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 31, 2001 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 18, 2002, there were outstanding 14,052,600 shares of the registrant's
common stock, $.001 par value. The aggregate market value of common stock held
by nonaffiliates of the registrant (8,378,678 shares) based on the closing sale
price of the common stock as reported on the Nasdaq National Market on March 18,
2002, was $40,887,949. 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 2002 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 31, 2001
TABLE OF CONTENTS
PART I PAGE
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 24
ITEM 3. LEGAL PROCEEDINGS.............................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 36
ITEM 11. EXECUTIVE COMPENSATION......................................... 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.................................................. 37
SIGNATURES................................................................. 40
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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 2002 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 five T.G.I. Friday's restaurants. We also own
five Redfish Cajun Grill and Bar restaurants and five Bamboo Club restaurants.
We currently have under construction one T.G.I. Friday's restaurant and one
Redfish restaurant in Chandler, Arizona that are scheduled to open in the later
part of April 2002 and in May 2002, respectively, and one Bamboo Club restaurant
in Tucson, Arizona scheduled to open in the beginning of April 2002. On November
19th, 2001, we entered into two license agreements with Celebrity Restaurants,
L.L.C., the owner of the exclusive rights to operate Alice Cooper'stown
restaurants and which operates one such restaurant in Phoenix, Arizona. The
agreements allow us to operate an Alice Cooper'stown restaurant in Cleveland,
Ohio and in San Diego, California. On approximately April 1, 2002, we plan to
open an Alice Cooper'stown restaurant in Cleveland, Ohio, in the location
formally occupied by one of our Redfish Cajun Grill and Bar restaurants.
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 Cajun
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. Alice Cooper'stown restaurants are rock and
roll and sports themed and feature a connection to the music celebrity Alice
Cooper.
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,
- the development of our rights to the Alice Cooper'stown
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," the "Company" 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
1
predecessors, has conducted a business since 1972 that is substantially similar
to the business currently conducted by its franchisees. As of December 31 2001,
Carlson Restaurants Worldwide had 237 franchisor-operated and 274 franchised
T.G.I. Friday's restaurants operating worldwide. Carlson Restaurants Worldwide
currently owns approximately 1.8% 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.
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. 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 85 food items, including
* appetizers, such as 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 $9 to $19 for beef, chicken, and seafood entrees; $9
to $12 for pasta and oriental and southwestern specialty items; $4 to $9 for
salads, sandwiches, and burgers; and $6 to $12 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% 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,
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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
2001 generated an average of approximately $3,381,000 in annual revenue.
OUR REDFISH CAJUN GRILL AND BAR RESTAURANTS
THE REDFISH CONCEPT
Redfish Cajun 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, although our Denver restaurant is not open on Sundays.
Hours of operation are usually from 11:00 a.m. until Midnight Monday through
Thursday and 11:00 a.m. until 2:00 a.m. on weekends.
MENU
We have developed a menu of more than 50 items for our Redfish restaurants.
Signature dishes include blackened redfish, Bourbon Street jambalaya, southern
fried catfish, and crawfish etoufee. The menu also features a selection of
appetizers, including Looziana egg rolls, Dungeness Maryland-style crab cakes,
"Alligator Bites," buffalo crawfish tails, and crab & artichoke dip. Our Redfish
menu also features a variety of fresh seafood, 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 31%
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 mementos 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 that 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
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local real estate and employment markets. Our Redfish restaurants open during
all of fiscal 2001 generated an average of approximately $2,423,500 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
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. Monday 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 $16 for appetizers; and
$9 to $29 for entrees. The average guest check is approximately $25 per person.
Alcoholic beverage sales account for approximately 22% of total revenue.
Take-out orders represent approximately 5% of total revenue. In addition, sales
through a third-party delivery service in Phoenix, Arizona, represent
approximately 3% of total Phoenix 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 five Bamboo Club restaurants are located in high-traffic retail
shopping environments. Each restaurant contains approximately 6,340 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. We have developed a prototype
for use in developing inline Bamboo Club restaurants in the future. We
constructed our first restaurant using this prototype in Tampa, Florida. This
restaurant opened on September 25, 2001. Since that date we have opened two more
Bamboo Club restaurants, one in West Palm Beach, Florida on October 12, 2001,
and the other in Tempe, Arizona, on November 21, 2001. We plan to use this
prototype whenever possible in order to standardize the construction process and
4
to reduce costs. We have signed a lease for a freestanding Bamboo Club location
and currently are developing a prototype for this type of location.
UNIT ECONOMICS
After opening three Bamboo Club restaurants, our total cost of opening
averaged $1,125,000, exclusive of annual operating expenses. These costs
included 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) $175,000 in
pre-opening expenses, including hiring expenses, wages for managers and hourly
employees, and supplies. We are currently developing plans for a free standing
Bamboo Club restaurant and anticipate that this cost will be in excess of the
preceding averages. Actual costs for future openings may vary significantly,
depending on a variety of factors. Our two Bamboo Club restaurants open during
all of fiscal 2001 generated an average of approximately $3,026,600 in annual
revenue.
ALICE COOPER'STOWN RESTAURANTS
THE ALICE COOPER'STOWN CONCEPT
The Alice Cooper'stown concept was developed by Celebrity Restaurants,
L.L.C. and is rock and roll and sports themed, featuring a connection to Alice
Cooper. We own no interest in Celebrity Restaurants, L.L.C., and it owns no
interest in us. Celebrity Restaurants operates one Alice Cooper'stown
restaurant, which opened in December 1998 in Phoenix, Arizona. Although we have
the right to operate Alice Cooper'stown restaurants in Cleveland, Ohio and in
San Diego, California, we have to date only elected to open in Cleveland, Ohio.
That restaurant is currently scheduled for opening in April 2002, in a location
formally occupied by a Redfish Cajun Grill and Bar restaurant. The Cleveland
location's proximity to Jacobs Field, the home of the Cleveland Indians, and the
fact that Cleveland is the home of the Rock and Roll Hall of Fame, resulted in
our decision to convert the location into a Alice Cooper'stown. Celebrity
Restaurant's Alice Cooper'stown 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 that are sports and rock and roll themed. In
addition, the restaurants sell sports and rock and roll memorabilia. The
restaurants feature quick, efficient, and friendly table service designed to
minimize customer-waiting time and facilitate table turnover. Although we have
not yet opened our Alice Cooper'stown restaurant, we believe it will benefit
significantly from the name recognition of Alice Cooper and the proximity to
Jacobs Field, the home of the Cleveland Indians, and the Rock and Roll Hall of
Fame.
MENU
Our menu in Cleveland will include salads and sandwiches, pizza and burgers
and tempting appetizers and desserts.
Menu prices are expected to range from $4.00 to $9.00 for appetizers and
desserts, $5.00 to $18.00 for entrees and $6.00 to $11.00 for pizzas and
burgers.
RESTAURANT LAYOUT AND STAFFING
Our Alice Cooper'stown restaurant has been designed to feature a rock and
roll and sports theme, featuring the connection to rock and roll legend Alice
Cooper. The general decor is rock and roll and sports memorabilia. The logo
reads "Where Rock and Roll and Sports Collide". The restaurant will feature a
video wall in the bar and a large screen (semi) video in the dining room. In
keeping with its sports bar theme, there will be more than 35 TV screens in the
restaurant. Some of the Cleveland Redfish staff, including management personnel,
will be operating this restaurant.
UNIT ECONOMICS
We anticipate that the construction costs to convert this location will be
approximate $400,000 and that pre-opening expenses will approximate $150,000.
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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, 2002.
IN OPERATED BY
SQUARE SEATING OPERATION OUR COMPANY
LOCATION FOOTAGE CAPACITY SINCE 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
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
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IN OPERATED BY
SQUARE SEATING OPERATION OUR COMPANY
LOCATION FOOTAGE CAPACITY SINCE SINCE
- -------- ------- -------- --------- -----------
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
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, California....... 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 West, New Mexico................. 6,426 241 2001 2001
Roseville, California........................ 6,426 245 2001 2001
Porter Ranch, California..................... 6,426 245 2001 2001
MANAGED T.G.I. FRIDAY'S RESTAURANTS
San Bruno, California........................ 8,345 200 1980 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............................... 4,800 198 1997 1997
ACQUIRED 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
DEVELOPED REDFISH RESTAURANTS
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
DEVELOPED BAMBOO CLUB RESTAURANTS
Tampa, Florida............................... 8,100 235 2001 2001
West Palm Beach, Florida..................... 6,317 180 2001 2001
Tempe, Arizona............................... 6,400 210 2001 2001
7
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. The acquired Bamboo Club restaurants average 5,400
square feet and our developed Bamboo Club restaurants average approximately
6,340 square feet. The size of our Alice Cooper'stown restaurant to be opened in
Cleveland is 10,964 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.
T.G.I. FRIDAY'S, REDFISH, AND BAMBOO CLUB OPERATIONS
Once a restaurant is integrated into our operations, we provide a variety
of corporate services to assure 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.
8
We also maintain quality assurance procedures designed to assure compliance
with the high quality of products and services mandated by our company and, for
our T.G.I. Friday's restaurants, by Carlson Restaurants Worldwide. We respond to
and investigate inquiries and complaints, initiate on-site resolution of
deficiencies, and consult with each 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.
We maintain a zero tolerance policy for discrimination of any type towards
both our employees and customers, and to this end constantly enforce this policy
through our training of new employees, our policy and training manuals, and
periodic re-enforcement programs.
