunities created by the combination
of acquired operations to achieve significant revenue opportunities and
substantial cost savings, including increased product offerings and decreased
operating expenses as a result of the elimination of duplicative facilities and
personnel associated with sales, marketing, administrative, and purchasing
functions. Significant uncertainties, however, accompany any business
combination. We may not be able to achieve revenue increases; integrate
facilities, functions, and personnel in order to achieve operating efficiencies;
or otherwise realize cost savings as a result of acquisitions. The inability to
achieve revenue increases or cost savings could have a material adverse effect
on our business, financial condition, and operating results.
WE FACE RISKS ASSOCIATED WITH THE EXPANSION OF OUR OPERATIONS.
The success of our business depends on our ability to expand the number of
our restaurants, either by developing or acquiring additional restaurants. Our
success also depends on our ability to operate and manage successfully our
growing operations. Our ability to expand successfully will depend upon a number
of factors, including the following:
* the availability and cost of suitable restaurant locations for
development;
* the availability of restaurant acquisition opportunities;
* the hiring, training, and retention of additional management and
restaurant personnel;
* the availability of adequate financing;
* the continued development and implementation of management information
systems;
* competitive factors; and
* general economic and business conditions.
17
The rate at which we will be able to increase the number of restaurants we
operate will vary depending upon whether we acquire existing restaurants or
develop new restaurants. The acquisition of existing restaurants depends upon
our ability to identify and acquire restaurants on satisfactory terms and
conditions. The opening of new restaurants depends upon our ability to
* locate suitable sites in terms of
- favorable population characteristics,
- density and household income levels,
- visibility, accessibility, and traffic volume,
- proximity to demand generators, including shopping malls, lodging,
and office complexes, and
- potential competition;
* obtain financing for construction, tenant improvements, furniture,
fixtures, and equipment;
* negotiate acceptable leases or terms of purchase;
* secure liquor licenses and zoning, environmental, health, and similar
regulatory approvals;
* recruit and train qualified personnel; and
* manage successfully the rate of expansion and expanded operations.
Increased construction costs and delays resulting from governmental
regulatory approvals, strikes or work stoppages, adverse weather conditions, and
various acts of God may also affect the opening of new restaurants. Newly opened
restaurants may operate at a loss for a period following their initial opening.
The length of this period will depend upon a number of factors, including
* the time of year the restaurant is opened,
* sales volume, and
* our ability to control costs.
We may not successfully achieve our expansion goals. Additional restaurants
that we develop or acquire may not be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing
customers from and reducing the sales volume of our existing restaurants in
those markets.
WE MAY NEED ADDITIONAL CAPITAL.
The development of new restaurants requires funds for construction, tenant
improvements, furniture, fixtures, equipment, training of employees, permits,
initial franchise fees, and other expenditures. We expect that cash flow from
operations, together with financing commitments, will be sufficient to develop
the additional two T.G.I. Friday's restaurants, the one new Redfish restaurant,
and the three new Bamboo Club restaurants that we plan to open during 2001. We
will require funds to develop additional T.G.I. Friday's, Redfish, and Bamboo
Club restaurants after 2001 and to pursue any additional restaurant development
or restaurant acquisition opportunities that may develop. In the future, we may
seek additional equity or debt financing to provide funds so that we can develop
or acquire additional restaurants. Such financing may not be available or may
not be available on satisfactory terms. If financing is not available on
satisfactory terms, we may be unable to satisfy our obligations under our
development agreements with Carlson Restaurants Worldwide or otherwise to expand
our restaurant operations. See "Special Considerations - We may not be able to
comply with all of the requirements of our development agreements." While debt
financing will enable us to add more restaurants than we otherwise would be able
to add, debt financing increases expenses and we must repay the debt regardless
of our operating results. Future equity financings could result in dilution to
our stockholders.
18
WE HAVE SIGNIFICANT BORROWINGS.
We have incurred significant indebtedness in connection with our growth
strategy. Our growth strategy has focused on restaurant acquisitions and
internal restaurant development. As of December 25, 2000, we had long-term debt
of approximately $44.4 million and a working capital deficit of $7.7 million.
Our borrowings will result in interest expense of approximately $4.1
million in 2001 and $4.35 million in 2002, based on currently prevailing
interest rates and assuming outstanding and contemplated indebtedness is paid in
accordance with the existing payment schedules without any prepayments or
additional borrowings. We must make these interest payments regardless of our
operating results. Currently, 56 of our restaurants are pledged to secure our
debt obligations. We also may seek additional equity or debt financing in the
future to provide funds to develop or acquire additional restaurants. See
"Special Considerations - We may need additional capital."
WE WILL BE SUBJECT TO THE RISKS ASSOCIATED WITH FRANCHISING OPERATIONS IF WE
BEGIN FRANCHISING THE REDFISH OR BAMBOO CLUB CONCEPTS.
We will be subject to the risks associated with franchising if we begin
franchising activities in the future. If we develop a franchising program, our
success as a franchisor will depend upon our ability to
* develop and implement a successful system of concepts and operating
standards;
* attract and identify suitable franchisees with adequate business
experience and access to sufficient capital to enable them to open and
operate restaurants in a manner consistent with our concepts and
operating standards;
* monitor the operations of our franchisees to ensure compliance with
our concepts and operating standards;
* identify suitable sites for restaurant development; and
* negotiate favorable purchasing terms with national distribution
companies.
We cannot provide assurance that we would be able to successfully meet these
challenges as a franchisor. In addition, as a franchisor we would be subject to
a variety of federal and state laws and regulations, including Federal Trade
Commission regulations, governing the offer and sale of franchises. These laws
and regulations
* impose registration and disclosure requirements on franchisors in the
offer and sale of franchises, and
* regulate the termination of franchises, the refusal to renew
franchises, and other substantive aspects of the relationships between
franchisors and franchisees.
These laws and regulations could result in significant increased expenses and
potential liabilities for our company in the event we engage in franchising
activities in the future.
WE FACE RISKS THAT AFFECT THE RESTAURANT INDUSTRY IN GENERAL.
A variety of factors over which we have no control may affect the ownership
and operation of restaurants. These factors include the following:
* adverse changes in national, regional, or local economic or market
conditions;
* increased costs of labor or food products;
* fuel, utility, and energy and other price increases;
* competitive factors;
* the number, density, and location of competitors;
* changing consumer tastes, habits, and spending priorities;
* the cost and availability of insurance coverage;
* management problems;
* uninsured losses;
* limited alternative uses for properties and equipment;
19
* changing demographics;
* changing traffic patterns;
* changes in government regulation; and
* weather conditions.
Third parties may file lawsuits against us based on discrimination,
personal injury, claims for injuries or damages caused by serving alcoholic
beverages to an intoxicated person or to a minor, or other claims. As a
multi-unit restaurant operator, our business could be adversely affected by
publicity about food quality, illness, injury, or other health and safety
concerns or operating issues at one restaurant or a limited number of
restaurants operated under the same name, whether or not we actually own or
manage the restaurants in question. We cannot predict any of these factors with
any degree of certainty. Any one or more of these factors could have a material
adverse effect on our business.
WE FACE INTENSE COMPETITION.
The restaurant business is highly competitive with respect to price,
service, and food type and quality. Restaurant operators also compete for
attractive restaurant sites and qualified restaurant personnel and managers. Our
restaurants compete with a large number of other restaurants, including national
and regional restaurant chains and franchised restaurant systems, as well as
with locally owned, independent restaurants. Many of our competitors have
greater financial resources, more experience, and longer operating histories
than we possess.
WE DEPEND UPON OUR SENIOR MANAGEMENT.
Our success depends, in large part, upon the services of our senior
management. The loss of the services of any members of our senior management
team could have a material adverse effect on our business.
WE FACE RISKS ASSOCIATED WITH GOVERNMENT REGULATION.
Various federal, state, and local laws affect our business. The development
and operation of restaurants depend to a significant extent on the selection and
acquisition of suitable sites. These sites are subject to zoning, land use,
environmental, traffic, and other regulations of state and local governmental
agencies. City ordinances or other regulations, or the application of such
ordinances or regulations, could impair our ability to construct or acquire
restaurants in desired locations and could result in costly delays. In addition,
restaurant operations are subject to
* licensing and regulation by state and local departments relating to
health, sanitation, safety standards, and fire codes;
* federal and state labor laws, including applicable minimum wage
requirements, tip-credit provisions, overtime regulations, workers'
compensation insurance rates, unemployment and other taxes, working
and safety conditions, and citizenship requirements; and
* state and local licensing of the sale of alcoholic beverages.
The delay or failure to obtain or maintain any licenses or permits
necessary for operations could have a material adverse effect on our business.
In addition, an increase in the minimum wage rate, employee benefit costs, or
other costs associated with employees could adversely affect our business. We
also are subject to the Americans with Disabilities Act of 1990 that, among
other things, may require us to install certain fixtures or accommodations in
new restaurants or to renovate existing restaurants to meet federally mandated
requirements.
Sales of alcoholic beverages represent an important source of revenue for
each of our restaurants. The temporary suspension or permanent loss or the
inability to maintain a liquor license for any restaurant would have an adverse
effect on the operations of that restaurant. We do not plan to open a restaurant
in any location for which we believe we cannot obtain or maintain a liquor
license.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
Historically, the market price of our common stock has been volatile. In
the future, the market price of our common stock will be subject to wide
fluctuations as a result of a variety of factors, including the following:
20
* quarterly variations in our operating results or those of other
restaurant companies;
* changes in analysts' estimates of our financial performance;
* changes in national and regional economic conditions, the financial
markets, or the restaurant industry;
* natural disasters; and
* other developments affecting our business or other restaurant
companies.
The trading volume of our common stock has been limited, which may increase
the volatility of the market price for our stock. In addition, the stock market
has experienced extreme price and volume fluctuations in recent years. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons not necessarily related to the operating
performances of these companies.
OUR MANAGEMENT CONTROLS A SIGNIFICANT PORTION OF THE VOTING POWER OF OUR COMMON
STOCK.
Our directors and officers currently own, directly or indirectly,
approximately 5,566,000 shares, or 40.3%, of our outstanding common stock. These
directors and officers also hold options to purchase an aggregate of 1,855,000
shares of common stock at exercise prices ranging from $2.00 to $5.00 per share.
As a result, these persons voting together will have significant voting power.
THE EXISTENCE OF STOCK OPTIONS AND WARRANTS MAY ADVERSELY AFFECT THE TERMS OF
FUTURE FINANCINGS.
Stock options to acquire an aggregate of 2,733,000 shares of common stock
currently are outstanding. An additional 379,466 have been reserved for issuance
upon exercise of options that may be granted under our existing stock option
plans. In addition, warrants to acquire 231,000 shares of common stock currently
are outstanding. During the terms of those options and warrants, the holders of
those securities will have the opportunity to profit from an increase in the
market price of our common stock. The existence of options and warrants may
adversely affect the terms on which we can obtain additional financing in the
future, and the holders of options and warrants can be expected to exercise
those options and warrants at a time when, in all likelihood, we would be able
to obtain additional capital by offering shares of common stock on terms more
favorable to us than those provided by the exercise of such options and
warrants.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK.
