UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly Period Ended July 1, 2002
Commission File Number: 000-18668
MAIN STREET AND MAIN INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 11-2948370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5050 N. 40TH STREET, SUITE 200, PHOENIX, ARIZONA 85018
(Address of principal executive offices)
(602) 852-9000
(Registrant's telephone number, including area code)
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 [ ]
Number of shares of common stock, $.001 par value, of registrant outstanding at
July 30, 2002: 14,140,928
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Main Street and Main Incorporated
Condensed Consolidated Balance Sheets -
July 1, 2002 (unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended July 1, 2002
and June 25, 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended July 1, 2002 and June 25, 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
ITEM 1. FINANCIAL STATEMENTS
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value and Share Data)
JULY 1, DECEMBER 31,
2002 2001
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ..................................... $ 8,846 $ 9,466
Accounts receivable, net ...................................... 1,663 2,683
Inventories ................................................... 2,691 2,416
Prepaid expenses .............................................. 1,629 1,255
--------- ---------
Total current assets ....................................... 14,829 15,820
Property and equipment, net ..................................... 69,233 65,222
Other assets, net ............................................... 4,744 3,969
Goodwill, net ................................................... 25,149 25,149
Franchise fees, net ............................................. 2,279 2,302
--------- ---------
Total assets ............................................... $ 116,234 $ 112,462
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................. $ 3,168 $ 3,012
Accounts payable .............................................. 2,100 7,336
Other accrued liabilities ..................................... 14,546 13,459
--------- ---------
Total current liabilities .................................. 19,814 23,807
Long-term debt, net of current portion .......................... 51,983 47,232
Other liabilities and deferred credits .......................... 2,045 1,216
--------- ---------
Total liabilities .......................................... 73,842 72,255
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized;
no shares issued and outstanding in 2002 and 2001 ............. -- --
Common stock, $.001 par value, 25,000,000 shares authorized;
14,129,929 and 14,052,600 shares issued and outstanding in
2002 and 2001, respectively ................................... 14 14
Additional paid-in capital ...................................... 53,889 53,645
Accumulated deficit ............................................. (10,718) (13,250)
Other comprehensive loss ........................................ (793) (202)
--------- ---------
Total stockholders' equity ................................. 42,392 40,207
--------- ---------
Total stockholders' equity and liabilities ............ $ 116,234 $ 112,462
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
-------- --------
(UNAUDITED)
JULY 1, JUNE 25,
2002 2001
-------- --------
Revenue ............................................. $ 57,898 $ 53,229
-------- --------
Restaurant operating expenses
Cost of sales ..................................... 15,775 14,783
Payroll and benefits .............................. 17,675 16,188
Depreciation and amortization ..................... 1,935 1,899
Other operating expenses .......................... 16,852 15,085
-------- --------
Total restaurant operating expenses .......... 52,237 47,955
-------- --------
Income from restaurant operations ................... 5,661 5,274
Depreciation and amortization ..................... 85 447
General and administrative expenses ............... 2,378 1,985
Preopening expenses ............................... 440 128
New manager training expenses ..................... 447 357
Management fee income ............................. -- (145)
-------- --------
Operating income .................................... 2,311 2,502
Interest expense and other, net ................... 770 948
-------- --------
Net income before income taxes ...................... 1,541 1,554
Income tax expense ................................ 277 --
-------- --------
Net income before extraordinary loss from debt
extinguishment .................................... 1,264 1,554
Extraordinary loss from debt extinguishment ......... -- --
-------- --------
Net income .......................................... $ 1,264 $ 1,554
======== ========
Basic earnings per share
Net income before extraordinary loss from debt
extinguishment .................................. $ 0.09 $ 0.11
Extraordinary loss from debt extinguishment ....... -- --
-------- --------
Net income ..................................... $ 0.09 $ 0.11
======== ========
Diluted earnings per share
Net income before extraordinary loss from debt
extinguishment .................................. $ 0.08 $ 0.11
Extraordinary loss from debt extinguishment ....... -- --
-------- --------
Net income ..................................... $ 0.08 $ 0.11
======== ========
Weighted average number of shares outstanding
-- Basic .......................................... 14,084 14,046
======== ========
Weighted average number of shares outstanding
-- Diluted ........................................ 15,258 14,469