RESTAURANT MANAGEMENT
Our T.G.I. Friday's regional and restaurant management personnel are
responsible for complying with Carlson Restaurants Worldwide's and our
operational standards. Our one senior regional manager and five regional
managers are responsible for between 5 and 12 of our restaurants within their
region. These regional managers and three Directors of Operations report to our
Senior Vice President of Restaurant Operations. The Senior Vice President of
Restaurant Operations and three other Directors of Operations report to our
President and Chief Operating Officer, who has responsibility for our T.G.I.
Friday's and Redfish operations. Our Bamboo Club system is run by the Vice
President of Bamboo Club operations, who reports to our President and Chief
Operating Officer. 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,
and a kitchen manager. Our T.G.I. Friday's restaurants average between 80 and 90
hourly employees. Our Redfish restaurants average approximately 65 hourly
employees and our Bamboo Club restaurants average approximately 72 hourly
employees.
We have established a program of appointing multi-location general managers
in geographic areas having locations close enough to each other to support this
concept. We currently have ten multi-location general managers. 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, for our T.G.I. Friday's restaurants, by 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 T.G.I. Friday's 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 14 weeks of training. 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 plan to implement all of
our policies and training programs in order to operate the Alice Cooper'stown
restaurant with the same high standards we have established for our other
brands.
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
9
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 T.G.I. Friday's
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. We are currently developing plans to convert some of our T.G.I.
Friday's locations to develop a take out program, and our Chandler, Arizona
T.G.I. Friday's has been designed for this program. One Bamboo Club restaurant
lease requires us to periodically refurbish the location.
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 frame relay. 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
T.G.I. Friday's we own and manage is currently supported by Carlson Restaurants
Worldwide. We are presently re-designing our store point of sale (POS), back
office accounting system and corporate enterprise resource planning system
(ERP). The selected software vendors are considered restaurant industry market
leaders and are expected to increase our store productivity and enhance
corporate information flow. These new systems will not be supported by Carlson
Restaurants Worldwide, but will be utilized uniformly in all of our restaurant
concepts. Management and support of the POS and back office accounting system
hardware and software will be outsourced to the selected POS vendor. Management
and support of the corporate ERP system will be outsourced to an appropriate
third party vendor. We are currently in final negotiations with each of the
selected vendors. Upon successful completion of the final contract negotiations,
full system implementation is expected to begin in April 2002 and be completed
by the end of fiscal year 2002.
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
10
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.
Celebrity Restaurants is assisting us in converting the Cleveland location
into an Alice Cooper'stown restaurant. They are providing guidance in restaurant
design, acquisition of themed memorabilia for decor, developing the menu, and
locating sources for the purchase of memorabilia for sale to guests.
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 and three new Bamboo Club restaurants currently utilize the
distribution operations that were in place when we acquired the original
restaurants, although we are in negotiation to convert this distribution to U.S.
Foodservice. 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, which were suspended by Carlson Restaurants
Worldwide for the fourth quarter of 2001 because they changed advertising
agencies. These programs resumed in February of 2002. 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.
11
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.
ALICE COOPER'STOWN RESTAURANT
Our in-house marketing department is developing advertising and marketing
programs for our Alice Cooper'stown restaurant. We will emphasize the sports and
rock and roll connection and feature Alice Cooper.
EXPANSION OF OPERATIONS
Between 1990 and 2001, 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
California that we continue to manage. Between 1990 and 2001, we also developed
31 new T.G.I. Friday's restaurants, including three during 2001. These include
16 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 2001, we closed our T.G.I.
Friday's restaurant in Texas. We plan to open two T.G.I. Friday's restaurants in
2002, one in Chandler, Arizona and the other in north Phoenix, Arizona.
We, with the concurrence of the franchisee for whom we managed, closed one
under-performing T.G.I. Friday's restaurant in San Francisco, California, in
2002. We closed one under-performing T.G.I. Friday's restaurant in El Paso,
Texas and one under-performing Redfish Cajun Grill and Bar restaurant in
Cleveland, Ohio during 2001.
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 Cajun Grill and Bar restaurants. We opened two additional
Redfish restaurants in 1999 and closed one in each of 2000 and 2001. We plan to
open one Redfish restaurant in Chandler, Arizona in 2002. We also may explore
opportunities to franchise the Redfish concept to third parties in the future.
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. In 2001 we opened three Bamboo Club restaurants, two in
Florida, in Tampa and West Palm Beach and one in Tempe, Arizona. We plan to open
seven additional Bamboo Clubs in 2002, in Tucson, Arizona; Novi (Detroit),
Michigan; Fairfax (Washington D.C.), Virginia; San Antonio (River walk), Texas;
North Phoenix, Arizona; Aventura, Florida; and Raleigh/Durham, North Carolina.
We may open one additional Bamboo Club restaurant in Newport (Cincinnati)
Kentucky. We plan to expand the Bamboo Club concept by opening other additional
restaurants in the future. We also may explore opportunities to franchise the
Bamboo Club concept to third parties in the future.
Generally when we close a location due to underperformance or other reasons
that management deems appropriate, our first priority is to transfer useable
assets to other locations. Other assets that are not transferable, including
leasehold improvements and certain kitchen equipment are written off at the time
of closure.
In November of 2001, we received a license to open two Alice Cooper'stown
restaurants; we plan to open one in Cleveland, Ohio in 2002.
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 three T.G.I. Friday's, one Redfish, and three
Bamboo Club restaurants during 2001.
12
We have signed leases for nine locations and we are negotiating leases for
three additional restaurants, two of which are 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 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
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 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.
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 could fully assess the effects of these issues.
13
We subsequently analyzed these effects entered into modifications of our
Northern and Southern California Development Agreements on November 6, 2001.
The following table sets forth information regarding our minimum
requirements to open new T.G.I. Friday's restaurants under our current
development agreements, 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
- ---- ------------ ------------ ------------ ------------ -----
2002................... -- -- 1 1 2
2003................... 2 1 1 1 5
---- ---- ---- ---- ----
Total............. 2 1 2 2 7
==== ==== ==== ==== ====
Existing Restaurants... 30 6(4) 15(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 the four restaurants managed in the Northern California
Territory.
(5) Does not include the one restaurant managed in the Southwest Territory.
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
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 non-compete 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 $7,444,000 during fiscal 2001,
$6,634,000 during fiscal 2000 and $4,830,000 during fiscal 1999. 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 years 1999, 2000, and the first three quarters of 2001 to
the national marketing fund, this sum was reduced to 1.7% during the last fiscal
quarter of 2001, but has now been increased to 2.7%. Marketing expenses totaled
$4,163,000 during fiscal 2000 and $4,774,000 during fiscal 2001.
14
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.
LICENSE AGREEMENTS
Our two license agreements with Celebrity Restaurants, L.L.C., allow us to
open Alice Cooper'stown restaurants in Cleveland, Ohio and San Diego,
California. The agreements grant us the right to use Celebrity Restaurants'
exclusive rights to Alice Cooper's likeness and its trademarks and trade names
to operate sport and rock and roll themed restaurants featuring Alice Cooper.
Each license agreement requires us to pay Celebrity Restaurants a royalty
fee in the amount of 1% of gross sales for food and beverage sales up to the
amount of gross sales derived in 2001 in each location through its existing
operations; 2.5% from that point to $3,500,000 and 3% over $3,500,000. For the
sale of merchandise products, such as logo and memorabilia, we pay a royalty of
20 % of gross sales.
Our license agreements are not inter-related and a default under one will
not be a default under the other.
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
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 2,410 people on a full-time basis, of whom 74 are
corporate management and staff personnel. We also employ approximately 3,615
part-time employees, which results in our employment of 6,025 total personnel,
of which 5,951 are restaurant personnel. 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
15
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..... 70 Chief Executive Officer, and Director
William G. Shrader.... 54 President, Chief Operating Officer, and Director
Lawrence K. White..... 37 Vice President - Finance and Treasurer
Jeff Smit............. 43 Senior Vice President-Restaurant Operations
David C. Moore........ 52 Vice President of Bamboo Club Operations
Michael J. Herron..... 61 General Counsel and Secretary
BART A. BROWN, JR. has served as our Chief Executive Officer and as a
director since December 1996. Mr. Brown served as our President from December
1996 until June 2001. 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 President and Chief Operating
Officer and as a director since March 1999. Mr. Shrader served as our Executive
Vice President from March 1999 until June 2001. 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 Treasurer
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.
JEFF SMIT has served as our Senior Vice President-Restaurant Operations
since June 2001. Mr. Smit served as our Vice President of Operations prior to
June of 2001. Mr. Smit joined us in 1994 and has been a general and regional
manager. Prior to joining us, Mr. Smit worked for Carlson Restaurants Worldwide
as a general manager in its T.G.I. Friday's operation. Prior to that, Mr. Smit
worked in a variety of capacities in various restaurants.
DAVID C. MOORE has served as vice president of Bamboo Club operations since
November of 2001. From 1999 until he joined the company Mr. Moore was in the
custom home building business, building under the name Ponderosa Homes, LLC, and
owned a sports grill and bar franchise called Famous Sams through a company
called Grand Slam 7, LLC. From 1995 through 1999 Mr. Moore was Senior Vice
President for Tosco Marketing Company. Prior to that Mr. Moore was a Senior Vice
President of Circle K Corporation.