Sales of substantial amounts of common stock in the public market, or even
the potential for such sales, could adversely affect prevailing market prices
for our common stock and could adversely affect our ability to raise capital. As
of March 20, 2001, there were outstanding 14,045,601 shares of our common stock.
All of these shares are freely transferable without restriction under the
securities laws, unless they are held by our "affiliates," as that term is
defined in the securities laws. Affiliates also are subject to certain of the
resale limitations of Rule 144. Generally, under Rule 144, each person that
beneficially owns restricted securities with respect to which at least one year
has elapsed since the later of the date the shares were acquired from us or one
of our affiliates may, every three months, sell in ordinary brokerage
transactions or to market makers an amount of shares equal to the greater of 1%
of our then-outstanding common stock or the average weekly trading volume for
the four weeks prior to the proposed sale of such shares.
WE DO NOT ANTICIPATE THAT WE WILL PAY DIVIDENDS.
We have never paid any dividends on our common stock, and we do not
anticipate that we will pay dividends in the foreseeable future. We intend to
apply any earnings to the expansion and development of our business. In
addition, the terms of our credit facilities limit our ability to pay dividends
on our common stock.
21
ITEM 2. PROPERTIES
In December 1998, we entered into a five-year lease for space to serve as
our corporate offices. We believe that the leased space is adequate for our
current and reasonably anticipated needs and that we will be able to secure
adequate space upon the expiration of the lease.
We also lease space for all of our restaurants. The initial lease terms
range from 10 to 20 years and contain renewal options for up to 20 years. The
leases typically provide for a fixed rental payment plus a percentage of our
revenue in excess of a specified amount.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to routine contract, negligence,
employment related, and other litigation in the ordinary course of business. We
do not believe that we are subject to any pending litigation that will have a
material adverse effect on our business or financial condition that is not
otherwise reserved for in our consolidated financial statements.
We have settled our dispute with Ameriserve, our former primary restaurant
supplier, which in January 2000 filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Under the terms of the settlement we recouped
approximately $1,591,000 (net of related expenses) of previously increased food
costs, labor costs, and other expenses we incurred as a result of Ameriserve's
breach of its obligations with us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "MAIN" since October 30, 1992. The following table sets forth the
quarterly high and low sales prices of our common stock for the periods
indicated as reported by the Nasdaq Stock Market.
HIGH LOW
---- ---
1999
First Quarter................................... $3.63 $2.97
Second Quarter.................................. 3.88 3.00
Third Quarter................................... 4.00 3.13
Fourth Quarter.................................. 3.56 3.03
2000
First Quarter................................... $3.47 $3.00
Second Quarter.................................. 3.56 2.78
Third Quarter................................... 3.38 2.19
Fourth Quarter.................................. 3.56 2.63
2001
First Quarter (through March 20, 2001).......... $3.09 $2.50
On March 20, 2001, there were 914 holders of record of our common stock. On
March 20, 2001, the closing sale price of our common stock on the Nasdaq
National Market was $3.00 per share.
We have never declared or paid any cash dividends. We intend to retain any
earnings to fund the growth of our business and do not anticipate paying any
cash dividends in the foreseeable future. In addition, our existing debt
obligations limit our ability to pay cash dividends.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for our
company for the periods indicated. The selected consolidated financial data for
each of the five fiscal years in the period ending December 25, 2000 has been
derived from our consolidated financial statements, which have been audited by
Arthur Andersen LLP, independent accountants. These data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and the notes thereto and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Report.
FISCAL YEAR ENDED
---------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEC. 30, DEC. 29, DEC. 28, DEC. 27, DEC. 25,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenue ..................................................... $122,563 $107,018 $114,242 $140,294 $186,542
Restaurant operating expenses:
Cost of sales ............................................. 35,089 30,995 33,242 39,960 53,671
Payroll and benefits ...................................... 38,858 31,907 33,701 42,405 55,971
Depreciation and amortization ............................. 4,586 3,265 3,730 4,664 7,490
Other operating expenses .................................. 36,944 30,589 31,004 38,923 52,008
Reduction of disputed liabilities ......................... -- -- -- -- (1,591)
-------- -------- -------- -------- --------
Total restaurant operating expenses .................. 115,477 96,756 101,677 125,952 167,549
-------- -------- -------- -------- --------
Income from restaurant operations ........................... 7,086 10,262 12,565 14,342 18,993
Amortization of intangibles ............................... 1,450 953 983 990 996
General and administrative expenses ....................... 4,388 4,559 4,906 5,955 7,868
Pre-opening expenses ...................................... -- 287 661 2,228 1,370
New manager training expenses ............................. -- 562 731 1,748 1,914
Non-recurring items ....................................... 20,208 (2,390) (17) 494 (92)
Management fee income ..................................... -- (979) (1,082) (865) (611)
-------- -------- -------- -------- --------
Operating income (loss) ..................................... (18,960) 7,270 6,383 3,792 7,548
Interest expense and other, net ...................... 3,206 2,466 2,218 2,604 3,604
-------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary loss, and
cumulative effect of change in accounting principle ........ (22,166) 4,804 4,165 1,188 3,944
Provision for income taxes .................................. -- -- -- 50 250
-------- -------- -------- -------- --------
Net income (loss) before extraordinary loss and cumulative
effect of change in accounting principle ................... $(22,166) $ 4,804 $ 4,165 $ 1,138 $ 3,694
======== ======== ======== ======== ========
Net income (loss)(1)(2)(3) .................................. $(22,166) $ 3,166 $ 4,165 $ 970 $ 3,678
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income (loss) before extraordinary loss and
cumulative effect of change in accounting principle ...... $ (2.73) $ 0.47 $ 0.39 $ 0.11 $ 0.33
Net income (loss)(1)(2)(3) ................................ $ (2.73) $ 0.31 $ 0.39 $ 0.09 $ 0.33
Weighted average shares outstanding - diluted ............. 8,110 10,098 10,608 10,407 11,117
BALANCE SHEET DATA:
Working capital ........................................... $ (1,343) $ (1,330) $ (2,807) $(16,652) $ (7,692)
Total assets .............................................. 70,848 61,168 70,255 86,525 107,574
Long-term debt, net of current portion .................... 33,809 24,308 28,264 31,513 44,395
Stockholders' equity ...................................... 16,585 22,203 26,372 27,383 40,499
- ----------
(1) Fiscal 2000 includes a charge of $16,000 for early extinguishment of debt.
(2) Fiscal 1999 include a charge of $168,000, or $0.02 per share, due to the
cumulative effect of change in accounting principle related to the adoption
of SOP 98-5. See Note 3 to our consolidated financial statements.
(3) Fiscal 1997 include an extraordinary loss from debt extinguishment of
$1,638,000, or $0.16 per share.
24
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statement of operations
data for each of the eight quarters in the period ended December 25, 2000. We
believe that all necessary adjustments have been included to present fairly the
quarterly information when read in conjunction with our consolidated financial
statements. The operating results for any quarter are not necessarily indicative
of the results for any subsequent quarter.
FISCAL QUARTER ENDED
--------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 2000
--------------------------------------------- -------------------------------------------
MAR. 29(1) JUNE 28 SEPT. 27 DEC. 27(2) MAR. 27 JUNE 26 SEPT. 25 DEC. 25(3)
---------- ------- -------- ---------- ------- ------- -------- ----------
Revenue .............................. $31,464 $35,615 $35,291 $ 37,921 $44,339 $47,297 $48,293 $46,613
Cost of sales ........................ 8,964 10,080 9,911 11,005 13,273 13,697 13,561 13,140
Income (loss) before income taxes,
extraordinary loss, and cumulative
effect of change in accounting
principle............................ 731 1,148 735 (1,426) 318 1,103 1,104 1,419
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss) .................... 563 1,148 735 (1,426) 404 1,083 1,013 1,178
======= ======= ======= ======== ======= ======= ======= =======
Net income (loss) per share
before income taxes, extraordinary
loss, and cumulative effect of
change in accounting principle ...... 0.07 0.11 0.07 (0.14) 0.04 0.11 0.10 0.08
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss) per share .......... 0.05 0.11 0.07 (0.14) 0.04 0.11 0.10 0.08
======= ======= ======= ======== ======= ======= ======= =======
- ----------
(1) Includes a charge of $168,000, or $0.02 per share, due to the cumulative
effect of change in accounting principle related to the adoption of SOP
98-5. See Note 3 to our consolidated financial statements.
(2) Includes a charge of $494,000, or $0.05 per share, due to the lawsuit
settlement in February 2000 offset by legal and settlement costs. See Note
2 to our consolidated financial statements.
(3) Includes a net gain of $92,000, or $0.01 per share, due to the settlement
of condemnation proceedings offset by impairment of the assets of three
under-performing restaurants. Includes a reduction in liabilities related
to the Ameriserve settlement. See Note 2 to our consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We commenced our restaurant operations in May 1990 with the acquisition of
four T.G.I. Friday's restaurants in Arizona and Nevada. During the past ten
years, we have grown through acquisitions and development of new restaurants. We
currently own 64 restaurants and manage an additional six restaurants.
During 1996, we had a change in management and implemented a long-term
business strategy to enhance our financial position, to place more emphasis on
our casual dining business in certain designated areas, and to dispose of
underperforming assets.
The first step was to strengthen our financial position. This was
accomplished by (i) the sale of 1,250,000 shares of common stock for $2,500,000
through a private placement transaction in January 1997; (ii) the sale of five
restaurants in northern California in January 1997 for $10,800,000, of which
$8,000,000 in proceeds were used to repay debt (see Notes 2 and 5 to our
consolidated financial statements); and (iii) new borrowings of $21,300,000 with
a repayment period of 15 years. Proceeds from the new borrowings were used
primarily to pay off debt with shorter repayment periods (see Note 5 to our
consolidated financial statements).
We also renegotiated our development agreements with Carlson Restaurants
Worldwide, Inc. to reduce the number of T.G.I. Friday's restaurants we were
required to build with the intent to focus on those development territories that
were most economically favorable (see Note 7 to our consolidated financial
statements). In addition, we recorded net restructuring and reorganization gains
of $17,000 in 1998 and $2,390,000 in 1997 related to the disposition of various
non-core assets and the write-down of certain core assets to realizable values
(see Note 2 to our consolidated financial statements).
25
After these steps, we strengthened our operation and commenced expansion
plans, principally through developing T.G.I. Friday's restaurants. This
expansion was financed by borrowings from various lenders.
The next step was taken in 1999 with the acquisition of our Redfish
restaurants and concept and in 2000 with the acquisition of the Bamboo Club
restaurants and concept. This Bamboo Club acquisition was financed in part by
our rights offering to stockholders in 2000.
In 2000, we entered into a new loan with Bank of America in the amount of
$15,000,000, which we believe will be sufficient to fund all of the T.G.I.