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
SIX MONTHS ENDED
----------------------
(UNAUDITED)
JULY 1, JUNE 25,
2002 2001
--------- ---------
Revenue ............................................. $ 113,227 $ 104,934
--------- ---------
Restaurant operating expenses
Cost of sales ..................................... 30,958 29,381
Payroll and benefits .............................. 34,571 32,023
Depreciation and amortization ..................... 3,767 3,710
Other operating expenses .......................... 32,684 29,766
--------- ---------
Total restaurant operating expenses .......... 101,980 94,880
--------- ---------
Income from restaurant operations ................... 11,247 10,054
Depreciation and amortization ..................... 176 893
General and administrative expenses ............... 4,542 3,871
Preopening expenses ............................... 882 526
New manager training expenses ..................... 813 725
Management fee income ............................. -- (285)
--------- ---------
Operating income .................................... 4,834 4,324
Interest expense and other, net ................... 1,690 1,982
--------- ---------
Net income before income taxes ...................... 3,144 2,342
Income tax expense ................................ 566 --
--------- ---------
Net income before extraordinary loss from debt
extinguishment .................................... 2,578 2,342
Extraordinary loss from debt extinguishment ......... 46 --
--------- ---------
Net income ..................................... $ 2,532 $ 2,342
========= =========
Basic earnings per share
Net income before extraordinary loss from debt
extinguishment .................................. $ 0.18 $ 0.17
Extraordinary loss from debt extinguishment ....... -- --
--------- ---------
Net income ..................................... $ 0.18 $ 0.17
========= =========
Diluted earnings per share
Net income before extraordinary loss from debt
extinguishment .................................. $ 0.17 $ 0.16
Extraordinary loss from debt extinguishment ....... -- --
--------- ---------
Net income ..................................... $ 0.17 $ 0.16
========= =========
Weighted average number of shares outstanding
-- Basic .......................................... 14,069 14,046
========= =========
Weighted average number of shares outstanding
-- Diluted ........................................ 15,006 14,262
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
SIX MONTHS ENDED
--------------------
(UNAUDITED)
July 1, June 25,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 2,532 $ 2,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 3,943 4,603
Changes in assets and liabilities:
Accounts receivable, net ........................... 1,020 1,926
Inventories ........................................ (275) (491)
Prepaid expenses ................................... (374) (306)
Other assets, net .................................. (845) 14
Accounts payable ................................... (5,236) (4,337)
Other accrued liabilities and deferred credits ..... 1,324 1,260
-------- --------
Cash provided by operating activities ........ 2,089 5,011
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment .............. (7,810) (5,032)
Cash received from sale-leaseback transactions, net .. -- 2,851
Cash paid to acquire franchise rights and goodwill ... (50) (18)
-------- --------
Cash used in investing activities ............ (7,860) (2,199)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings ............................ 7,435 4,350
Principal payments on long-term debt ................. (2,528) (1,258)
Proceeds received from the exercise of stock options . 244 --
-------- --------
Cash provided by financing activities ........ 5,151 3,092
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ................ (620) 5,904
CASH AND CASH EQUIVALENTS, BEGINNING ................... 9,466 4,565
-------- --------
CASH AND CASH EQUIVALENTS, ENDING ...................... $ 8,846 $ 10,469
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes ......... $ 47 $ 454
Cash paid during the period for interest ............. $ 1,821 $ 2,199
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
MAIN STREET AND MAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2002
(Unaudited)
1. INTERIM FINANCIAL REPORTING
The accompanying condensed consolidated financial statements have been prepared
without an independent audit pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished herein reflects
all adjustments (consisting of normal recurring accruals and adjustments), which
are, in the opinion of the Company, necessary to fairly state the operating
results for the respective periods. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. For a
complete description of the accounting policies, see the Company's Form 10-K
Annual Report for the fiscal year ended December 31, 2001.
The Company operates on fiscal quarters of 13 weeks. The results of operations
for the three and six months ended July 1, 2002, are not necessarily indicative
of the results to be expected for a full year.
2. PROPERTY AND EQUIPMENT
Property and equipment includes $1,603,000 that represents the purchase of the
building and land of the El Paso restaurant location that was closed on October
16, 2001. The Company is holding these assets for sale.
3. INCOME TAXES
The Company recorded an income tax provision for the quarters ended April 1,
2002 and July 1, 2002. In prior years, the Company did not have an income tax
provision due to the utilization of tax loss and tax credit carryforwards.