MICHAEL J. HERRON joined our company as General Counsel in March 2001 and
has been Secretary since June 2001. Prior to joining us, Mr. Herron was actively
engaged in the private practice of law in Miami Beach, Florida and in Aspen,
Colorado. From April 1990 to February 2001 Mr. Herron was a member of the law
firm of Garfield & Hecht, P.C., in Aspen, Colorado. Mr. Herron is a former
President of the Miami Beach, Florida Bar Association and was a member of the
Florida Bar Association's standing Ethics Committee.
16
SPECIAL CONSIDERATIONS-RISK FACTORS
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 five 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
17
* 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.
That sum was reduced to 1.7% during the last four months of 2001, as Carlson had
no national campaign during that period. In 2002, Carlson Restaurants Worldwide
intends to increase the national marketing pool to 2.7% and to have an active
national campaign. 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.
During 2001, we renegotiated our development agreements with Carlson
Restaurants Worldwide for southern and northern California. While we expect to
fulfill our obligations under the terms of our development agreements as they
exist for the south and Midwest areas and for California as they have been
renegotiated, we can provide no assurance that we will successfully fulfill
these obligations.
18
WE FACE RISKS ASSOCIATED WITH THE ACQUISITION AND INTEGRATION OF THE REDFISH,
THE BAMBOO CLUB AND ALICE COOPER'STOWN RESTAURANTS, AND ANY OTHER ACQUIRED
RESTAURANTS, WITH OUR EXISTING OPERATIONS.
We must integrate the operations of our Redfish, Bamboo Club and Alice
Cooper'stown 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, and Alice Cooper'stown
restaurants will feature, diverse menus served in an upscale atmosphere, these
restaurants present operating requirements that differ from our existing T.G.I.
Friday's restaurants. These requirements 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, Bamboo Club, and
Alice Cooper'stown operations or any future acquired businesses with
our existing operations;
* effectively manage the Redfish, Bamboo Club, and Alice Cooper'stown
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, Alice Cooper'stown, 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, Bamboo Club, and Alice Cooper'stown 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;
19
* competitive factors; and
* general economic and business conditions.
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 two T.G.I. Friday's restaurants, the one new Redfish restaurant, the one
Alice Cooper'stown restaurant, and the eight new Bamboo Club restaurants that we
plan to open during 2002. We will require funds to develop additional T.G.I.
Friday's, Redfish, Bamboo Club, and Alice Cooper'stown restaurants after 2002
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.
20
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 31, 2001, we had long-term debt
of approximately $47.2 million and a working capital deficit of $8.0 million.
Our borrowings will result in interest expense of approximately $4.0
million in 2002 and $4.4 million in 2003, 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, 58 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 demographics;
* changing traffic patterns;
* 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;
* changes in government regulation; and
* weather conditions.
21
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.
Employees may file claims or lawsuits against us based on discrimination or
wrongful termination. These claims or lawsuits could result in unfavorable
publicity and 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.
22
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:
* 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 5,673, 922 shares, or 40.4%, of our outstanding common stock.
These directors and officers also hold options to purchase an aggregate of
2,172,000 shares of common stock at exercise prices ranging from $1.88 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 others than directors or officers, to acquire an
aggregate of 865,497 shares of common stock currently are outstanding. An
additional 193,000 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 18, 2002, there were outstanding 14,052,600 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.
23
ITEM 2. PROPERTIES
In December 1998, we entered into a five-year lease for space to serve as
our corporate offices. We acquired additional space in 2001 and in the first
quarter of 2002. 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 usually 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, based on the advice of legal council, that we are subject to any
pending litigation that will have a material adverse effect on our business or
financial condition, results of operations or liquidity.
In 2001, we 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.
24
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
------ ------
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.............................. $ 3.13 $ 2.50
Second Quarter............................. 4.15 2.94
Third Quarter.............................. 5.91 3.35
Fourth Quarter............................. 5.81 3.55
2002
First Quarter (through March 18, 2002)..... $ 5.10 $ 4.00
On March 18, 2002, there were 889 holders of record of our common stock. On
March 18, 2002, the closing sale price of our common stock on the NASDAQ
National Market was $4.88 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.
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 ended December 31, 2001 has been
derived from our consolidated financial statements, which have been audited by
Arthur Andersen LLP, our former independent accountants, for the period through
December 25, 2000, and for the year ended December 31, 2001, by KPMG LLP our
current independent accountants.
25
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 YEARS ENDED
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
-------------------------------------------------------------
DEC. 31, DEC. 25, DEC. 27, DEC. 28, DEC. 29,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue .................................................. 211,823 $ 186,542 $ 140,294 $ 114,242 $ 107,018
Restaurant operating expenses:
Cost of sales .......................................... 59,139 53,671 39,960 33,242 30,995
Payroll and benefits ................................... 64,435 55,971 42,405 33,701 31,907
Depreciation and amortization .......................... 8,632 7,490 4,664 3,730 3,265
Other operating expenses ............................... 61,285 52,008 38,923 31,004 30,589
Reduction of disputed liabilities ...................... -- (1,591) -- -- --
--------- --------- --------- --------- ---------
Total restaurant operating expenses .................. 193,491 167,549 125,952 101,677 96,756
--------- --------- --------- --------- ---------
Income from restaurant operations ........................ 18,332 18,993 14,342 12,565 10,262
Amortization of intangibles ............................ 1,044 996 990 983 953
General and administrative expenses .................... 8,105 7,868 5,955 4,906 4,559
Pre-opening expenses ................................... 1,417 1,370 2,228 661 287
New manager training expenses .......................... 1,676 1,914 1,748 731 562
Impairment charges and other ........................... 3,453 (92) 494 (17) (2,390)
Management fee income .................................. (432) (611) (865) (1,082) (979)
--------- --------- --------- --------- ---------
Operating income ......................................... 3,069 7,548 3,792 6,383 7,270
Non-operating gain ..................................... -- (11) -- -- --
Interest expense and other, net ........................ 3,825 3,615 2,604 2,218 2,466
--------- --------- --------- --------- ---------
Income (loss) before income taxes, extraordinary loss, and
cumulative effect of change in accounting principle .... (756) 3,944 1,188 4,165 4,804
Income tax expense (benefit) ............................. (645) 250 50 -- --
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary loss and cumulative
effect of change in accounting principle ............... (111) $ 3,694 $ 1,138 $ 4,165 $ 4,804
========= ========= ========= ========= =========
Net income (loss)(1)(2)(3) ............................... (111) $ 3,678 $ 970 $ 4,165 $ 3,166
========= ========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Net income (loss) before extraordinary loss and
cumulative effect of change in accounting principle .. (0.01) $ 0.34 $ 0.11 $ 0.39 $ 0.47
Net income (loss)(1)(2)(3) ............................. (0.01) $ 0.33 $ 0.09 $ 0.39 $ 0.31
Weighted average shares outstanding - diluted .......... 14,048 11,117 10,407 10,608 10,098
BALANCE SHEET DATA:
Working capital (deficiency) ........................... $ (7,987) $ (7,692) $ (16,652) $ (2,807) $ (1,330)
Total assets ........................................... 112,462 108,261 86,525 70,255 61,168
Long-term debt, net of current portion ................. 47,232 44,395 31,513 28,264 24,308
Stockholders' equity ................................... 40,207 40,499 27,383 26,372 22,203
- ----------
(1) Fiscal 2000 includes a charge of $16,000 for early extinguishment of debt.
(2) Fiscal 1999 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.
(3) Fiscal 1997 includes an extraordinary loss from debt extinguishment of
$1,638,000, or $0.16 per share.
26
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
2001. 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)
2001 2000
-------------------------------------------- ---------------------------------------------
MAR. 26 JUNE 25 SEPT. 24 DEC. 31 MAR. 27 JUNE 26 SEPT. 25 DEC. 25(1)
-------- -------- -------- -------- -------- -------- -------- ----------
Revenue ....................... $ 51,705 $ 53,229 $ 52,222 $ 54,667 $ 44,339 $ 47,297 $ 48,293 $ 46,613
Cost of sales ................. 14,598 14,783 14,628 15,130 13,273 13,697 13,561 13,140
Income (loss) before income
taxes, extraordinary loss,
and cumulative effect of
change in accounting
principle ................... 788 1,554 723 (3,821) 318 1,103 1,104 1,419
Net income (loss) ............. 788 1,554 723 (3,176) 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 ..... 0.06 0.11 0.05 (0.28) 0.04 0.11 0.10 0.08
Net income (loss) per share ... 0.06 0.11 0.05 (0.23) 0.04 0.11 0.10 0.08
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 eleven
years, we have grown through acquisitions and development of new restaurants. We
currently own 66 restaurants and manage an additional five 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; 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.
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. 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.
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.
27
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. The Bamboo Club acquisition was financed in part by our
rights offering to stockholders in 2000.
In 2001, 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 6
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 8.54%.
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.
In 2001, operations were impacted by soft economic conditions, especially
in the fourth quarter and subsequent to the September 11th attacks on America.
These conditions halted our positive same store sales increase record at 18
consecutive quarters and predicated the fourth quarter impairment write-down of
five Company owned restaurants and the management agreement impairment
write-down for six stores we manage in Northern California and El Paso, Texas.
The total impairment charges were $3,453,000, of which $1,838,000 related to
Company owned assets and $1,615,000 related to the management agreement
impairment. We also faced two distinctive challenges in our T.G. I. Friday's
California market, which affected operational profitability; a $0.50 per hour
minimum wage increase effective January 1, 2001 and controlling the escalating
utility prices. To effectively combat these challenges, we implemented a new
labor program for our top store managers to manage multiple locations, where it
was geographically efficient; and we implemented utility programs to measure
optimum usage and to ensure cost efficiency.