Friday's restaurants we plan to complete by June 2002. We executed an interest
rate swap and locked in our interest rate on $12,500,000 of the loan total. We
believe that this is a favorable rate, as our existing financing is at a higher
rate, and that this portion of the loan will be sufficient to fund our current
construction and expansion of T.G.I. Friday's restaurants for the next 18
months. The interest rate is performance based and indexed to the LIBOR rate
plus a predetermined spread based upon our adjusted senior funded debt (as
defined in the loan documents) to EBITDA. The interest rate is currently 8.51%.
The interest rate swap qualifies as a cash flow hedge in accordance with SFAS
No. 133. On a periodic basis, we will adjust the fair market value of the swap
on the balance sheet and offset the amount of the change to other comprehensive
income.
Our strategy is to reduce operating costs and expand our restaurant
operations. This will entail continuing to build T.G.I. Friday's, Redfish, and
Bamboo Club restaurants and evaluating other concepts in the casual dining
segment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
that certain items of income and expense bear to total revenue:
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 25,
1998 1999 2000
------------ ------------ ------------
Revenue 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of sales .................................... 29.1 28.5 28.8
Payroll and benefits ............................. 29.5 30.2 30.0
Depreciation and amortization .................... 3.3 3.3 4.0
Other operating expenses ......................... 27.1 27.8 27.9
Reduction of disputed liabilities ................ -- -- (0.9)
----- ----- -----
Total restaurant operating expenses .............. 89.0 89.8 89.8
----- ----- -----
Income from restaurant operations .................. 11.0 10.2 10.2
Amortization of intangibles ...................... 0.9 0.7 0.6
General and administrative expenses .............. 4.3 4.2 4.2
Preopening expenses .............................. 0.6 1.6 0.7
New manager training expenses .................... 0.6 1.2 1.0
Non-recurring items .............................. -- 0.4 0.0
Management fee income ............................ (0.9) (0.6) (0.3)
----- ----- -----
Operating income ................................... 5.5 2.7 4.0
Interest expense and other, net .................... 1.9 1.9 1.9
----- ----- -----
Income before income taxes, extraordinary loss, and
cumulative effect of change in accounting principle 3.6% 0.8% 2.1%
===== ===== =====
FISCAL 2000 COMPARED WITH FISCAL 1999
Revenue for the fiscal year ended December 25, 2000 increased 33.0% to
$186.5 million compared with $140.3 million for the year ended December 27,
1999. This increase was primarily a result of opening 13 new restaurants in 1999
and seven new restaurants in 2000. Same-store sales increased 5.1% for fiscal
2000 as compared with an increase in same-store sales of 4.9% for the prior
year. Additionally, we purchased the two Bamboo Club restaurants in July 2000.
26
Revenue from alcoholic beverages accounted for 24.4% of revenue for both the
fiscal years.
Cost of sales as a percentage of revenue increased to 28.8% in 2000 from
28.5% in 1999. This increase was due primarily to supply interruption of our
food and related items. We replaced our major supplier during the year. Much of
our loss was recouped from the past supplier.
Labor costs decreased as a percentage of revenue to 30.0% in 2000 from
30.2% in 1999. This decrease was primarily due to a maturing of the restaurants
we opened in 1999. Once a restaurant has reached operating maturity, labor
costs, as a percentage of revenue, are normalized. Additionally, during 1999 we
implemented a program to increase our restaurant management staff in many of our
restaurants from four to five managers. This increase in management staff has
had the effect of reducing turnover by improving the quality of life of our
managers, which we believe has ultimately led to lower labor costs.
Other operating expenses include rent, real estate taxes, common area
maintenance charges, advertising, insurance, maintenance, and utilities. In
addition, the franchise agreements between Carlson Restaurants Worldwide, and
our company require a 4% of net sales royalty and a 4% of net sales marketing
contribution. Each year we contribute to a TGI Friday's national marketing pool.
For 1999 and 2000, the pool contribution was 2.1% of net sales. This
contribution offsets a portion of our general 4% marketing requirement. Other
operating expenses increased as a percentage of revenue to 27.9% in 2000 from
27.8% in 1999. The increase was due primarily to additional energy and workers'
compensation costs, especially in California.
In total, depreciation and amortization increased as a percentage of
revenue to 4.6% in 2000 from 4.0% in 1999. The increase was due primarily to the
number of new restaurants we have opened in 1999 and 2000.
General and administrative expenses as a percentage of revenue of 4.2% in
2000 is the same as the 1999 percentage. We have made a significant effort to
keep this expense in line. Improved expense control, tight control on head
count, and a larger revenue base over which to spread some fixed expenses helped
us maintain this expense, as a percentage of sales, at last year's level.
On December 29, 1998, we adopted Statement of Position 98-5 ("SOP 98-5")
"REPORTING ON THE COSTS OF START-UP ACTIVITIES," as promulgated by the American
Institute of Certified Public Accountants, which requires us to expense
pre-opening expenses as they are incurred. Prior to 1999, we capitalized such
expenses and amortized them over a period of one year. Pursuant to SOP 98-5,
pre-opening expenses of $1,370,000, or 0.7% of revenue, were charged to
operations during the year ended December 25, 2000 as compared to $2,228,000, or
1.6% of revenue, being charged to operations during the year ended December 27,
1999.
New manager training expenses are those costs incurred in training newly
hired or promoted managers, as well as those costs incurred to relocate those
managers to permanent management positions. These expenses increased to
$1,914,000, or 1.0% of revenue, for the year ended December 25, 2000 as compared
to $1,748,000, or 1.2% of revenue, for the year ended December 27, 1999.
In 2000, we concluded by either payment or settlement the legal and
condemnation issues that were reserved for in our provision for non-recurring
and projected losses. Concluded items created the net decrease in the reserve
for losses account of $1,064,000, leaving a balance of $149,000 on December 25,
2000 to cover three minor contingencies.
Interest expense was approximately $3,615,000 in 2000 compared with
$2,604,000 in 1999. This increase was due to debt incurred in the development of
new restaurants and generally higher interest rates for much of 2000.
An income tax provision of $250,000 was recorded in 2000 because of the
potential income tax exposure in several of the states in which we operate. In
1999, we recorded a $50,000 expense related to state income taxes due in certain
states where net operating losses are no longer available to us. At December 25,
2000, we had approximately $8,100,000 of net operating loss carryforwards as
well as capital loss carryforwards and tax credits available to offset future
income for federal income tax purposes. We have determined that a 100% valuation
allowance is appropriate on the deferred tax asset created by the net operating
loss carryforwards as a result of our current restaurant expansion plans. We
re-evaluate the need for a valuation allowance at each quarter.
27
FISCAL 1999 COMPARED WITH FISCAL 1998
Revenue for the fiscal year ended December 27, 1999 increased 22.8% to
$140,294,000 compared with $114,242,000 in the year ended December 28, 1998.
This increase was primarily a result of the acquisition of six restaurants in
May 1998 and the development of three new restaurants in 1998 and 13 new
restaurants in 1999. Additionally, same-store sales increased 4.9% in fiscal
1999 as compared with an increase in same-store sales of 4.7% for the prior
year. Revenue from alcoholic beverages accounted for 24.4% of revenue for the
fiscal year ended December 27, 1999 as compared with 23.3% for the year ended
December 28, 1998.
Cost of sales as a percentage of revenue decreased to 28.5% in 1999 from
29.1% in 1998. This decrease was due to management's on-going efforts to reduce
food costs by implementing more efficient and cost-effective practices in food
preparation, as well as reducing costs through more efficient purchasing of food
items.
Labor costs increased as a percentage of revenue to 30.2% in 1999 from
29.5% in 1998. This increase was primarily due to increased staffing needs
during the initial months of operation for newly opened restaurants. Once a
restaurant has reached operating maturity, labor costs, as a percentage of
revenue, will be normalized. Additionally, during 1999 we implemented a program
to increase our restaurant management staff in many of our restaurants from four
to five managers. This increase in management staff is intended to reduce
turnover by improving the quality of life of our managers, which we believe will
ultimately lead to lower labor costs.
Other operating expenses include rent, real estate taxes, common area
maintenance charges, advertising, insurance, maintenance, and utilities. In
addition, the franchise agreements between Carlson Restaurants Worldwide and our
company require a 4% royalty and a contribution to a national marketing pool of
up to 4% of gross sales, although we were only required to contribute 2.1% for
1999. Other operating expenses increased as a percentage of revenue to 27.8% in
1999 from 27.1% in 1998. The increases were due primarily to additional
marketing and promotional costs.
In total, depreciation and amortization decreased as a percentage of
revenue to 4.0% in 1999 from 4.2% in 1998. The decrease was due primarily to the
relatively fixed nature of these expenses as compared with our increased
revenue.
General and administrative expenses as a percentage of revenue decreased to
4.2% in 1999 from 4.3% in 1998. This decrease was in spite of costs incurred in
training our restaurant management staff on new software and hardware installed
to ensure that our restaurant computer systems were Year 2000 compliant, as well
as additional recruiting costs associated with the hiring of managers for the
restaurants we opened in 1999.
On December 29, 1998, we adopted Statement of Position 98-5 ("SOP 98-5")
"REPORTING ON THE COSTS OF START-UP ACTIVITIES," as promulgated by the American
Institute of Certified Public Accountants, which requires us to expense
preopening expenses as they are incurred. Prior to 1999, we capitalized such
expenses and amortized them over a period of one year. Pursuant to SOP 98-5,
pre-opening expenses of $2,228,000, or 1.6% of revenue, were charged to
operations during the year ended December 27, 1999 as compared with amortization
of pre-opening expenses of $661,000, or 0.6% of revenue, for fiscal 1998.
New manager training expenses are those costs incurred in training newly
hired or promoted managers, as well as those costs incurred to relocate those
managers to permanent management positions. Due to our aggressive growth, these
expenses increased to $1,748,000, or 1.2% of revenue, for the year ended
December 27, 1999 as compared with $731,000, or 0.6% of revenue, for fiscal
1998.
In 1999, we increased the provision for non-recurring items and the reserve
for projected losses by approximately $494,000. This represents (a) a decrease
in the reserve of approximately $341,000 related to an adjustment of legal and
settlement costs, and (b) an increase in the reserve of approximately $835,000
in connection with the settlement of a lawsuit in February 2000.
Interest expense was approximately $2,604,000 in 1999 compared with
$2,218,000 in 1998. This increase was due to debt incurred in the development of
new restaurants and to the acquisition of six new restaurants in May 1998.
28
No income tax provision was recorded in 1998 due to the availability of net
operating loss carryforwards. In 1999, we recorded a $50,000 expense related to
state income taxes due in certain states where net operating losses are no
longer available to us.
LIQUIDITY AND CAPITAL RESOURCES
Our primary use of funds over the past five years has been for the
acquisition of existing T.G.I. Friday's restaurants, the completion of new
T.G.I. Friday's restaurants, and the acquisition of the Redfish and Bamboo Club
restaurants and concepts. These acquisitions were financed principally through
the issuance of long-term debt and internally generated cash. We have also
expended funds for the development of new restaurants.