Although the Company still has tax loss and tax credit carryforwards available,
the law limits the estimated amount that can be realized in 2002. Based on these
circumstances, the Company has estimated its effective tax rate during 2002 to
be 18%.
4. 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 adopted FASB Statement No.'s 141 and 142 effective January 1, 2002.
Upon adoption, the Company had net unamortized goodwill in the amount of
$25,149,225 that is subject to the transition provisions of Statements 141 and
142. The effect of the Company's adoption of this method of accounting resulted
in a reduction in amortization expense of $357,000 ($0.02 basic earnings per
share, $0.03 fully diluted earnings per share) and $713,000 ($0.05 for both
basic and fully diluted earnings per share) for the three and six-month periods
ended July 1, 2002, respectively.
In connection with SFAS No.142's transitional goodwill impairment evaluation,
the Statement required the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company was required to identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company was required to determine the
fair value of each reporting unit and compare it to the carrying amount of the
reporting unit within six months of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the reporting unit, an
indication would exist that the reporting unit goodwill may be impaired and the
Company would be required to perform the second step of the transitional
impairment test.
7
The Company has determined that its restaurants meet the criteria supporting a
single reporting unit consistent with the aggregation of all restaurants into a
single reportable operating segment under SFAS No. 131. The Company has
performed the requisite testing related to the carrying value of goodwill in
accordance with SFAS No. 142. The fair value of the reporting unit was analyzed
using two fair value approaches to determine enterprise value: (1) EBITDA
multiples and (2) stock market price data. Under both approaches, the implied
fair value of the reporting unit exceeded its carrying amount, including
goodwill and intangibles. The Company determined there was no indication of
impairment to goodwill and it was not necessary to perform any additional tests.
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. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not
effect the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds the requirement to report gains and losses from
extinguishment of debt as an extraordinary item. Additionally, this statement
amends Statement 13 to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The provisions of this statement relating to Statement 4 are applicable in
fiscal years beginning after May 15, 2002. The provisions of this Statement
related to Statement 13 are effective for transactions occurring after May 15,
2002. All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. For purposes of this Statement, an
exit activity includes, but is not limited to a restructuring as that term is
defined in IAS 37, "Provisions, Contingent Liabilities, and Contingent Assets".
The Statement is effective for exit or disposal activities initiated after
December 31, 2002. Management is evaluating the impact of adopting SFAS No. 146
on the Company's financial statements.
5. DERIVATIVE INSTRUMENTS AND HEDGE ACTIVITY
The Company follows the accounting guidelines of SFAS No. 133 as amended.
On January 31, 2001, the Company entered into a $15 million Development Facility
with Bank of America to provide construction and permanent financing for certain
Company T.G.I. Friday's units. During an 18-month development period ending July
31, 2002, the facility allows for borrowings up to $15 million at an interest
rate indexed to the bank's prime rate less 50 basis points. Subsequent to the
development period, the facility converts to term debt and begins amortizing
over a twelve-year period. The term debt will have interest rates with a
performance-based formula of senior funded debt to EBITDA, with the range over
30-day LIBOR being 1.75% to 2.75%. In conjunction with this note, on January 31,
2001, the Company entered into an interest rate swap agreement with Bank of
America. This swap agreement effectively fixes the Company's one-month LIBOR
base to 6.26% per annum on a notional amount of $12,500,000 from July 2002
through June 2014. The swap qualifies as a cash flow hedge in accordance with
SFAS No. 133. On a periodic basis, the Company will adjust the fair market value
of the swap on the balance sheet and offset the amount of the change to other
comprehensive income. As of July 1, 2002, the fair value of the hedge resulted
in a liability of $950,294. The net-of-tax effect was ($570,176) in accumulated
other comprehensive loss with a deferred tax asset of $380,118.
On March 26, 2002, the Company entered into an interest rate swap agreement with
Bank of America on a note held by CNL Funding with a remaining unpaid balance of
$5,516,000. The interest rate on the note, 9.457%, is the same as the interest
rate to be received under the interest rate swap agreement. The swap effectively
floats the 9.457% note to a 30-day LIBOR base plus a spread of 4.34% on a
notional amount of $5,516,000. On a quarterly basis, the Company adjusts the
fair value of the swap on the balance sheet (and charges/credits the amount of
the change to other comprehensive income). As of July 1, 2002, the fair value of
the hedge resulted in an asset of $109,269. The net-of-tax effect was $65,561 in
accumulated other comprehensive income with a deferred tax liability of $43,708.