We opened seven new restaurants in 2001, including three T.G.I.Friday's,
one Redfish and three Bamboo Club locations. The new T.G. I. Friday's
restaurants are located in West Albuquerque, New Mexico; Roseville, California
(Sacramento area); and Porter Ranch, California (Los Angeles area). The new
Redfish restaurant is located in North Scottsdale, Arizona; and the new Bamboo
Club restaurants are located in Tampa, Florida; Wellington, Florida (West Palm
Beach area); and Tempe, Arizona (Phoenix area). We closed an under performing
T.G. I. Friday's restaurant in El Paso, Texas. We will convert an
underperforming Redfish restaurant in Cleveland, Ohio to another concept in
2002. The new concept is Alice Cooper'stown, a rock 'n' roll / sports themed
restaurant, will debut to coincide with the opening of the major league baseball
season in April 2002. The restaurant is located near Jacobs Field, home of the
Cleveland Indians and the Rock 'n' Roll Hall of Fame.
Our strategy is to continue reducing 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.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates and assumptions
based upon historical experience and various other factors and circumstances. We
believe our estimates and assumptions are reasonable in the circumstances;
however, actual results may differ from these estimates under different future
conditions.
We believe that the estimates and assumptions that are most important to the
portrayal of the our financial condition and results of operations, in that they
require management's most difficult, subjective or complex judgments, form the
basis for the accounting policies deemed to be most critical to our operations.
These critical accounting policies relate to the valuation and amortizable lives
of long-lived assets, goodwill and to other identifiable intangible assets,
valuation of deferred tax assets and reserves related to self-insurance. We
periodically perform asset impairment analysis of long-lived assets related to
our restaurant locations, goodwill and other identifiable intangible assets. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We use an actuarial based
28
methodology utilizing historical experience factors to periodically adjust
self-insurance reserves. We believe estimates and assumptions related to these
critical accounting policies are appropriate under the circumstances; however,
should future events or occurrences result in unanticipated consequences, there
could be a material impact on our future financial condition or results of
operations.
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 31, DECEMBER 25, DECEMBER 27,
2001 2000 1999
------ ------ ------
Revenue .................................................. 100.0% 100.0% 100.0%
Restaurant operating expenses:
Cost of sales ......................................... 27.9 28.8 28.5
Payroll and benefits .................................. 30.4 30.0 30.2
Depreciation and amortization ......................... 4.1 4.0 3.3
Other operating expenses .............................. 28.9 27.9 27.8
Reduction of disputed liabilities ..................... -- (0.9) --
------ ------ ------
Total restaurant operating expenses ................... 91.3 89.8 89.8
------ ------ ------
Income from restaurant operations ........................ 8.7 10.2 10.2
Amortization of intangibles ........................... 0.5 0.6 0.7
General and administrative expenses ................... 3.8 4.2 4.2
Preopening expenses ................................... 0.7 0.7 1.6
New manager training expenses ......................... 0.8 1.0 1.2
Impairment charges and other .......................... 1.6 0.0 0.4
Management fee income ................................. (0.2) (0.3) (0.6)
------ ------ ------
Operating income ......................................... 1.4 4.0 2.7
Interest expense and other, net .......................... 1.8 1.9 1.9
------ ------ ------
Income (loss) before income taxes, extraordinary loss, and
cumulative effect of change in accounting principle ... (0.4)% 2.1% 0.8%
====== ====== ======
FISCAL 2001 COMPARED TO FISCAL 2000
Revenue for the fiscal year ended December 31, 2001 increased 13.6% to
$211.8 million compared with $186.5 million for the year ended December 25,
2000. This increase was primarily a result of opening seven new restaurants in
2000 and seven new restaurants in 2001. Same-store sales increased 1.9% for
fiscal 2001 as compared with an increase in same-store sales of 5.1% for the
comparable period in 2000. Revenue from alcoholic beverages accounted for 24.5%
of revenue in 2001 and 24.4% in 2000.
Cost of sales as a percentage of revenue decreased to 27.9% in 2001 from
28.8% in 2000. This decrease from the comparable period in 2000 resulted from
multiple factors. Food costs were higher in 2000 because we were required to
find alternative food suppliers to replace Ameriserve, our primary food supplier
who declared bankruptcy in the first quarter of 2000. Additionally, we
experienced increased food costs in 2001 due to sales mix changes and increases
in meat and cheese costs. We offset these increases through improved operations,
better margins on alcohol sales and maturing relationships with our suppliers
that have led to more favorable contract terms.
Payroll and benefit costs increased as a percentage of revenue to 30.4% in
2001 from 30.0% for the comparable period in 2000. This increase was primarily
due to the $0.50 per hour minimum wage increase in our California market
effective January 1, 2001 and higher management labor and benefits resulting
from lower turnover.
29
In total, depreciation and amortization increased as a percentage of
revenue to 4.1% in 2001 from 4.0% for the comparable period in 2000. The
increase was due primarily to the number of new restaurants we have opened in
2000 and 2001.
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.
In 2000, the pool contribution was 2.1% of net sales. In 2001, the pool
contribution was 2.1% of net sales for the first three fiscal quarters and 1.7%
of net sales for the fourth quarter. The pool contribution percentage decreased
because Carlson Restaurants Worldwide cancelled its T.G.I. Friday's national
advertising campaign for the entire fourth quarter. This contribution offsets a
portion of our general 4% marketing requirement. Other operating expenses
increased as a percentage of revenue to 28.9% in 2001 from 27.9% for the
comparable period in 2000. The increase was due primarily to additional unit
level advertising efforts, store rent increases, and additional energy and
workers' compensation costs, especially in California.
Reduction of disputed liabilities in 2000 represents the one-time
settlement proceeds paid to us for the Ameriserve bankruptcy claim. Ameriserve
was our primary food supplier until they declared bankruptcy in the first
quarter of 2000.
Amortization of intangible expenses include amortization on capitalized
liquor licenses, loan financing fees, franchise fees, and goodwill. These
amortization expenses decreased as a percentage of revenue to 0.5% in 2001 from
0.6% for the comparable period in 2000. The decrease in 2001 was primarily due
to spreading a small increase in fixed expenses over a larger revenue base.
General and administrative expenses decreased as a percentage of revenue to
3.8% in 2001 from 4.2% compared with the comparable period in 2000. The decrease
was primarily due to reduced legal fees and recruiting expenses as we hired both
an in house attorney and recruiter during 2001. In addition, reduction in travel
expenses related to postponing all non-mandatory travel during the fourth
quarter 2001 after the events of September 11 contributed to the overall
decrease.
Pre-opening expenses of $1,417,000, or 0.7% of revenue, were charged to
operations during the year ended December 31, 2001 as compared to $1,370,000, or
0.7% of revenue, being charged to operations during the year ended December 25,
2000. The increase was due to opening of two Bamboo Clubs outside of our
Phoenix, Arizona market (Central Florida) that resulted in additional travel
expenses for our new store opening teams.
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 decreased to
$1,676,000, or 0.8% of revenue, for the year ended December 31, 2001 as compared
to $1,914,000, or 1.0 % of revenue, for the year ended December 25, 2000
primarily as a result of lower turnover.
In 2001 and 2000, impairment charges and other included the impairment of
certain leasehold improvements and other operating assets in accordance with
SFAS No. 121. The charges amounted to $1,838,000 and $832,000 in 2001 and 2000,
respectively to reduce the carrying value of these assets to their estimated
fair value. In addition, we recorded an impairment expense of $1,615,000 in the
fourth quarter of 2001 against a management agreement with CNL for six under
performing locations we manage in Northern California and one location in El
Paso, Texas. Other charges in 2000 included the final settlement proceeds of
$924,000, net, received from the City and County of San Francisco, California in
connection with condemnation proceedings against a Company owned restaurant.
Management fee income represents 3% of store gross revenue charged to five
T.G.I. Friday's locations we manage in Northern California and one location in
El Paso, Texas for CNL. Based on the impairment of the management agreement in
the fourth quarter of 2001, we did not record any management fee income for the
fourth quarter of 2001.
Interest expense and other, net was approximately $3,825,000 in 2001
compared with $3,615,000 in 2000. The net expense decreased as a percentage of
revenue to 1.8% in 2001 from 1.9% for the comparable period in 2000. Although we
30
incurred additional debt and a subsequent increase in interest expense in 2001,
the increased expenses compared with 2000 were offset by more favorable interest
rate conditions on our variable interest rate debt. As of December 31, 2001,
approximately 50% of our total debt is tied to variable interest rates.
An income tax benefit of $645,000 was recorded in 2001 because we offset
net operating loss carryforwards against taxable income. We were in a taxable
income situation in 2001 due to the recognition of various timing differences
from 2000. In 2000, we recorded a $250,000 expense related to state income taxes
due in certain states where net operating loss carryforwards are no longer
available to us. At December 31, 2001, we had approximately $6,600,000 of net
operating loss carryforwards including capital loss carryforwards available to
offset future income for federal income tax purposes.
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.
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 T.G.I. 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 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.
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.
31
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.
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 development of new
T.G.I. Friday's restaurants, and the acquisition and development of the Redfish
and Bamboo Club restaurants and concepts. These acquisitions were financed
principally through new stock issuance and the issuance of long-term debt and
internally generated cash.
In 2001, we 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 T.G.I. Friday's units
and equipment.
In 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 is being used to
fund future new restaurant development.
Net cash flows from operating activities were $12,547,000 in 2001, and
$3,824,000 in 2000. These were supplemented by net cash flows from financing of
$3,864,000 in 2001, $22,496,000 in 2000, and $3,755,000 in 1999, which we used
to fund our acquisitions and development of new restaurants.