During 2000, we purchased the remaining minority interest in Redfish
America, LLC for $500,000 in cash and two Bamboo Club restaurant operations and
the "Bamboo Club" name and concept for approximately $12,000,000 in cash. We
financed the acquisition of the Bamboo Club restaurants with approximately $7.0
million from available cash resources and $5.0 million of short-term debt from
one of our lenders. On October 10, 2000, we completed our stockholder rights
offering by issuing 4,011,740 additional shares, or the maximum number available
to our qualified stockholders. The net proceeds of $9,425,000 were used to repay
the $5.0 million short-term debt and the remaining $4.3 million will be used to
fund future new restaurant development.
Net cash flows from operating activities were $3,824,000 in 2000,
$16,219,000 in 1999, and $11,124,000 in 1998. These were supplemented by net
cash flows from financing of $22,496,000 in 2000, $3,755,000 in 1999, and
$4,092,000 in 1998, which we used to fund our acquisitions and development of
new restaurants.
Our current liabilities exceed our current assets due in part to cash
expended on our development requirements and because the restaurant business
receives substantially immediate payment for sales, while payables related to
inventories and other current liabilities normally carry longer payment terms,
usually 15 to 30 days. At December 25, 2000, we had a deficit in working capital
of approximately $7,692,000.
At December 25, 2000, we had a cash balance of $4,565,000. Monthly cash
receipts have been sufficient to pay all obligations as they become due.
At December 25, 2000, we had long-term debt of $44,395,000 and current
portion of long-term debt of $2,006,000.
Approximately $18,454,000 of this debt is a term loan comprised of five
notes payable to one lender. Three of the notes bear interest at 9.457% per
annum and two of the notes bear interest at the one month LIBOR rate plus 320
basis points. The notes are payable in equal monthly installments of principal
and interest that total approximately $223,000 per month. The notes mature on
May 1, 2012.
During April 1999, we obtained a $5.0 million revolving line of credit with
another lender. The line of credit is available to finance construction and
other costs associated with developing new restaurants. Borrowings under the
line of credit bear interest at bank prime plus 112.5 basis points. The line of
credit includes covenants related to our net worth, fixed charge coverage ratio,
profitability, and access to capital. We were in compliance with these covenants
at December 25, 2000. The line of credit matures on July 15, 2001. At December
25, 2000, we had no borrowings outstanding under this line of credit.
During November 1999, we entered into two working capital revolving loan
agreements with another lender. One agreement provides for a maximum of
$8,050,000 to finance 80% of the costs to develop seven T.G.I. Friday's
restaurants. Borrowings under this agreement will mature in 10 years. These
borrowings are secured by the assets financed with the borrowings and are
guaranteed by certain of our subsidiaries. The other agreement provides for a
maximum of $3,150,000 to finance 80% of the costs to furnish and equip seven
T.G.I. Friday's restaurants. Borrowings under this agreement are secured by the
assets financed with the borrowings and will mature in seven years. Borrowings
under both agreements bear interest at 2.65% over the "30-Day Dealer Commercial
Paper Rate," as defined in the agreements, or a combined rate of 8.5% at
December 25, 2000. At December 25, 2000, we had outstanding borrowings of
$6,320,000 under these agreements. These agreements include covenants related to
our fixed charge coverage ratio and debt to adjusted cash flow ratio. We were in
compliance with these covenants at December 25, 2000.
29
The remainder of our long-term debt consists of notes payable to various
lending institutions. These notes bear interest at rates ranging from 7.75% to
11.0% and mature at various times over the next 15 years.
We plan to develop at least six additional restaurants during fiscal 2001.
Subsequent to December 25, 2000, we have not borrowed any funds under the credit
arrangements described above or new credit arrangements that we entered into
after December 25, 2000. As of March 16, 2001, we have permanent debt and
sale-leaseback financing commitments totaling approximately $17,500,000 that we
will use to fund restaurant development activity and working capital
requirements through the remainder of 2001. The previously discussed $15,000,000
Bank of America development line and funds from one of our sale-leaseback
providers of $2,500,000 make up this total commitment. The terms of the Bank of
America loan are described in Note 10 to our consolidated financial statements.
The terms of the pending sale-leaseback transactions are essentially the same as
the sale-leaseback transactions completed in 2000.
We lease all of our restaurants with terms ranging from 10 to 20 years.
Minimum payments on our existing lease obligations are approximately $10,100,000
per year through 2002.
We believe that our current resources, our lines of credit, and expected
cash flows from operations will be sufficient to fund our capital needs during
the next 15 months at our anticipated level of new restaurant development. We
may be required to obtain additional capital to fund our planned growth after
June 2002. Potential sources of any such capital may include bank financing,
strategic alliances, and additional offerings of our equity or debt securities.
We cannot provide assurance that such capital will be available from these or
other potential sources, and the lack of capital could have a material adverse
effect on our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 25, 2000, we did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. We do not hold investment securities that would require disclosure of
market risk.
Our market risk exposure is limited to interest rate risk associated with
our credit instruments. We incur interest on loans made at variable interest
rates of 1.125% over prime, 3.20% over LIBOR, and 2.65% over "30-Day Dealer
Commercial Paper Rates." At December 25, 2000, we had outstanding borrowings on
these loans of approximately $19,651,000. Our net interest expense for 2000 was
$3,604,000. A one percent variation in either the 30-day LIBOR rate or the
Dealer Commercial Paper Rates would have increased or decreased our total
interest expense by $196,000 for the year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto and the supplementary data commencing at page F-1 of this report,
which financial statements, report, notes, and data are incorporated by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to our directors is
incorporated by reference to our Proxy Statement to be filed for our 2001 Annual
Meeting of Stockholders. The information required by this Item relating to our
executive officers is included in Item 1, "Business - Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our
Proxy Statement to be filed for our 2001 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to our
Proxy Statement to be filed for our 2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to our
Proxy Statement to be filed for our 2001 Annual Meeting of Stockholders.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) Financial statements are listed in the index to the consolidated
financial statements on page F-1 of this Report.
(2) No financial statement schedules are included because they are not
applicable or are not required or the information required to be set
forth therein is included in the consolidated financial statements or
notes thereto.
(b) REPORTS ON FORM 8-K.
Not applicable.
(c) EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------ -------
3.1 Certificate of Incorporation of the Company(1)
3.2 Certificate of Amendment of Restated Certificate of Incorporation(l)
3.3 Amended and Restated Bylaws of the Company(1)
10.1 Company's 1990 Stock Option Plan(2)
10.5 Form of Franchise Agreement between the Company and TGI Friday's,
Inc.(3)
10.9 Form of Management Agreement between Main St. California II, Inc. and
Main St. California, Inc., a wholly owned subsidiary of Company(4)
10.10 Master Incentive Agreements between Main St. California II, Inc. and
Main St. California, Inc., a wholly owned subsidiary of Company(4)
10.11 Employment Agreement with Bart A. Brown, Jr.(5)
10.11A Employment Agreement dated January 1, 1999 between the Company and
Bart A. Brown, Jr.(6)
10.13 Promissory Note between the Company and CNL Financial I, Inc.(5)
10.14 Promissory Note between the Company and CNL Financial I, Inc.(5)
10.15 Promissory Note between the Company and CNL Financial I, Inc.(5)
10.16 1995 Stock Option Plan(7)
10.17 Amended and Restated Development Agreement between TGI Friday's, Inc.
and Cornerstone Productions, Inc., a wholly owned subsidiary of the
Company(8)
10.18 Amended and Restated Development Agreement between TGI Friday's, Inc.
and Main St. California, Inc., a wholly owned subsidiary of the
Company(8)
10.18A First Amendment to Development Agreement dated February 10, 1999,
between TGI Friday's, Inc. and Main St. California, Inc., a wholly
owned subsidiary of the Company(6)
10.19 Amended and Restated Development Agreement between TGI Friday's, Inc.
and Main St. Midwest, Inc., a wholly owned subsidiary of the
Company(8)
10.20 Amended and Restated Purchase Agreement between RJR Holdings, Inc.
and Main St. California, Inc., a wholly owned Subsidiary of the
Company(8)
10.21 Development Agreement dated April 22, 1998 between Main St.
California, Inc. and TGI Fridays, Inc., and First Amendment to
Development Agreement dated February 10, 1999 between TGI Friday's,
Inc. and Main St. California, Inc., a wholly owned subsidiary of the
Company(6)
10.22 Stock Option Agreement dated August 5, 1996, between the Company and
John F. Antioco for 800,000 shares of Common Stock(9)
10.22A Stock Option Agreement dated June 15, 1998, between the Company and
John F. Antioco amending the Stock Option Agreement dated August 5,
1996(9)
32
EXHIBIT
NUMBER EXHIBIT
------ -------
10.23 Stock Option Agreement dated December 16, 1996, between the Company
and Bart A. Brown, Jr. for 250,000 shares of Common Stock. (The
Company issued three additional Stock Option Agreements that are
substantially identical in all material respects, except as to number
of shares. The four Stock Option Agreements give rights to purchase a
total of 625,000 shares of Common Stock.)(9)
10.23A Schedule of Stock Option Agreements substantially identical to
Exhibit 10.23(9)
10.24 Stock Option Agreement dated July 14, 1997, between the Company and
Bart A. Brown, Jr. for 75,000 shares of Common Stock. (The Company
issued one additional Stock Option Agreement that is substantially
identical in all material respects, except as to number of shares.
The two Stock Option Agreements give rights to purchase a total of
175,000 shares of Common Stock.)(9)
10.24A Schedule of Stock Option Agreements substantially identical to
Exhibit 10.24(9)
10.25 Stock Option Agreement dated June 15, 1998, between the Company and
James Yeager for 15,000 shares of Common Stock. (The Company issued
two additional Stock Option Agreements that are substantially
identical in all material respects, except as to option holder and
number of shares. The three Stock Option Agreements give rights to
purchase a total of 50,000 shares of Common Stock.)(9)
10.25A Schedule of Stock Option Agreements substantially identical to
Exhibit 10.25(9)
10.26 Stock Option Agreement dated December 31, 1998, between the Company
and Tim Rose for 10,000 shares of Common Stock. (The Company issued
one additional Stock Option Agreement that is substantially identical
in all material respects, except as to option holder and number of
shares. The two Stock Option Agreements give rights to purchase a
total of 160,000 shares of Common Stock.)(9)
10.26A Schedule of Stock Option Agreements substantially identical to
Exhibit 10.26(9)
10.27 Registration Rights Agreement dated August 5, 1996, between the
Company and John F. Antioco(10)
10.28 1999 Incentive Stock Plan.(11)
10.29 Working Capital Management Agreement Reducing Revolver Loan Agreement
dated November 2, 1999, between the Company and Merrill Lynch
Business Financial Services, Inc.
10.30 Working Capital Management Agreement Reducing Revolver Loan Agreement
dated November 22, 1999, between the Company and Merrill Lynch
Business Financial Services, Inc.
10.31 Form of Unconditional Guaranty executed in connection with Working
Capital Management Agreement Reducing Revolver Loan Agreement dated
November 22, 1999. (Such guarantees were executed by Main St.
California, Inc., Cornerstone Productions, Inc., and Redfish America,
LLC.)