8
In conjunction with the remaining unhedged amounts on the above referenced
development facility and other portions of the Company's floating rate debt, on
April 18, 2002, the Company entered into an interest rate swap agreement with
Bank of America. This swap agreement effectively fixes the Company's floating
rate liabilities to 5.65% per annum (plus credit spread) on a notional amount of
$10,700,000 from May 2002 through May 2012. The swap qualifies as a cash flow
hedge in accordance with SFAS No. 133. On a periodic basis, the Company will
adjust the fair market value of the swap on the balance sheet and offset the
amount of the change to other comprehensive income. As of July 1, 2002, the fair
value of the hedge resulted in a liability of $480,512. The net-of-tax effect
was ($288,307) in accumulated other comprehensive loss with a deferred tax asset
of $192,205.
6. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and adjustments to
derivative statements. The components of comprehensive income are as follows (in
thousands):
SIX MONTHS ENDED
-----------------------------
JULY 1, 2002 JUNE 25, 2001
------------ -------------
Net income $ 2,532 $ 2,342
Other comprehensive income (loss),
net of taxes;
derivative income (loss),
net of taxes of $394 and $57
for the period ended July 1,
2002 and June 25, 2001,
respectively (591) (85)
------- -------
Comprehensive income $ 1,941 $ 2,257
======= =======
7. EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share, or "EPS",
computations for the three and six months ended July 1, 2002, and June 25, 2001
(in thousands, except per share amounts):
THREE MONTHS ENDED
-----------------------------------------------------
JULY 1, 2002 JUNE 25, 2001
------------------------- -------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
Basic $1,264 14,084 $ 0.09 $1,554 14,046 $ 0.11
Effect of stock options
and warrants -- 1,174 -- -- 423 --
------ ------ ------ ------ ------ ------
Diluted $1,264 15,258 $ 0.08 $1,554 14,469 $ 0.11
====== ====== ====== ====== ====== ======
SIX MONTHS ENDED
-----------------------------------------------------
JULY 1, 2002 JUNE 25, 2001
------------------------- -------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
Basic $2,532 14,069 $ 0.18 $2,342 14,046 $ 0.17
Effect of stock options
and warrants -- 937 -- -- 216 --
------ ------ ------ ------ ------ ------
Diluted $2,532 15,006 $ 0.17 $2,342 14,262 $ 0.16
====== ====== ====== ====== ====== ======
9
8. STOCK OPTION PLAN
On April 30, 2002, the Company's Board of Directors adopted and its stockholders
approved the 2002 Incentive Stock Option Plan (the "2002 Plan"). The 2002 Plan
provides for the issuance of up to 1,000,000 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 or as
options which are not intended to meet the requirements of such section
("non-qualified stock options"). Awards granted under the 2002 Plan also may
include stock appreciation rights and restricted stock awards.
The exercise price of all incentive stock options granted under the 2002 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 plan administrator (the Board of
Directors) shall set the term of each stock option, but no incentive stock
option shall be exercisable more than 10 years after the date such option is
granted.
During the quarter ended July 1, 2002, options to acquire 130,000 shares of the
Company's Common Stock were granted. On July 22, 2002, the Company's Board of
Directors approved the issuance of an additional 262,000 options to acquire the
Company's Common Stock. The record date of the awards was set to the close of
business on July 23, 2002. The market price of the Company's Common Stock on
July 23, 2002 was $4.16.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING
OUR BUSINESS STRATEGIES, OUR BUSINESS, AND THE INDUSTRY IN WHICH WE OPERATE.
THESE FORWARD-LOOKING STATEMENTS ARE BASED PRIMARILY ON OUR EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, SOME OF WHICH ARE BEYOND OUR
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF NUMEROUS FACTORS, INCLUDING THOSE SET FORTH IN OUR
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
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 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.