Net cash used in investing activities was $11,510,000 in 2001, $24,810,000
in 2000 and $24,213,000 in 1999, which we used primarily to fund property and
equipment purchases for our new restaurants and to acquire franchise rights and
goodwill related to both the purchase and opening of new restaurants. These
amounts were offset by cash received from the sale of assets related to our
sale-leaseback transactions.
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 31, 2001, we had a working capital deficit of
approximately $7,987,000.
At December 31, 2001, we had a cash balance of $9,466,000. Monthly cash
receipts have been sufficient to pay all obligations as they become due.
At December 31, 2001, we had long-term debt of $47,232,000 and current
portion of long-term debt of $3,012,000.
Approximately $17,539,000 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.
32
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 31, 2001. The line of credit matures on July 15, 2002. At December
31, 2001, 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 4.42% at
December 31, 2001. At December 31, 2001, we had outstanding borrowings of
$5,924,000 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 31, 2001 and December 25, 2000.
The remainder of our long-term debt consists of notes payable to various
lending institutions. These notes bear interest at rates ranging from 7.22% to
11.0% and mature at various times over the next 15 years.
We plan to develop at least eleven additional restaurants during fiscal
2002. Subsequent to December 31, 2001, we borrowed an additional $5,260,000
under the $15,000,000 facility financing agreement with Bank of America
described above, but we have not entered into any new credit arrangements after
December 31, 2001. As of March 27, 2002, we have permanent debt financing
commitments totaling approximately $3,215,000 that we will use to fund
restaurant development activity and working capital requirements through the
remainder of 2002. The previously discussed $15,000,000 Bank of America
development line makes up this remaining commitment.
We lease all of our restaurants with terms ranging from 10 to 20 years.
Minimum payments on our existing lease obligations are approximately $11.4
million in 2002 and $10.7 million per year through 2003.
The Company's future debt and lease obligations are summarized by year as
follows:
Debt Minimum Lease Total Cash
Maturities Commitments Obligations
---------- ----------- -----------
2002 $ 3,012 $ 11,367 $ 14,379
2003 2,956 10,748 13,704
2004 3,187 9,962 13,149
2005 3,472 9,457 12,929
2006 3,604 8,682 12,286
Thereafter 34,013 84,793 118,806
-------- -------- --------
$ 50,244 $135,009 $185,253
======== ======== ========
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
April 2003. 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.
33
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Upon its initial adoption, Statement 142 eliminates the amortization
of all existing and newly acquired goodwill on a prospective basis and requires
companies to assess goodwill impairment, at least annually, based on the fair
value of the reporting unit. The Company is required to adopt the provisions of
Statement 141 immediately.
As of the date of adoption, the Company will have unamortized goodwill in the
amount of $25,149,000 that will be subject to the transition provisions of
Statements 141 and 142. Accumulated amortization related to goodwill is
$5,914,000 as of December 31, 2001. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
On October 3, 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced managements' ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. At the current time, management does not
believe that the adoption of this statement on January 1, 2002 will have a
material impact on the Company's financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2001, we were participating in a derivative financial
instrument for which fair value disclosure is required under SFAS No. 133. From
inception, we have reduced the fair value of the interest rate swap agreement
discussed in the notes to the consolidated financial statements to a liability
of $336,260 using "hedge accounting" per SFAS No. 133 as a result of the recent
decline in interest rates. We have no other derivative financial instruments.
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 prime less 0.50%, 1.125% over prime, 3.20% over LIBOR, 2.75% over
LIBOR, 3.50% over "30-Day Dealer Commercial Paper Rates," and 2.65% over "30-Day
Dealer Commercial Paper Rates." At December 31, 2001, we had outstanding
borrowings on these loans of approximately $25,069,000. Our net interest expense
for 2001 was $3,825,000. A one percent variation on any of variable rates would
have increased or decreased our total interest expense by $251,000 for the year.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements, the report
thereon, the notes thereto and the supplementary data commencing at page F-1 of
this report, which consolidated financial statements, report, notes, and data
are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 27, 2001, we engaged the accounting firm of KPMG LLP as our new
independent public accountants and dismissed Arthur Andersen LLP. The decision
to change our accounting firm was recommended and approved by the audit
committee of our board of directors and approved by our board of directors.
During the two most recent fiscal years and subsequent interim reporting periods
preceding the date of this report, there were no disagreements between us and
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, accounting scope or procedure, or any reportable
events. The report of Arthur Andersen LLP on our consolidated financial
statements for the past two fiscal years contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. Prior to their engagement, we had not consulted
with KPMG LLP on either the application of accounting principles or type of
opinion KPMG LLP might issue on our consolidated financial statements. Arthur
Anderson LLP agreed with the above statements and a letter from it was attached
to our Form 8-K filed on August 27, 2001.
35
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 2002 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 2002 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 2002 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 2002 Annual Meeting of Stockholders.
36
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)
10.18B Second Amendment to Development Agreement dated November 6, 2001,
between T.G.I. Friday's. Inc. and Main St. California, Inc., a
wholly owned subsidiary of the Company.
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)
10.21A Second Amendment to Development Agreement dated October 20, 1999
between T.G.I. Friday's, Inc. and Main St. California, Inc., a
wholly owned subsidiary of the Company.
10.21B Third Amendment to Development Agreement dated November6, 2001
between T.G.I. Friday's, Inc. and Main St. California, Inc., a
wholly owned subsidiary of the Company.
10.22 Stock Option Agreement dated August 5, 1996, between the Company
and John F. Antioco for 800,000 shares of Common Stock(9)
37
EXHIBIT
NUMBER EXHIBIT
- ------ -------
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)
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. (12)
10.30 Working Capital Management Agreement Reducing Revolver Loan
Agreement dated November 22, 1999, between the Company and
Merrill Lynch Business Financial Services, Inc. (12)
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.) (12)
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.)
(12)
10.35 Credit Agreement dated April 2, 1999, between the Company and
Imperial Bank (13)
10.35A First Amendment to Credit Agreement dated August 2, 1999, between
the Company and Imperial Bank (13)
10.35B Second Amendment to Credit Agreement dated July 13, 2000, between
the Company and Imperial Bank (13)
10.35C Third Amendment to Credit Agreement and First Amendment to
Promissory Note dated July 5, 2001, between the Company and
Imperial Bank
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 (13)
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 (13)
10.38 Unconditional Guarantee of Payment of Term Promissory Note
executed by John F. Antioco, as Guarantor, in favor of Imperial
Bank, as Lender (13)
38
EXHIBIT
NUMBER EXHIBIT
- ------ -------
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 (13)
10.40 401(k) Profit Sharing Plan (14)
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 (15)
16 Letter from Arthur Andersen LLP regarding the change in
certifying accountant (16)
21 List of Subsidiaries
23.1 Consent of KPMG LLP
23.2 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 10-K for the year ended
December 27, 1999, filed with the Securities and Exchange Commission on
March 28, 2000.
(13) 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.
(14) 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.
(15) Incorporated by reference to the Company's Form 10-K for the year ended
December 25, 2000, filed with the Securities and Exchange Commission on
March 29, 2001.
(16) Incorporated by reference to the Company's Form 8-K dated September 4,
2001, as filed with the Securities and Exchange Commission on September 4,
2001.
39
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: April 1, 2002 By: /s/ Bart A. Brown, Jr.
-------------------------------------
Bart A. Brown, Jr.
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 April 1, 2002
- -----------------------------
John F. Antioco
/s/ Bart A. Brown, Jr. Chief Executive Officer April 1, 2002
- ----------------------------- and Director (Principal
Bart A. Brown, Jr. Executive Officer)
/s/ William G. Shrader President, April 1, 2002
- ----------------------------- Chief Operating Officer,
William G. Shrader and Director
/s/ Lawrence K. White Vice President-Finance April 1, 2002
- ----------------------------- (Principal Financial
Lawrence K. White and Accounting Officer)
and Treasurer
/s/ David C. Moore Vice President
- ----------------------------- (Bamboo Club Operations) April 1, 2002
David C. Moore
/s/ Michael J. Herron Vice President
- ----------------------------- General Counsel April 1, 2002
Michael J. Herron
/s/ Jane Evans Director April 1, 2002
- -----------------------------
Jane Evans
/s/ John C. Metz Director April 1, 2002
- -----------------------------
John C. Metz
/s/ Debra Bloy Director April 1, 2002
- -----------------------------
Debra Bloy
MAIN STREET AND MAIN INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report - KPMG LLP..................................... F-2
Report of Independent Public Accountants - Arthur Andersen LLP.............. F-3
Consolidated Balance Sheets as of December 31, 2001 and December 25, 2000... F-4
Consolidated Statements of Operations for the fiscal years ended
December 31, 2001, December 25, 2000, and December 27, 1999............... F-5
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended December 31, 2001, December 25, 2000, and
December 27, 1999 ........................................................ F-6
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2001, December 25, 2000, and December 27, 1999 .............. F-7
Notes to Consolidated Financial Statements.................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Main Street and Main Incorporated:
We have audited the accompanying consolidated balance sheet of Main Street and
Main Incorporated (a Delaware corporation) and subsidiaries (the Company) as of
December 31, 2001, and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive income (loss) and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Main Street and Main
Incorporated and subsidiaries as of December 31, 2001 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, effective January
1, 2001.