10.32 Form of Security Agreement executed in connection with Working
Capital Management Agreement Reducing Revolver Loan Agreement dated
November 22, 1999. (Such security agreements were executed by Main
St. California, Inc. and Cornerstone Productions, Inc.)
10.35 Credit Agreement dated April 2, 1999, between the Company and
Imperial Bank (12)
10.35A First Amendment to Credit Agreement dated August 2, 1999, between the
Company and Imperial Bank (12)
10.35B Second Amendment to Credit Agreement dated July 13, 2000, between the
Company and Imperial Bank (12)
10.36 Revolving Promissory Note dated July 13, 2000, in the principal
amount of $5,000,000 from the Company, as Borrower, to Imperial Bank,
as Lender (12)
10.37 Term Promissory Note dated July 13, 2000, in the principal amount of
$5,000,000 from the Company, as Borrower, to Imperial Bank, as Lender
(12)
10.38 Unconditional Guarantee of Payment of Term Promissory Note executed
by John F. Antioco, as Guarantor, in favor of Imperial Bank, as
Lender (12)
10.39 Unconditional Guarantee of Payment of Term Promissory Note executed
by Bart A. Brown, Jr., as Guarantor, in favor of Imperial Bank, as
Lender (12)
10.40 401(k) Profit Sharing Plan (13)
33
EXHIBIT
NUMBER EXHIBIT
------ -------
10.41 Loan and Security Agreement dated January 31, 2001, between Bank of
America, N.A., the Company, and certain subsidiaries of the Company
listed therein
21 List of Subsidiaries
23 Consent of Arthur Andersen LLP
- ----------
(1) Incorporated by reference to the Company's Form 10-K for the year ended
December 30, 1991, filed with the Securities and Exchange Commission on or
about March 31, 1992.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-40993) which became effective in September 1991.
(3) Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on or about April 15, 1994.
(4) Incorporated by reference to the Company's Form 8-K Report filed with the
Commission in January 1997.
(5) Incorporated by reference to the Company's Form 10-K for the year ended
December 30, 1996, filed with the Securities and Exchange Commission on or
about April 14, 1997.
(6) Incorporated by reference to the Company's Form 10-K for the year ended
December 28, 1998, filed with the Securities and Exchange Commission on
March 29, 1999.
(7) Incorporated by reference to Company's Proxy Statement for its 1995 Annual
Meeting of Stockholders.
(8) Incorporated by reference to the Company's Form 10-K for the year ended
December 29, 1997, filed with the Securities and Exchange Commission on
March 27, 1998.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 333-78155), filed with the Securities and Exchange
Commission on May 10, 1999.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-3 (Registration No. 333-78161) as declared effective on May 14, 1999.
(11) Incorporated by reference to Company's Registration Statement on Form S-8
(Registration No. 333-89931), filed with the Securities and Exchange
Commission on October 29, 1999.
(12) Incorporated by reference to the Company's Form 8-K dated July 21, 2000,
as filed with the Securities and Exchange Commission on July 24, 2000.
(13) Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 333-55100) filed with the Securities and Exchange
Commission on February 6, 2001.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAIN STREET AND MAIN INCORPORATED
Date: March 26, 2001 By: /s/ Bart A. Brown, Jr.
----------------------------------------
Bart A. Brown, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE POSITION DATE
--------- -------- ----
/s/ John F. Antioco Chairman of the Board March 26, 2001
- --------------------------
John F. Antioco
/s/ Bart A. Brown, Jr. President, Chief Executive March 26, 2001
- -------------------------- Officer, and Director (Principal
Bart A. Brown, Jr. Executive Officer)
/s/ William G. Shrader Executive Vice President, March 26, 2001
- -------------------------- Chief Operating Officer, and
William G. Shrader Director
/s/ Lawrence K. White Vice President-Finance (Principal March 26, 2001
- -------------------------- Financial and Accounting Officer),
Lawrence K. White Secretary and Treasurer
/s/ Jane Evans Director March 26, 2001
- --------------------------
Jane Evans
/s/ John C. Metz Director March 26, 2001
- --------------------------
John C. Metz
/s/ Debra Bloy Director March 26, 2001
- --------------------------
Debra Bloy
35
MAIN STREET AND MAIN INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 25, 2000 and
December 27, 1999......................................................... F-3
Consolidated Statements of Operations for the fiscal years ended
December 25, 2000, December 27, 1999, and December 28, 1998............... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended December 25, 2000, December 27, 1999, and
December 28, 1998......................................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 25, 2000, December 27, 1999, and December 28, 1998............... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Main Street and Main Incorporated:
We have audited the accompanying consolidated balance sheets of MAIN STREET AND
MAIN INCORPORATED (a Delaware corporation) AND SUBSIDIARIES, (the Company) as of
December 25, 2000 and December 27, 1999, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the years
ended December 25, 2000, December 27, 1999, and December 28, 1998. These
consolidated 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 audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 25,
2000 and December 27, 1999, and the results of its operations and its cash flows
for the years ended December 25, 2000, December 27, 1999, and December 28, 1998,
in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona
March 12, 2001
F-2
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
DECEMBER 25, DECEMBER 27,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 4,565 $ 3,055
Accounts receivable ................................................ 6,263 3,434
Inventories ........................................................ 1,624 1,453
Prepaid expenses ................................................... 744 621
--------- ---------
Total current assets ......................................... 13,196 8,563
Property and equipment, net (Note 3) ................................. 63,857 58,006
Other assets, net .................................................... 2,466 2,072
Goodwill, net (Note 3) ............................................... 26,355 15,779
Franchise costs, net (Note 3) ........................................ 2,387 2,105
--------- ---------
Total assets ................................................. $ 108,261 $ 86,525
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 2,006 $ 1,830
Accounts payable ................................................... 9,228 14,033
Other accrued liabilities .......................................... 9,654 9,352
--------- ---------
Total current liabilities .................................... 20,888 25,215
Long-term debt, net of current portion ............................... 44,395 31,513
Other liabilities and deferred credits ............................... 2,479 2,414
--------- ---------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued and outstanding in 2000 and 1999.................. -- --
Common stock, $.001 par value, 25,000,000 shares authorized,
14,044,791 and 10,025,776 shares issued and outstanding in 2000
and 1999, respectively............................................. 14 10
Additional paid-in capital ......................................... 53,624 44,190
Accumulated deficit ................................................ (13,139) (16,817)
--------- ---------
Total stockholders equity .................................... 40,499 27,383
--------- ---------
Total stockholders equity and liabilities .................... $ 108,261 $ 86,525
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
----------------------------------------------
DECEMBER 25, DECEMBER 27, DECEMBER 28,
2000 1999 1998
------------ ------------ ------------
Revenue ............................................................. $ 186,542 $ 140,294 $ 114,242
--------- --------- ---------
Restaurant operating expenses
Cost of sales ..................................................... 53,671 39,960 33,242
Payroll and benefits .............................................. 55,971 42,405 33,701
Depreciation and amortization ..................................... 7,490 4,664 3,730
Other operating expenses .......................................... 52,008 38,923 31,004
Reduction of disputed liabilities ................................. (1,591) -- --
--------- --------- ---------
Total restaurant operating expenses ......................... 167,549 125,952 101,677
--------- --------- ---------
Income from restaurant operations ................................... 18,993 14,342 12,565
Amortization of intangible assets ................................. 996 990 983
General and administrative expenses ............................... 7,868 5,955 4,906
Pre-opening expenses .............................................. 1,370 2,228 661
New manager training expenses ..................................... 1,914 1,748 731
Non-recurring items ............................................... (92) 494 (17)
Management fees ................................................... (611) (865) (1,082)
--------- --------- ---------
Operating income .................................................... 7,548 3,792 6,383
Interest expense and other, net.................................... 3,604 2,604 2,218
--------- --------- ---------
Income before income taxes, extraordinary loss, and cumulative
effect of change in accounting principal............................ 3,944 1,188 4,165
Provision for income taxes ........................................ 250 50 --
--------- --------- ---------
Net income before income taxes, extraordinary loss, and
cumulative effect of change in accounting principal................. 3,694 1,138 4,165
Extraordinary loss on debt extinguishment ......................... (16) -- --
Cumulative effect of change in accounting principle ............... -- (168) --
--------- --------- ---------
Net income .................................................. $ 3,678 $ 970 $ 4,165
========= ========= =========
Basic earnings per share:
Net income before extraordinary loss and cumulative effect of
change in accounting principle.................................... $ 0.34 $ 0.11 $ 0.42
Extraordinary loss on debt extinguishment ......................... -- -- --
Cumulative effect of change in accounting principle ............... -- (0.02) --
--------- --------- ---------
Net income .................................................. $ 0.34 $ 0.09 $ 0.42
========= ========= =========
Diluted earnings per share:
Net income before extraordinary loss and cumulative effect of
change in accounting principle.................................... $ 0.33 $ 0.11 $ 0.39
Extraordinary loss on debt extinguishment ......................... -- -- --
Cumulative effect of change in accounting principle ............... -- (0.02) --
--------- --------- ---------
Net income .................................................. $ 0.33 $ 0.09 $ 0.39
========= ========= =========
Weighted average number of shares outstanding:
Basic ........................................................... 10,944 10,008 9,976
========= ========= =========
Diluted ......................................................... 11,117 10,407 10,608
========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
--------------------- ADDITIONAL
PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
------ ----- ------- ------- -----
BALANCE, December 29, 1997 ........................ 9,971 $ 10 $ 44,145 $(21,952) $ 22,203
Shares issued in connection with options
exercised (net)................................. 5 -- 4 -- 4
Net income ...................................... -- -- -- 4,165 4,165
------- ------ -------- -------- --------
BALANCE, December 28,1998 ......................... 9,976 10 44,149 (17,787) 26,372
Shares issued in connection with options
exercised (net)................................. 50 -- 41 -- 41
Net income ...................................... -- -- -- 970 970
------- ------ -------- -------- --------
BALANCE, December 27, 1999 ........................ 10,026 10 44,190 (16,817) 27,383
Shares issued in connection with rights
offering (net).................................. 4,012 4 9,421 -- 9,425
Shares issued to employees ...................... 7 -- 13 -- 13
Net income ...................................... -- -- -- 3,678 3,678
------- ------ -------- -------- --------
BALANCE, December 25, 2000 ........................ 14,045 $ 14 $ 53,624 $(13,139) $ 40,499
======= ====== ======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
------------------------------------------------
DECEMBER 25, DECEMBER 27, DECEMBER 28,
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 3,678 $ 970 $ 4,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 8,486 5,654 5,374
Gain on sale of assets .................................. (289) -- 2,062
Non-recurring items ..................................... (92) 494 (17)
Extraordinary loss from debt extinguishments ............ 16 -- --
Changes in assets and liabilities:
Accounts receivable ..................................... (2,829) (1,338) (865)
Inventories ............................................. (171) (613) 203
Prepaid expenses ........................................ (123) (28) (304)
Other assets, net ....................................... (414) 29 (341)
Accounts payable ........................................ (4,085) 9,850 293
Other accrued liabilities ............................... 367 1,201 554
-------- -------- --------
Cash provided by operating activities ............... 3,824 16,219 11,124
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from note receivable ........................ -- -- 757
Cash paid to acquire additional interest in subsidiary..... -- (500) --
Net additions to property and equipment ................... (18,103) (31,401) (19,002)
Cash paid to acquire franchise rights and goodwill ........ (12,139) (238) (3,318)
Cash received from the sale of assets ..................... 5,432 7,926 6,791
-------- -------- --------
Cash used by investing activities ................... (24,810) (24,213) (14,772)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ........................ 9,541 41 4
Financing and offering costs paid ......................... (103) -- --
Long-term debt financing .................................. 16,442 5,296 5,620
Principal payments on long-term debt ...................... (3,384) (1,582) (1,532)
-------- -------- --------
Cash provided by financing activities ............... 22,496 3,755 4,092
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..................... 1,510 (4,239) 444
CASH AND CASH EQUIVALENTS, BEGINNING ........................ 3,055 7,294 6,850
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING ........................... $ 4,565 $ 3,055 $ 7,294
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest .................... $ 4,163 $ 3,218 $ 2,557
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Main Street and Main Incorporated (the "Company") is a Delaware corporation
engaged in the business of acquiring, developing, and operating restaurants. The
Company currently owns 56 T.G.I. Friday's restaurants and operates 6 T.G.I.