/s/ KPMG LLP
Phoenix, Arizona
March 12, 2002
F-2
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Main Street and Main Incorporated:
We have audited the accompanying consolidated balance sheet of MAIN STREET AND
MAIN INCORPORATED (a Delaware corporation) AND SUBSIDIARIES, (the Company) as of
December 25, 2000 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years ended December 25, 2000 and
December 27, 1999. 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 the results of its operations and its cash flows for each of the years
ended December 25, 2000 and December 27, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Arthur Andersen LLP
Phoenix, Arizona
March 12, 2001
F-3
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
DECEMBER 31, DECEMBER 25,
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 9,466 $ 4,565
Accounts receivable ................................ 2,683 6,263
Inventories ........................................ 2,416 1,624
Prepaid expenses ................................... 1,255 744
--------- ---------
Total current assets ............................ 15,820 13,196
Property and equipment, net .......................... 65,222 63,857
Other assets, net .................................... 3,969 2,466
Goodwill, net ........................................ 25,149 26,355
Franchise fees, net .................................. 2,302 2,387
--------- ---------
Total assets .................................... $ 112,462 $ 108,261
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................. $ 3,012 $ 2,006
Accounts payable ................................... 7,336 9,228
Other accrued liabilities .......................... 13,459 9,654
--------- ---------
Total current liabilities ....................... 23,807 20,888
Long-term debt, net of current portion ............... 47,232 44,395
Other liabilities and deferred credits ............... 1,216 2,479
--------- ---------
Total liabilities ............................... 72,255 67,762
--------- ---------
Commitments, contingencies and subsequent events
(see notes 8 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding in 2001
and 2000 ........................................... -- --
Common stock, $.001 par value, 25,000,000 shares
authorized, 14,052,600 and 14,044,791 shares issued
and outstanding in 2001 and 2000, respectively ..... 14 14
Additional paid-in capital ........................... 53,645 53,624
Accrued other comprehensive loss ..................... (202) --
Accumulated deficit .................................. (13,250) (13,139)
--------- ---------
Total stockholders' equity ...................... 40,207 40,499
--------- ---------
Total stockholders' equity and liabilities . $ 112,462 $ 108,261
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 25, DECEMBER 27,
2001 2000 1999
--------- --------- ---------
Revenue ............................................................. $ 211,823 $ 186,542 $ 140,294
--------- --------- ---------
Restaurant operating expenses
Cost of sales ..................................................... 59,139 53,671 39,960
Payroll and benefits .............................................. 64,435 55,971 42,405
Depreciation and amortization ..................................... 8,632 7,490 4,664
Other operating expenses .......................................... 61,285 52,008 38,923
Reduction of disputed liabilities ................................. -- (1,591) --
--------- --------- ---------
Total restaurant operating expenses ............................ 193,491 167,549 125,952
--------- --------- ---------
Income from restaurant operations ................................... 18,332 18,993 14,342
Other operating expense and income:
Amortization of intangible assets ................................. 1,044 996 990
General and administrative expenses ............................... 8,105 7,868 5,955
Pre-opening expenses .............................................. 1,417 1,370 2,228
New manager training expenses ..................................... 1,676 1,914 1,748
Impairment charges and other ...................................... 3,453 (92) 494
Management fee income ............................................. (432) (611) (865)
--------- --------- ---------
Operating income .................................................... 3,069 7,548 3,792
Non-operating gain ................................................ -- (11) --
Interest expense and other, net ................................... 3,825 3,615 2,604
--------- --------- ---------
Income (loss) before income taxes, extraordinary loss,
and cumulative effect of change in accounting principal ........... (756) 3,944 1,188
Income tax expense (benefit) ...................................... (645) 250 50
--------- --------- ---------
Net income before income taxes, extraordinary loss, and cumulative
effect of change in accounting principal .......................... (111) 3,694 1,138
Debt extinguishment ............................................... -- (16) --
Cumulative effect of change in accounting principle ............... -- -- (168)
--------- --------- ---------
Net income (loss) ............................................. $ (111) $ 3,678 $ 970
========= ========= =========
Basic earnings per share:
Net income before cumulative effect of change in
accounting principle ............................................ $ (0.01) $ 0.34 $ 0.11
Cumulative effect of change in accounting principle ............... -- -- (0.02)
--------- --------- ---------
Net income (loss) .............................................. $ (0.01) $ 0.34 $ 0.09
========= ========= =========
Diluted earnings per share:
Net income before cumulative effect of change in
accounting principle ........................................... $ (0.01) $ 0.33 $ 0.11
Cumulative effect of change in accounting principle .............. -- -- (0.02)
--------- --------- ---------
Net income (loss) .............................................. $ (0.01) $ 0.33 $ 0.09
========= ========= =========
Weighted average number of shares outstanding:
Basic .......................................................... 14,048 10,944 10,008
========= ========= =========
Diluted ........................................................ 14,048 11,117 10,407
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL OTHER
PAR PAID-IN ACCUMULATED COMPREHENSIVE
SHARES VALUE CAPITAL DEFICIT LOSS TOTAL
-------- -------- -------- -------- -------- --------
BALANCES, 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
-------- -------- -------- -------- -------- --------
BALANCES, 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
-------- -------- -------- -------- -------- --------
BALANCES, December 27, 2000 .............. 14,045 14 53,624 (13,139) -- 40,499
-------- -------- -------- -------- -------- --------
Shares issued in connection with
options exercised (net) .............. 7 -- 21 -- -- 21
Shares issued to employees ............. 1 -- -- -- -- --
Comprehensive income:
Unrealized loss on hedging contract, net
of $134,504 tax benefit .............. -- -- -- -- (202) (202)
Net loss ............................... -- -- -- (111) -- (111)
-------- -------- -------- -------- -------- --------
Comprehensive loss: ...................... (313)
--------
-------- -------- -------- -------- -------- --------
BALANCES, December 31, 2001 .............. 14,053 $ 14 $ 53,645 $(13,250) $ (202) $ 40,207
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 25, DECEMBER 27,
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (111) $ 3,678 $ 970
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 9,676 8,486 5,654
Gain on sale of assets ................................ -- (289) --
Impairment charges and other .......................... 3,453 (92) 494
Extraordinary loss from debt extinguishments .......... -- 16 --
Changes in assets and liabilities:
Accounts receivable ................................... 1,994 (2,829) (1,338)
Inventories ........................................... (792) (171) (613)
Prepaid expenses ...................................... (511) (123) (28)
Other assets, net ..................................... (1,610) (414) 29
Accounts payable ...................................... (1,892) (4,805) 9,850
Other accrued liabilities ............................. 2,340 367 1,201
-------- -------- --------
Cash provided by operating activities ............ 12,547 3,824 16,219
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid to acquire additional interest in subsidiary.... -- -- (500)
Net additions to property and equipment .................. (14,343) (18,103) (31,401)
Cash paid to acquire franchise rights and goodwill ....... (18) (12,139) (238)
Cash received from the sale of assets .................... 2,851 5,432 7,926
-------- -------- --------
Cash used by investing activities ................ (11,510) (24,810) (24,213)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ....................... -- 9,541 41
Financing and offering costs paid ........................ -- (103) --
Proceeds received from the exercise of stock options ..... 21 -- --
Long-term debt borrowings ................................ 6,583 16,442 5,296
Principal payments on long-term debt ..................... (2,740) (3,384) (1,582)
-------- -------- --------
Cash provided by financing activities ............ 3,864 22,496 3,755
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................... 4,901 1,510 (4,239)
CASH AND CASH EQUIVALENTS, BEGINNING ....................... 4,565 3,055 7,294
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING .......................... $ 9,466 $ 4,565 $ 3,055
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest .................. $ 4,259 $ 4,163 $ 3,218
======== ======== ========
Cash paid during the year for income taxes .............. $ 1,408 $ 539 $ 154
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
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 five T.G.I.
Friday's restaurants under a management agreement. The Company also owns and
operates five Redfish, five Bamboo Club and will soon open one Alice
Cooper'stown restaurant.
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 consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate estimates and assumptions
based upon historical experience and various other factors and circumstances. We
believe our estimates and assumptions are reasonable in the circumstances;
however, actual results may differ from these estimates under different future
conditions.
We believe that the estimates and assumptions that are most important to the
portrayal of the our financial condition and results of operations, in that they
require management's most difficult, subjective or complex judgments, form the
basis for the accounting policies deemed to be most critical to our operations.
These critical accounting policies relate to the valuation and amortizable lives
of long-lived assets, goodwill and to other identifiable intangible assets,
valuation of deferred tax assets and reserves related to self-insurance. We
periodically perform asset impairment analysis of long-lived assets related to
our restaurant locations, goodwill and other identifiable intangible assets. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We use an actuarial based
methodology utilizing historical experience factors to periodically adjust
self-insurance reserves. We believe estimates and assumptions related to these
critical accounting policies are appropriate under the circumstances; however,
should future events or occurrences result in unanticipated consequences, there
could be a material impact on our future financial condition or results of
operations.
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.
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.
F-8
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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 31,
2001, the Company managed six restaurants, although one closed on February 26,
2002. Management fee income has not been recorded by the Company since September
2001 as a result of not meeting the cash flow provisions pursuant to the
Management Agreement.
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.