Friday's restaurants under management agreements. The Company also owns and
operates six Redfish and two Bamboo Club restaurants.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated in consolidation. All references herein refer to the Company and
its subsidiaries.
FISCAL YEAR
The Company operates on a fiscal year that ends on the Monday on or before
December 31.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, 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.
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
The consolidated financial statements reflect the application of the
following accounting policies:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include funds on hand, short-term money market
investments, and certificate of deposit accounts with original maturities of 90
days or less.
REVENUE RECOGNITION
Revenue from restaurant sales is recognized when food and beverage items
are sold.
DEFERRED GAINS
Deferred gains on sale-leaseback transactions are accreted to income as a
reduction of rent expense over the related lease terms in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 98, ACCOUNTING FOR
LEASES.
MANAGEMENT FEE INCOME
The Company earns management fees on restaurants operated under contracts
with a single owner. The management fees are based upon a percentage of adjusted
revenues in accordance with the respective management agreements for each
restaurant. In January 2000, three of the restaurants were sold by the owner,
terminating the management agreements for those restaurants. As of December 25,
2000, the Company managed six restaurants.
INVENTORIES
Inventories consist primarily of food, beverages, and supplies and are
stated at the lower of cost determined on a first-in, first-out basis (FIFO) or
net realizable value.
F-7
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash equivalents, accounts receivable, other assets,
accounts payable, accrued liabilities, and other liabilities approximate fair
value due to the short-term nature of these instruments. The revolving lines of
credit approximate fair value as they bear interest at indexed rates. Fixed rate
long-term debt is currently at rates similar to current quotations for like
debt.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, depreciated on a straight-line
basis over the estimated useful lives, and consist of the following (in
thousands):
USEFUL LIVES DECEMBER 25, DECEMBER 27,
(YEARS) 2000 1999
------- ------------ ------------
Land .................................................. $ 534 $ 534
Building and leasehold improvements ................... 5-20 45,163 38,955
Kitchen equipment ..................................... 5-7 19,004 15,431
Restaurant equipment .................................. 5-10 8,205 6,472
Smallwares and decor .................................. 5-10 7,077 5,849
Office equipment, software, and furniture.............. 5-7 4,226 3,009
-------- --------
84,209 70,250
Less: Accumulated depreciation and amortization........ (25,737) (19,457)
-------- --------
58,472 50,793
Construction in progress .............................. 4,982 7,213
-------- --------
Total .............................................. $ 63,454 $ 58,006
======== ========
Construction in progress (CIP) represents costs incurred by the Company
during the development of future restaurant sites for fixtures and building
improvements at future restaurant sites. As of December 25, 2000, and December
27, 1999, approximately $4,800,000 and $6,000,000, respectively, of the CIP
balance was related to assets held with the intent to sell upon completion and
subsequently lease back.
Depreciation expense was $7,066,000 for 2000, $4,734,000 for 1999, and
$3,786,000 for 1998.
OTHER ASSETS
Other assets include miscellaneous assets that individually do not exceed
5% of total assets, and as such are not disclosed separately. Other assets, as
of December 25, 2000, and December 27, 1999, were $2,466,000 and $2,072,000,
respectively, net of accumulated amortization of $754,000 and $734,000,
respectively.
FRANCHISE COSTS
The Company has paid certain franchise costs for the exclusive right to
operate restaurants in certain of its franchise territories. These costs are
being amortized on a straight-line basis over the life of the agreement and
consist of the following (in thousands):
F-8
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
AMORTIZATION
PERIOD DECEMBER 25, DECEMBER 27,
(YEARS) 2000 1999
------------ ------------ ------------
Franchise fees and license costs..... 20-30 $ 3,156 $ 2,708
Less: Accumulated amortization....... (769) (603)
------- -------
Total .......................... $ 2,387 $ 2,105
======= =======
Franchise fees and license costs represent the value assigned to the franchise
agreements in the regions acquired and to the licenses to operate the
restaurants. These agreements provide for an initial term of 20 to 30 years,
with two renewal terms of 10 years each. Prepaid franchise fees relate to the
restaurants the Company is committed to develop under the terms of the
development agreements.
GOODWILL
The Company has recorded significant goodwill in conjunction with major
acquisitions, most recently the Bamboo Club purchase. These costs are being
amortized on a straight-line basis over the estimated useful life of the
goodwill and consist of the following (in thousands):
AMORTIZATION
PERIOD DECEMBER 25, DECEMBER 27,
(YEARS) 2000 1999
------------ ------------ ------------
Acquisition of Main Street
California ......................... 20-30 $19,207 $19,222
Acquisition of Bamboo Club .......... 15 11,611 --
Less: Accumulated amortization ...... (4,463) (3,443)
------- -------
Total .......................... $26,355 $15,779
======= =======
PRE-OPENING COSTS
On December 29, 1998, the Company adopted Statement of Position 98-5 ("SOP
98-5"), "REPORTING ON THE COSTS OF START-UP ACTIVITIES," as promulgated by the
American Institute of Certified Public Accountants, which requires that the
Company expense pre-opening expenses as they are incurred. Prior to December 29,
1998, such expenses were capitalized and amortized over a period of one year.
The cumulative effect of this change in accounting principle resulted in a
charge of $168,000 on December 29, 1998.
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
DECEMBER 25, DECEMBER 27,
2000 1999
------------ ------------
Accrued payroll .......................... $3,139 $2,888
Reserve for projected losses ............. 149 1,153
Accrued sales tax ........................ 1,345 1,174
Accrued insurance ........................ 1,669 1,594
Accrued rent ............................. 1,661 1,995
Other accrued liabilities ................ 1,691 548
------ ------
Total ............................... $9,654 $9,352
====== ======
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." Under the liability
method, deferred taxes are provided based on temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
F-9
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
liabilities, using enacted tax rates in the years in which the differences are
expected to reverse. Deferred tax assets are reviewed periodically for
recoverability and valuation allowances are provided as necessary.
EARNINGS PER SHARE
The Company has calculated earnings per share ("EPS") in accordance with
SFAS No. 128, "EARNINGS PER SHARE." The following table sets forth basic and
diluted EPS computations for the years ended December 25, 2000, December 27,
1999, and December 28, 1998 (in thousands, except per share amounts):
2000 1999 1998
---------------------------- ---------------------------- ------------------------------
PER PER PER
SHARE SHARE SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- ------ ------ ---------- ------ ------ ---------- ------ ------
Basic EPS ............... $3,678 10,944 $0.34 $970 10,008 $0.09 $4,165 9,976 $0.42
Effect of stock
options and warrants.... -- 173 0.01 -- 399 -- -- 632 0.03
------ ------ ----- ---- ------ ----- ------ ------ -----
Diluted EPS ............. $3,678 11,117 $0.33 $970 10,407 $0.09 $4,165 10,608 $0.39
====== ====== ===== ==== ====== ===== ====== ====== =====
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," which established revised standards for the
reporting of financial and descriptive information about operating segments in
financial statements.
The Company has three operating segments that are managed based on its
restaurant concepts, T.G.I. Friday's, Redfish, and Bamboo Club. SFAS No. 131
allows for aggregation of similar operating segments into a single reportable
operating segment if the components are considered similar under certain
criteria. As a result of the foregoing, the Company believes that its
restaurants meet the criteria supporting aggregation of all restaurants into one
operating segment. Accordingly, the Company has not presented separate financial
information for each of its operating segments, as the Company's consolidated
financial statements present its one reportable segment.
STAFF ACCOUNTING BULLETIN NO. 101
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL
STATEMENTS," which provides additional guidance in applying generally accepted
accounting principles for revenue recognition in consolidated financial
statements. The issuance of SAB No. 101 did not have a material impact on the
revenue recognition method of the Company.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133," which deferred
implementation of SFAS No. 133 until fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 requires all derivatives to be carried on the
balance sheet at fair value. Changes in the fair value of derivatives must be
recognized in the Company's Consolidated Statement of Operations when they
occur; however, there is an exception for derivatives that qualify as hedges as
defined by SFAS No. 133. If a derivative qualifies as a hedge, a company can
elect to use "hedge accounting" to eliminate or reduce the income statement
volatility that would arise from reporting changes in a derivative's fair value.
In June 2000, the FASB issued SFAS No. 138, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT OF FASB STATEMENT NO. 133."
SFAS No. 138 adds to the guidance related to accounting for derivative
instruments and hedging activities. This statement should be adopted
concurrently with SFAS No. 133.
F-10
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company adopted these standards on December 26, 2000. The adoption of
both SFAS No. 133 and SFAS No. 138 is not expected to materially impact the
Company's financial results.
RECLASSIFICATIONS
Certain amounts in 1999 and 1998 have been reclassified to conform with the
current year presentation.
ACCOUNTING FOR LONG-TERM ASSETS
The FASB has issued SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," which the
Company adopted in 1996. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the expected
future cash flows (undiscounted and without interest charges) from an asset to
be held and used in operations is less than the carrying value of the asset, an
impairment loss must be recognized in the amount of the difference between the
carrying value and the fair value of the assets.
During 1996, the Company implemented a long-term business strategy to place
more emphasis on the core business and to dispose of underperforming core assets
and non-core assets. As a result of implementing this strategy, combined with
certain events occurring during fiscal years ended 2000, 1999, and 1998, the
Company recognized a gain on the sale of assets, certain non-recurring charges,
and impairment of certain assets as follows (in thousands):
DECEMBER 25, DECEMBER 27, DECEMBER 28,
2000 1999 1998
------------ ------------ ------------
Impairment of core assets held for disposal .......... $ -- $ -- $ (648)
Impairment of core assets used in operations ......... 832 -- --
Other non-recurring items ............................ (924) 494 631
------ ----- ------
$ (92) $ 494 $ (17)
====== ===== ======
IMPAIRMENT OF CORE ASSETS HELD FOR DISPOSAL
During 1998, a favorable lease payoff was negotiated related to the Front
Row Sports Grill, a restaurant the Company had developed in Portland, Oregon. A
$648,000 gain was recognized in connection with the lease settlement, resulting
in a reversal of the remaining reserve.
IMPAIRMENT OF CORE ASSETS USED IN OPERATIONS
The company reviews the operations and cash flows of each of its locations
on a regular basis. At the end of the fourth quarter of 2000, events and
circumstances indicated that certain leasehold improvements and other operating
assets at three under-performing locations were impaired under SFAS No. 121.
Accordingly, the Company recorded a pre-tax charge in the fourth quarter of 2000
amounting to approximately $832,000 to adjust the carrying value of these assets
to their estimated fair market value.
OTHER NON-RECURRING ITEMS
Other non-recurring costs include severance, contract termination,
professional service costs, and settlement of non-recurring litigation. The
non-recurring items of $924,000, net, in 2000 represents the final settlement
gain (in excess of book value) the company expects to receive from the City and
County of San Francisco, California, in connection with condemnation proceedings
against a restaurant the Company operated. The non-recurring items of $494,000
in fiscal 1999 include an approximately $835,000 increase in reserves for the
final settlement and legal costs, which the Company settled in February 2000.
This was offset by gains of approximately $341,000 resulting primarily from the
adjustment of legal costs required to settle litigation.
F-11
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REDUCTION OF DISPUTED LIABILITIES
During the first quarter of 2000, the Company's primary food distributor
declared bankruptcy. Leading up to the bankruptcy, the Company experienced a
reduction in performance by Ameriserve, causing disruption in the Company's
operations and an increase in delivery and food costs as the Company searched
for alternative sources of supply. The level of service provided by Ameriserve
continued to decline subsequent to the bankruptcy. When Ameriserve declared
bankruptcy, the Company had open accounts payable due Ameriserve, but also had
the right of offset for costs incurred because Ameriserve dissolved its casual
dining business. As of December 25, 2000, the Company was in negotiation to
resolve the dispute with Ameriserve. A final settlement was reached which
reduced the liability due by approximately $1,591,000. This amount is included
in the fourth quarter of 2000.
RESERVES
Valuation reserves for the years ended December 25, 2000, December 27,
1999, and December 28, 1998 consist of the following:
BEGINNING EXPENSE BALANCE AT BALANCE AT
OF PERIOD RECORDED PAYMENTS MADE END OF PERIOD
--------- -------- ------------- -------------
RESERVE FOR PROJECTED LOSSES:
Year ended December 25, 2000 $1,153,000 $ 90,000 $(1,094,000) $ 149,000
Year ended December 27, 1999 1,367,000 494,000 (708,000) 1,153,000
Year ended December 28, 1998 2,115,000 631,000 (1,379,000) 1,367,000
INSURANCE AND CLAIMS RESERVES:
Year ended December 25, 2000 $1,593,800 $3,764,600 $(3,689,700) $1,668,700
Year ended December 27, 1999 1,282,400 3,909,000 (3,597,600) 1,593,800
Year ended December 28, 1998 1,536,500 3,234,000 (3,488,100) 1,282,400
In 1998, the Company increased the reserve for projected losses by
approximately $631,000. The reserve was decreased by approximately $648,000
related to a favorable lease settlement and approximately $731,000 in other
costs and legal fees associated with terminating the lease. The reserve balance
in other accrued liabilities at December 28, 1998, was approximately $1,367,000
for the remaining severance, legal, and condemnation costs.
In 1999, the Company had increased the reserve for projected losses by
approximately $494,000 because the cost of the now-settled lawsuit offset by the
adjustment of the expected reduced legal costs in conjunction with the
condemnation proceeding in San Francisco. The reserve was decreased by
approximately $329,000 related to a favorable determination in condemnation
proceedings. The reserve was increased by approximately $835,000 due to
settlement of a lawsuit in February 2000. The reserve balance in other accrued
liabilities at December 27, 1999, was approximately $1,153,000 for the estimated
remaining legal and condemnation costs.
In 2000, the Company settled and paid its pending lawsuit in connection
with the condemnation proceedings in San Francisco. Subsequently, the Company
settled the condemnation proceedings in San Francisco. Due to resolutions of
these items and there being no other contingent events of which the Company is
aware, the reserve for projected losses decreased to a balance of $149,000 at
December 25, 2000.
3. BUSINESS COMBINATIONS
In July 2000, the Company acquired the assets, name, and concept of the
Bamboo Club restaurants for $12,000,000 in cash. This acquisition has been
accounted for as a purchase, and the results of operations of the acquired
business have been included in the consolidated financial statements since the
date of acquisition. The excess purchase price over the fair value of net assets
acquired was $11,611,000 and has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The net book value of
leasehold, equipment, and other assets was $389,000. Each of these is being
depreciated per current company policy.
The following unaudited consolidated pro forma information is presented as
if the Bamboo Club acquisition had occurred at the beginning of the periods
presented.
F-12
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 25, DECEMBER 27,
2000 1999
------------ ------------
(In Thousands, Except
Per Share Amounts)
Total revenues .............................................. $ 189,848 $ 145,834
Net income before extraordinary loss and cumulative effect
of change in accounting principle ......................... 4,373 1,769
Net income .................................................. 4,357 1,601
========= =========
Basic earnings per share:
Net income before extraordinary loss and cumulative effect
of change in accounting principle ....................... 0.40 0.18
Net income after extraordinary loss and cumulative effect
of change in accounting principle ....................... 0.40 0.16
========= =========
Diluted earnings per share:
Net income before extraordinary loss and cumulative effect
of change in accounting principle ...................... 0.39 0.17
Net income after extraordinary loss and cumulative effect
of change in accounting principle ...................... 0.39 0.15
========= =========
The consolidated pro forma information includes adjustments to give effect
to amortization of goodwill. The unaudited consolidated pro forma information is
not necessarily indicative of the combined results that would have occurred had
the acquisition been made at the beginning of the periods presented, nor is it
indicative of the results that may occur in the future.
4. INCOME TAXES
Deferred income taxes arise due to differences in the treatment of income
and expense items for financial reporting and income tax purposes. In prior
years, the Company generated net operating losses and in 2000, 1999, and 1998
the Company utilized net operating losses. The effect of temporary differences
and carryforwards that gave rise to deferred tax balances at December 25, 2000,
and December 27, 1999, were as follows (in thousands):
DECEMBER 25, DECEMBER 27,
NET DEFERRED TAX ASSETS 2000 1999
- ----------------------- ------------ ------------
(In Thousands)
Temporary differences:
Basis differences in investments ............................. $ 664 $ --
Basis differences in depreciable and amortizable assets....... (1,930) (799)
Provision for estimated expenses ............................. 2,019 1,353
Revenue recognition .......................................... (1,016) --
Other ........................................................ -- (300)
Tax carryforwards:
General business and AMT credits ............................. 5,689 4,335
Net operating loss and capital loss carryforwards............. 3,070 4,223
Valuation reserve .............................................. (7,894) (8,390)
------- -------
Total ................................................... $ 602 $ 422
======= =======
The amounts recorded as net deferred tax assets at December 25, 2000, and
December 27, 1999, are included as a component of other assets in the
consolidated balance sheets. The remaining net deferred tax asset as of December
25, 2000, consists primarily of the benefits to be obtained from the use of net
operating loss carryforwards and credits expected to be realized in the future.
At December 25, 2000, the Company had approximately $7,600,000 of federal
net operating and capital loss carryforwards to be used to offset future income
for income tax purposes. These carryforwards expire in the years 2002 to 2012.
F-13
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reconciliations of the federal income tax rate to the Company's effective
tax rate were as follows:
DECEMBER 25, DECEMBER 27, DECEMBER 28,
2000 1999 1998
------------ ------------ ------------
Statutory federal rate ................ 34.0% 34.0% 34.0%
State taxes, net of federal benefit.... 6.0 6.0 6.0
Nondeductible expenses ................ 0.4 1.4 6.3
Benefit of FICA credit ................ (17.5) (58.7) (15.2)
Change in valuation allowance ......... (16.5) 21.5 (31.1)
------ ------ ------
6.4% 4.2% 0.0%
====== ====== ======
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MATURITY DECEMBER 25, DECEMBER 27,
DATES INTEREST RATES 2000 1999
----- -------------- ---- ----
Term Loan II .............. 2012 9.457% and the one $18,454 $19,329
month LIBOR rate
plus 320 basis
points
Other notes payable ....... 1999-2015 7.75 - 11.0% 27,947 14,014
------- -------
Total ................ 46,401 33,343
Less current portion ...... (2,006) (1,830)
------- -------
Total ................ $44,395 $31,513
======= =======
In March 1997, the Company repaid existing debt with $8,000,000 of proceeds
from the Northern California sale and with proceeds from new borrowings. The new
borrowings ("Term Loan II") consist of five notes from one lender. Three of the
notes bear interest at 9.457% and two of the notes bear interest at the one
month LIBOR rate plus 320 basis points. All of the notes are payable in equal
monthly installments of principal and interest of approximately $223,000
(combined) until the notes are paid in full on May 1, 2012. Proceeds from the
Term Loan II were also used to repay a note payable to Carlson Restaurants
Worldwide including accrued interest of $301,000, with the remaining proceeds
used for general corporate purposes.
The Term Loan II is secured by the assets of 16 T.G.I. Friday's restaurants
and contains one financial covenant relative to a fixed charge coverage ratio,
which the Company currently is in compliance with. Assets at 33 T.G.I. Friday's
restaurants and assets at three Redfish restaurants have been pledged as
collateral for other notes payable.
In May 1998, the Company acquired six T.G.I. Friday's restaurants in
northern California for approximately $6,800,000, funded in part by the
assumption of existing long-term debt and the addition of new long-term debt for
a total increase in debt of $5,737,000.
During April 1999, the Company obtained a $5.0 million revolving line of
credit with another lender. The line of credit is available to finance
construction and other costs associated with developing new restaurants.
Borrowings under the line of credit bear interest at bank prime plus 112.5 basis
points. The line of credit includes covenants related to net worth, fixed charge
coverage ratio, profitability, and access to capital. The Company was in
compliance with these covenants at December 25, 2000. The line of credit matures
on July 15, 2001. At December 25, 2000, the Company had no borrowings
outstanding under this line of credit.
F-14
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Maturities of long-term debt, giving effect to the borrowings discussed
above, are as follows at December 25, 2000 (in thousands):
2001 .............................. $ 2,006
2002 .............................. 2,403
2003 .............................. 2,006
2004 .............................. 2,198
2005 .............................. 2,383
Thereafter ........................ 35,405
-------
Total ........................ $46,401
=======
6. STOCKHOLDERS' EQUITY
In October 2000, the Company completed a rights offering by selling
4,011,740 shares of its common stock to its existing stockholders. The net
proceeds were $9,425,000.