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 similar
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
(YEARS) DECEMBER 31, 2001 DECEMBER 25, 2000
------- ----------------- -----------------
Land ........................................ $ 534 $ 534
Building and leasehold improvements ......... 5-20 53,650 45,163
Kitchen equipment ........................... 5-7 21,591 19,004
Restaurant equipment ........................ 5-10 9,094 8,205
Smallwares and decor ........................ 5-10 7,557 7,077
Office equipment, software, and furniture ... 5-7 4,711 4,226
-------- --------
97,137 84,209
Less: Accumulated depreciation and
amortization ............................. (33,277) (25,737)
-------- --------
63,860 58,472
Construction in progress .................... 1,362 5,385
-------- --------
Total .................................... $ 65,222 $ 63,857
======== ========
Depreciation and amortization expense was $7,912,000 for 2001, $7,087,000
for 2000, and $4,734,000 for 1999.
Construction in progress (CIP) represents costs incurred by the Company
during the development of future restaurant sites for fixtures and building
improvements. As of December 25, 2000, approximately $4,800,000, respectively,
of the CIP balance was related to assets held with the intent to sell upon
completion and subsequently lease back.
F-9
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
FRANCHISE FEES
Franchise fees 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. These costs are being amortized on a straight-line basis over
the life of the agreement and consist of the following (in thousands):
AMORTIZATION
PERIOD
(YEARS) DECEMBER 31, 2001 DECEMBER 25, 2000
------- ----------------- -----------------
Franchise fees and license costs............ 20-30 $ 3,163 $ 3,156
Less: Accumulated amortization............. (861) (769)
--------- ---------
Total.................................... $ 2,302 $ 2,387
========= =========
GOODWILL
The Company has recorded significant goodwill in conjunction with major
acquisitions. 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
(YEARS) DECEMBER 31, 2001 DECEMBER 25, 2000
------- ----------------- -----------------
Acquisition of Main Street California....... 15-30 $ 16,632 $ 16,391
Acquisition of Main Street Midwest.......... 28-30 2,182 2,182
Acquisition of Redfish, LLC................. 25 500 500
Acquisition of Cornerstone ................. 15-20 134 134
Acquisition of Bamboo Club.................. 15 11,615 11,611
Less: Accumulated amortization........ (5,914) (4,463)
--------- ---------
Total.............................. $ 25,149 $ 26,355
========= =========
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
DECEMBER 31, 2001 DECEMBER 25, 2000
----------------- -----------------
Accrued payroll.......................... $ 2,264 $ 3,139
Accrued property and sales tax........... 1,763 1,345
Accrued insurance........................ 2,616 1,669
Accrued rent............................. 2,120 1,661
Gift certificate liability .............. 951 945
Other accrued liabilities................ 3,745 895
--------- ---------
Total........................... $ 13,459 $ 9,654
========= =========
F-10
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and 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 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
Basic earnings (loss) per share ("EPS") is computed by dividing earnings
(loss) available to stockholders by the weighted-average number of shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or contracts to issue common
stock were exercised or converted to stock or resulted in the issuance of stock
or resulted in the issuance of stock that then shared in the earnings or loss of
the Company. The assumed exercise of outstanding stock options and warrants have
been excluded from the calculations of diluted net loss per share as their
effect is antidilutive.
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 31, 2001, December 25,
2000, and December 27, 1999, (in thousands, except per share amounts):
2001 2000 1999
---------------------------- -------------------------- -------------------------
PER PER PER
SHARE NET SHARE NET SHARE
NET LOSS SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ ------ ------ ------ ------ ------ ------ ------
Basic EPS .................. $ (111) 14,048 $(0.01) $ 3,678 10,944 $0.34 $ 970 10,008 $0.09
Effect of stock
options and warrants ..... -- 533 -- -- 173 0.01 -- 399 --
Anti-dilutive stock ........ -- --
options and warrants ..... -- (533) -- -- -- -- -- -- --
------- ------- ------ ------- ------- ----- ------- ------- -----
Diluted EPS ................ $ (111) 14,048 $(0.01) $ 3,678 11,117 $0.33 $ 970 10,407 $0.09
======= ======= ====== ======= ======= ===== ======= ======= =====
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. It may soon open
a fourth for Alice Cooper'stown. 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.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company utilizes an
interest rate swap agreement to hedge the effects of fluctuations in interest
rates related to one of its long-term debt instruments. The interest rate swap
agreement met the criteria for cash flow hedge accounting. Amounts receivable or
payable due to settlement of the interest rate swap agreement are recognized as
interest expense on a monthly basis. A mark-to market adjustment is recorded as
F-11
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
a component of stockholders' equity, net of taxes, to reflect the fair value of
the interest rate swap agreement. The Company discontinues hedge accounting
prospectively if it is determined that the derivative is no longer effective.
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.
The Company adopted these standards on December 26, 2000. 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 total 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 spread over 30-day LIBOR being in the range of
1.75% to 2.75%. As of December 31, 2001, the interest rate swap agreement with
Bank of America has a notional principal amount of $6,525,000. The swap
qualifies as a cash flow hedge in accordance with SFAS No. 133. On a quarterly
basis, the Company will adjust the fair value of the swap on the balance sheet
(and charge/credit the amount of the change to other comprehensive income). As
of December 31, 2001, the fair value of the hedge resulted in a liability of
$336,260. The net-of-tax effect was ($201,756) in accumulated other
comprehensive loss with a deferred tax asset of $134,504.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Upon its initial adoption, Statement 142 eliminates the amortization
of all existing and newly acquired goodwill on a prospective basis and requires
companies to assess goodwill impairment, at least annually, based on the fair
value of the reporting unit. The Company was required to adopt the provisions of
Statement 141 immediately.
As of the date of adoption, the Company will have unamortized goodwill in
the amount of $25,149,000 which will be subject to the transition provisions of
Statements 141 and 142. Accumulated amortization related to goodwill is
$5,914,000 as of December 31, 2001. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
On October 3, 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
F-12
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
While Statement No. 144 supersedes Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of
a business. However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By broadening the
presentation of discontinued operations to include more disposal transactions,
the FASB has enhanced managements' ability to provide information that helps
financial statement users to assess the effects of a disposal transaction on the
ongoing operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. At the current time, management does not
believe that the adoption of this statement on January 1, 2002 will have a
material impact on the Company's financial position.
RECLASSIFICATIONS
Certain amounts in 2000 and 1999 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.
The Company has a policy of identifying and disposing of underperforming
assets. Under this policy, management reviews the operations and current and
projected cash flows. As a result of applying this policy, during fiscal years
ended 2001, 2000, and 1999, the Company recognized a loss (gain) on the sale of
assets and impairment of certain assets as follows (in thousands):
DECEMBER 31, DECEMBER 25, DECEMBER 27,
2001 2000 1999
---- ---- ----
Impairment charges and other ...... $ 3,453 $ (92) $ 494
======= ======= =======
IMPAIRMENT CHARGES AND OTHER
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 2001 and 2000,
respectively, current and projected cash flow deficits indicated that certain
leasehold improvements and other operating assets of several under-performing
locations were impaired under SFAS No. 121. Accordingly, the Company recorded a
pre-tax charge amounting to approximately $1,838,000 in the fourth quarter of
2001 and approximately $832,000 in the fourth quarter of 2000 to adjust the
carrying value of these assets to their estimated fair value. Estimated fair
value of assets was determined primarily on the likelihood of future use of the
assets and the fair value of the assets if the Company were to close the
specified locations. The majority of the assets impaired were leasehold
improvements and certain kitchen equipment that would have no value in the event
of future liquidation. Management determined that these assets have no future
value because these items are permanently affixed to the premises, and would
cause physical damage to the structure if removed and/or would be more costly to
move than their net book value. During the fourth quarter 2001, the Company
recorded an impairment charge of approximately $1,615,000 against its management
agreement with CNL for five Northern California locations and the El Paso
location.
F-13
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
Other charges include severance, contract termination, professional service
costs, and settlement of litigation. Other charges of $924,000, net, in 2000
represents the final settlement gain (in excess of book value) the Company
received from the City and County of San Francisco, California in connection
with condemnation proceedings against a restaurant the Company operated. Other
charges 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.
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 causal
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 31, 2001, December 25,
2000, and December 27, 1999 consist of the following:
BALANCE AT
BEGINNING OF EXPENSE BALANCE AT
PERIOD RECORDED PAYMENTS MADE END OF PERIOD
----------- ----------- ----------- -----------
RESERVE FOR SETTLEMENT LOSSES:
Year ended December 31, 2001 $ 149,000 $ -- $ (115,000) $ 34,000
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
INSURANCE AND CLAIMS RESERVES:
Year ended December 31, 2001 $ 1,668,700 $ 5,258,539 $(4,310,939) $ 2,616,300
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
In 2001, the Company paid the balance of the legal fees reserved for in
2000 amounting to $111,000. The remaining balance of $34,000 represents a
reserve for the settlement of the remaining outstanding gift certificates from
stores acquired in California during 1998.
In 2000, the Company settled and paid its pending lawsuit. 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 settlement losses decreased to a balance
of $149,000 at December 25, 2000.
In 1999, the Company had increased the reserve for settlement losses by
approximately $494,000 because of 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 $341,000 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.
F-14
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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.
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. In. 2001, 2000, and 1999, the
Company utilized net operating loss carryforwards. The effect of temporary
differences and carryforwards that gave rise to deferred tax balances at
December 31, 2001, and December 25, 2000, were as follows (in thousands):
F-15
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
NET DEFERRED TAX ASSETS/(LIABILITIES) DECEMBER 31, 2001 DECEMBER 25, 2000
- ------------------------------------- ----------------- -----------------
(In Thousands)
Temporary differences:
Basis differences in investments ..................... $ 652 $ 664
Basis differences in depreciable and amortizable
assets ............................................. (3,944) (1,930)
Provision for estimated expenses ..................... 2,301 2,019
Revenue recognition .................................. 63 (1,016)
Tax carryforwards:
General business and AMT credits ..................... 5,958 5,689
Net operating loss and capital loss carryforwards .... 2,320 3,070
Valuation reserve ...................................... (5,700) (7,894)
------- -------
Total ........................................ $ 1,650 $ 602
======= =======
The amounts recorded as net deferred tax assets at December 31, 2001 and
December 25, 2000, are included as a component of other assets in the
consolidated balance sheets.