STOCK OPTIONS
In July 1990, the Company's Board of Directors approved a stock option plan
("the 1990 Plan"). The 1990 Plan provides for the issuance of up to 250,000
options to acquire shares of the Company's Common Stock. The options are
intended to qualify as incentive stock options within the meaning of Section
422A of the Internal Revenue Code of 1986 or as options which are not intended
to meet the requirements of such section ("non-statutory stock options"). Awards
granted under the 1990 Plan also may include stock appreciation rights,
restricted stock awards, phantom stock, performance shares, or non-employee
director options.
The exercise price of all incentive stock options granted under the 1990
Plan must be at least equal to the fair market value of such shares as of the
date of grant or, in the case of incentive stock options granted to the holder
of 10% or more of the Company's Common Stock, at least 110% of the fair market
value of such shares on the date of grant. The exercise price of all
non-statutory stock options granted under the 1990 Plan shall be determined by
the Board of Directors of the Company at the time of grant. The maximum exercise
period for which the options may be granted is 10 years from the date of grant
(five years in the case of incentive sock options granted to an individual
owning more than 10% of the Company's Common Stock).
In 1996, the Company adopted the 1995 Stock Option Plan ("the 1995 Plan"),
with terms comparable to the 1990 Plan, covering 325,000 shares of Common Stock.
In 1999, the Company adopted the 1999 Incentive Stock Plan ("the 1999 Plan"),
with terms comparable to the 1990 Plan, covering 1,000,000 shares of Common
Stock.
In addition to the 1990, 1995, and 1999 Stock Option Plans, the Company's
Board of Directors approved the issuance of 210,000 non-statutory stock options
to two of the Company's officers during 1998 and 460,000 non-statutory stock
options to two of the Company's officers in 1999.
STOCK-BASED COMPENSATION PLANS
FASB Statement No.123 "ACCOUNTING FOR STOCK-BASED COMPENSATION" was issued
by the FASB in 1995 and, if fully adopted, changes the methods for recognition
of cost on plans similar to those of the Company. Adoption of FASB Statement No.
123 is optional; however, pro forma disclosures as if the Company had adopted
the cost recognition method are required. Had compensation cost for stock
options awarded under this plan been determined consistent with FASB Statement
No. 123, the Company's net income and earnings per share would have reflected
the following pro forma amounts:
F-15
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 25, DECEMBER 27, DECEMBER 27,
2000 1999 1998
------------ ----------- ------------
(In Thousands, Except Per Share Amount)
Net Income:
As Reported .............. $3,678 $ 970 $4,165
Pro Forma ................ $2,736 $ 169 $3,351
Primary EPS:
As Reported .............. $ 0.34 $0.09 $ 0.42
Pro Forma ................ 0.25 0.02 0.33
A summary of the status of the Company's stock option plans at December 25,
2000, December 27, 1999, and December 28, 1998, and changes during the years
then ended is presented in the table and narrative below:
2000 1999 1998
-------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at beginning
of period ......................... 2,439,000 $3.22 2,381,000 $2.98 2,077,500 $2.90
Granted ............................ 473,000 3.38 737,000 3.30 416,000 3.27
Exercised .......................... 0 0.00 (234,459) 2.42 (2,500) 2.50
Cancelled .......................... (179,000) 2.88 (444,541) 3.77 (110,000) 2.54
--------- --------- ---------
Options outstanding at end
of period ......................... 2,733,000 3.05 2,439,000 3.22 2,381,000 2.98
========= ========= =========
Exercisable at end of period ....... 1,859,333 2.91 1,642,544 2.79 1,590,577 2.56
========= ========= =========
Weighted average fair value of
options granted ................... $1.52 $1.82 $1.87
===== ===== =====
The weighted average fair value at the date of grant for options granted
during fiscal 2000 and 1999 were estimated using the Black-Scholes pricing model
with the following assumptions: weighted average risk-free interest rate of
6.29% and 5.95%; weighted average volatility of 52.70% and 65.76%; expected life
of 4 years; and weighted average dividend yield of 0.0%.
Details regarding the options outstanding as of December 25, 2000 are as
follows:
OUTSTANDING EXERCISABLE
--------------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OF SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- -------------- --------- ---------------- ----- ------ -----
$1.72 - $2.75 927,500 6.05 $2.22 927,500 $2.22
$3.00 - $3.63 1,560,500 8.39 $3.29 686,833 $3.23
$4.00 - $5.00 245,000 6.15 $4.63 245,000 $4.63
--------- ---------
Total .......... 2,733,000 1,859,333
========= =========
COMMON STOCK WARRANTS
As of December 25, 2000, and December 27, 1999, the Company had 231,277
outstanding warrants to acquire its common stock with its lenders in connection
with the issuances of previously paid off debt. The warrants are exercisable at
$9.08 per share and expire in March 2004.
F-16
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
DEVELOPMENT AGREEMENTS
The Company is obligated under four separate development agreements to open
31 new T.G.I. Friday's restaurants through 2003. Due to the tighter 2000
economic environment, especially in California, the Company's primary operating
area, the Company was unable to fully comply with its development agreements.
Early in the year, the Company began discussions with Carlson Restaurants
Worldwide to amend its development agreements. The development agreements give
Carlson Restaurants Worldwide certain remedies in the event the Company fails to
timely comply with the development agreements, including the right, under
certain circumstances, to reduce the number of restaurants the Company may
develop in related franchised territory or to terminate the Company's exclusive
rights to develop restaurants in the related franchised territory. The Company's
development territories include Arizona, Nevada, New Mexico, California and the
Kansas City and El Paso metropolitan areas.
FRANCHISE, LICENSE, AND MARKETING AGREEMENTS
In accordance with the terms of the T.G.I. Friday's restaurant franchise
agreements, the Company is required to pay franchise fees of $50,000 for each
restaurant opened. The Company also is required to pay a royalty of up to 4% of
gross sales. Royalty expense was approximately $6,634,000, $4,830,000, and
$3,929,000 under these agreements during 2000, 1999, and 1998, respectively. In
addition, the Company could be required to spend up to 4% of gross sales on
marketing. Marketing expense under these agreements was approximately
$4,163,000, $2,733,000, and $1,805,000 during 2000, 1999, and 1998,
respectively.
OPERATING LEASES
The Company leases land and restaurant facilities under operating leases
having terms expiring at various dates through January 2020. The restaurant
leases have from two to three renewal clauses of five years each at the option
of the Company, and have provisions for contingent rentals based upon a
percentage of gross sales. The Company's minimum future lease payments as of
December 27, 1999, were as follows (in thousands):
2001 ......................... $ 10,058
2002 ......................... 9,617
2003 ......................... 9,041
2004 ......................... 8,353
2005 ......................... 7,656
Thereafter ................... 70,218
--------
Total ................... $114,943
========
Rental expense during 2000, 1999, and 1998 was approximately $8,662,000,
$6,948,000, and $5,604,000, respectively. In addition, the Company paid
contingent rentals of $957,000, $678,000, and $523,000 during 2000, 1999, and
1998, respectively. The difference between rent expense and rent paid is
included in other liabilities and deferred credits in the accompanying
consolidated balance sheets.
SALE-LEASEBACK TRANSACTIONS
Historically, the Company has entered into sale-leaseback transactions in
order to provide further funds for development activities. During fiscal 2000,
the Company completed five sale-leaseback transactions at an aggregate selling
price of $14,494,000. The transactions resulted in a deferred gain of
approximately $1,316,000, which will be accreted to income as a reduction of
rent expense over the twenty-year lease terms. Pursuant to the lease agreements,
annual base rent equals approximately $1,449,000 as of December 25, 2000, with
10% increases in base rent occurring in 2005, 2010, and 2015. In addition, the
Company may be required to pay percentage rent if revenue levels reach certain
break points. In 2000, no percentage rent was required for these locations. In
1999, the Company completed two sale-leaseback transactions at an aggregate
selling price of $5,229,000, which resulted in a deferred gain of $245,000. In
1998, the Company completed two sale-leaseback transactions at an aggregate
selling price of $4,000,000, which resulted in a deferred gain of $110,000.
F-17
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the first quarter of fiscal 2001, the Company expects to complete
two sale-leaseback transactions with regard to the buildings, fixtures, and
improvements at two restaurant sites whereby the Company leases back the
restaurant sites under operating leases over a twenty-year period under terms
similar to those in the preceding paragraph. The Company will receive proceeds
of approximately $2,500,000. The transactions are expected to result in a
deferred gain that is not currently determinable, but will be accreted to income
as a reduction of rent over the twenty-year lease term.
CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, the ultimate resolution of
these matters will not have a material impact on the Company's financial
position or results of operations.
The Company is also subject, from time to time, to audit by various taxing
authorities reviewing the Company's income, property, sales, use, and payroll
taxes. Management believes that any finding from such audits will not have a
material impact on its financial position or results of operations.
8. BENEFIT PLANS
The Company maintains a 401(k) Savings Plan for all of its employees. The
Company currently matches 50% of the participants' contributions for the first
4% of the participants' compensation. Contributions by the Company were
approximately $174,000, $122,000, and $100,000 during 2000, 1999, and 1998,
respectively.
9. RELATED PARTY TRANSACTIONS
In October 1997, the Company sold three T.G.I. Friday's restaurants in
Colorado and Nebraska to Sherman Restaurants, LLC for $2,768,000. Sherman
Restaurants, LLC is controlled by Samuel Sherman, the brother of Steven Sherman.
Steven Sherman served as a director of the Company until February 2000, when he
resigned from the Board.
In December 1993, the Company entered into a five year lease agreement for
corporate office space with an entity controlled by Steven Sherman, who served
as a director of the Company until February 2000. During 1998 the lease was
amended to extend the original term through January 31, 2004. Approximately
$224,000, $244,000, and $177,000 were paid in rent for this leased space during
2000, 1999, and 1998, respectively.
The Company is management partner in joint ventures with another party. As
a result, the Company is obligated to provide both restaurant management and
capital to the joint ventures. The Company receives a management fee for these
services. The fees totaled $611,000, $865,000, and $1,082,000 in each of the
fiscal years of 2000, 1999, and 1998, respectively. The Company had receivables
of approximately $2,210,000 and $1,756,000 for 2000 and 1999, respectively,
related to the funding of operations of the joint ventures.
10. SUBSEQUENT EVENTS
On January 31, 2001, the Company entered into a $15,000,000 Development
Facility financing agreement with Bank of America. For a period of 18 months,
Bank of America will provide construction and permanent financing for certain
Company T.G.I. Friday's units and equipment based upon either the appraised or
real estate values. On January 31, 2001, the Company entered into an interest
rate swap agreement with Bank of America. This swap agreement fixes the
Company's one-month LIBOR base to 6.26% per annum on a notional amount of
$12,500,000 through June 2014. All the loans provided by the Development
Facility have interest rates that have a performance based formula of senior
funded debt to EBITDA, with the range over 30-day LIBOR being 1.75% to 2.75%.
The swap qualifies as a cash flow hedge in accordance with SFAS No. 133. On a
periodic basis, the Company will adjust the fair market value of the swap on the
balance sheet and offset the amount of the change to other comprehensive income.
F-18