Income tax expense (benefit) consists of the following (in thousands):
CURRENT DEFERRED TOTAL
------- -------- -------
Year ended December 31, 2001:
U.S. Federal ................... $ 228 $ (913) $ (685)
State and local ................ 175 (135) 40
------- ------- -------
$ 403 $(1,048) $ (645)
======= ======= =======
The net change in the total valuation allowance for the year ended December
31, 2001 was a decrease of $2,194,000, and there was no change for the year
ended December 25, 2000. At December 31, 2001, the Company had approximately
$6,600,000 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 2020. Management believes that its ability to utilize its net
operating loss carryforwards and certain of its general business and AMT credits
to offset future taxable income within the carryforward periods under existing
tax laws and regulations is more likely than not. Reconciliations of the federal
income tax rate to the Company's effective tax rate were as follows:
DECEMBER 31, 2001 DECEMBER 25, 2000 DECEMBER 27, 1999
----------------- ----------------- -----------------
Statutory federal rate .................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit ....... (51.4) 6.0 6.0
Nondeductible expenses .................... (4.4) 0.4 1.4
Benefit of FICA credit .................... -- (17.5) (58.7)
Change in valuation allowance ............. 107.1 (16.5) 21.5
----- ----- -----
85.3% 6.4% 4.2%
===== ===== =====
At December 31, 2001 and December 25, 2000, $1,072,000 and $461,000 of
estimated income tax payments are included in prepaid expenses.
5. LINE OF CREDIT
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
F-16
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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 31, 2001. During the quarter ended
September 21, 2001, we renewed our $5 million operating line at 1.125% over
prime. The line of credit matures on July 15, 2002. At December 31, 2001, and
December 25, 2000 the Company had no borrowings outstanding under this line of
credit.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MATURITY DECEMBER 31, DECEMBER 25,
DATES INTEREST RATES MONTHLY PAYMENT 2001 2000
----- -------------- --------------- ---- ----
CNL Term Loan II, ............. 2012 9.457% and the $ 87 $ 17,539 $ 18,454
secured by assets of 16 one month LIBOR
T.G.I Friday's Restaurants rate plus 320
basis points
Bank of America ............... 2013 6.25 - 8.52% 30 6,525 --
Merrill Lynch ................. 2007-2015 8.25% 15 5,925 6,324
FFCA .......................... 2002-2016 10.5%-11.0% 17 985 1,226
GE Capital .................... 2002-2014 7.22%-8.01% 38 3,442 3,789
FMAC .......................... 2010-2015 7.64%-11.0% 69 15,828 16,608
---- --------- ---------
Total .................... $256 50,244 46,401
====
Less current portion .......... (3,012) (2,006)
--------- ---------
Total .................... $ 47,232 $ 44,395
========= =========
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 from CNL ("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.
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. During 2001, the company borrowed
$6,525,000 from the new permanent long-term financing to fund the construction
of three new locations. Those locations include a TGI Friday's in North
Scottsdale AZ, Thousand Oaks, CA and N. Long Beach CA.
F-17
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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.
All long-term debt is secured by certain assets of various restaurant
locations.
Maturities of long-term debt, giving effect to the borrowings discussed
above, are as follows at December 31, 2001 (in thousands):
2002....................................... $ 3,012
2003....................................... 2,956
2004....................................... 3,187
2005....................................... 3,472
2006....................................... 3,604
Thereafter................................. 34,013
---------
Total................................. $ 50,244
=========
7. 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
F-18
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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:
DECEMBER 31, DECEMBER 25, DECEMBER 27,
2001 2000 1999
---- ---- ----
(In Thousands, Except Per Share Amounts)
Net Income (loss):
As Reported........ $(111) $3,678 $ 970
Pro Forma.......... $(961) $2,736 $ 169
Basic EPS:
As Reported........ $(0.01) $0.34 $0.09
Pro Forma.......... (0.07) 0.25 0.02
A summary of the status of the Company's stock option plans at December 31,
2001, December 25, 2000, and December 27, 1999, and changes during the years
then ended is presented in the table and narrative below:
2001 2000 1999
-------------------- -------------------- --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at beginning
of period..................... 2,733,000 $3.05 2,439,000 $3.22 2,381,000 $2.98
Granted.......................... 447,000 3.79 473,000 3.38 737,000 3.30
Exercised........................ (6,999) 3.02 0 0.00 (234,459) 2.42
Cancelled........................ (135,504) 3.47 (179,000) 2.88 (444,541) 3.77
--------- --------- ---------
Options outstanding at end
of period..................... 3,037,497 3.14 2,733,000 3.05 2,439,000 3.22
========= ========= =========
Exercisable at end of period..... 2,112,332 2.96 1,859,333 2.91 1,642,544 2.79
========= ========= =========
Weighted average fair value of
options granted............... $2.56 $1.52 $1.82
===== ===== =====
The weighted average fair value at the date of grant for options granted
during fiscal 2001, 2000 and 1999 were estimated using the Black-Scholes pricing
model with the following assumptions: weighted average risk-free interest rate
of 5.22%, 6.29% and 5.95%; weighted average volatility of 50.00%, 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 31, 2001 are as
follows:
OUTSTANDING EXERCISABLE
----------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- -------------- ------ ---------------- ----- ------ -----
$1.72 - $2.75 950,500 5.20 years $2.24 917,167 $2.20
$3.00 - $3.65 1,801,997 7.73 years $3.35 990,165 $3.26
$4.00 - $5.19 285,000 4.87 years $3.85 205,000 $4.76
--------- ---------
Total......... 3,037,497 2,112,332
========= =========
COMMON STOCK WARRANTS
As of December 31, 2001 and December 25, 2000, 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-19
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
DEVELOPMENT AGREEMENTS
The Company is obligated under four separate development agreements with
Carlson Restaurants Worldwide to open 7 new T.G.I. Friday's restaurants through
2003. 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. In 2001, the development agreements were amended to create
the above obligation. The Company estimates that it will invest approximately $5
million to open two stores in 2002 and approximately $12.5 million to open five
stores in 2003.
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 $7,444,000, $6,634,000, and
$4,830,000,under these agreements during 2001, 2000, and 1999, respectively. In
addition, the Company could be required to spend up to 4% of gross sales on
marketing. Marketing expense for T. G. I. Friday's locations under these
agreements were approximately $4,772,000, $4,163,000, and $2,733,000, during
2001, 2000, and 1999, 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 31, 2001, were as follows (in thousands):
2002....................................... $ 11,367
2003....................................... 10,748
2004....................................... 9,962
2005....................................... 9,457
2006....................................... 8,682
Thereafter................................. 84,793
----------
Total................................. $ 135,009
==========
Rent expense during 2001, 2000, and 1999, was approximately $10,836,000,
$8,662,000, and $6,948,000, respectively. In addition, the Company paid
contingent rentals of $1,060,000, $957,000, and $678,000, during 2001, 2000, and
1999, 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
During the first quarter of fiscal 2001, the Company completed two
sale-leaseback transactions with regard to the buildings, fixtures, and
improvements at two restaurant sites whereby the Company leased back the
restaurant sites under operating leases over a twenty-year period under terms
similar to those in the preceding paragraph. The Company received proceeds of
approximately $3,219,000. The transactions resulted in a deferred gain of
approximately $41,000, which will be accreted to income as a reduction of rent
over the twenty-year lease terms. Pursuant to the lease agreements, annual base
rent was approximately $469,000 as of December 31, 2001, 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
2001, no percentage rent was required for these locations.
F-20
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (CONTINUED)
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.
CONTINGENCIES
In the normal course of business, the Company is named as a defendant in
various litigation matters. In management's opinion, based on consultation with
legal counsel, the ultimate resolution of these matters will not have a material
impact on the Company's financial position, results of operations or liquidity.
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, results of operations or liquidity
9. 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 $ 248,000, $174,000, and $122,000, during 2001, 2000, and 1999,
respectively.
10. RELATED PARTY TRANSACTIONS
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
$253,000, $224,000, and $244,000, were paid in rent for this leased space during
2001, 2000, and 1999, respectively. In addition, a new lease was entered into
with the same entity in 2002 wherein the Company leased additional office space
with a term commencing on April 1, 2002.
The Company is under contract to manage five restaurants with an unrelated
party. The Company is obligated to provide both restaurant management and
capital to the operations. The Company receives a management fee for these
services. The fees totaled $432,000, $611,000, and $865,000, in each of the
fiscal years of 2001, 2000, and 1999, respectively. Management fee income has
not been earned or recorded by the Company since the end of the first quarter
2001 as a result of not meeting the cash flow provisions pursuant to the
Management Agreement. At December 31, 2001 the company recorded an impairment
charge against the Management Agreement in the amount of $1,615,000. The Company
had receivables of approximately $1,167,000 and $2,210,000 for 2001 and 2000
respectively, related to the funding of the operations.
11. SUBSEQUENT EVENT
On March 19, 2002, the Company purchased the land and building of the El
Paso store that was closed in the fourth quarter of 2001 for $1,603,000.
F-21