10
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:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 1, 2002 JUNE 25, 2001 JULY 1, 2002 JUNE 25, 2001
------------ ------------- ------------ -------------
Revenue 100% 100% 100% 100%
RESTAURANT OPERATING EXPENSES:
Cost of sales 27.3 27.8 27.3 28.0
Payroll and benefits 30.5 30.4 30.5 30.5
Depreciation and amortization 3.3 3.6 3.3 3.5
Other operating expenses 29.1 28.3 28.9 28.4
------ ------ ------ ------
Total restaurant operating expenses 90.2 90.1 90.0 90.4
------ ------ ------ ------
Income from restaurant operations 9.8 9.9 10.0 9.6
OTHER OPERATING (INCOME) EXPENSES:
Depreciation and amortization 0.2 0.8 0.2 0.9
General and administrative expenses 4.1 3.7 4.0 3.7
Preopening expenses 0.8 0.2 0.8 0.5
New manager training expenses 0.8 0.7 0.7 0.7
Management fee income -- (0.3) -- (0.3)
------ ------ ------ ------
Operating income 3.9 4.8 4.3 4.1
Interest expense and other, net 1.3 1.8 1.5 1.9
------ ------ ------ ------
Net income before income tax 2.6% 3.0% 2.8% 2.2%
====== ====== ====== ======
THREE AND SIX MONTHS ENDED JULY 1, 2002, COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 25, 2001
Revenue for the three months ended July 1, 2002, increased by 9% to $57,898,000
compared with $53,229,000 for the comparable period in 2001. Revenue for the six
months ended July 1, 2002, increased by 8% to $113,227,000 compared with
$104,934,000 for the comparable period in 2001. The increases resulted from the
opening of eight new restaurants since the second quarter 2001 (four restaurants
during the fourth quarter 2001 and four restaurants during the second quarter of
2002). Additionally, we had a same-store sales increase of 1.5% for the quarter
compared to 2.7% for the comparable quarter in 2001. For the six months ended
July 1, 2002, we had a same-store sales increase of 1.9% compared to 2.8% for
the same period in 2001. The decrease in same-store sales compared to the prior
year was due primarily to the introduction of new menu items that lowered
average ticket prices and failed to drive customer traffic.
Cost of sales as a percentage of revenue decreased to 27.3% for the three months
ended July 1, 2002, compared with 27.8% for the comparable quarter in 2001. For
the six months ended July 1, 2002, cost of sales as a percentage of revenue
decreased to 27.3% from 28.0% for the comparable period in 2001. The decrease in
cost of sales from the comparable period in 2001 was the result of favorable
arrangements with our principal food suppliers that provided for better pricing
on meat and dairy combined with better alcohol margins.
Payroll and benefit costs increased as a percentage of revenue to 30.5% for the
three months ended July 1, 2002, compared to 30.4% for the comparable quarter in
2001. For the six months ended July 1, 2002 and for the comparable period in
2001, payroll and benefits as a percentage of revenue remained constant. The
increase for the three months ended July 1, 2001 was primarily attributable to
higher health insurance costs. Increases due to higher wage rates due to a
minimum wage increase in California were offset by the implementation of
programs that have reduced overtime and hourly labor costs.
Depreciation and amortization expense before income from restaurant operations
includes depreciation of restaurant property and equipment and amortization of
franchise fees and liquor licenses. Depreciation and amortization expense
decreased as a percentage of revenue to 3.3% for the three months ended July 1,
2002 from 3.6% for the comparable period in 2001. For the six months ended July
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1, 2002, depreciation and amortization decreased to 3.3% from 3.5% for the
comparable period in 2001. Although depreciation expense increased as a result
of asset purchases for new restaurants, the increases were offset by a reduction
in depreciation expense as of result of the impairment of assets for several
under-performing locations recorded during the fourth quarter 2001.
Other operating expenses increased as a percentage of revenue to 29.1% for the
three months ended July 1, 2002, from 28.3% for the comparable quarter in 2001.
For the six months ended July 1, 2002, other operating expenses increased as a
percentage of revenue to 28.9% from 28.4% for the comparable period in 2001.
These increases resulted from increased advertising and promotion expense
related to additional marketing programs implemented during the first quarter of
2002, the implementation of marketing efforts for the Bamboo Club restaurants
and higher workers compensation and general liability insurance rates. We were
able to offset the increase somewhat by a reduction in utility costs resulting
from lower utility rates as compared to last year in our California market
combined with the implementation of energy conservation programs.
Depreciation and amortization after income from restaurant operations includes
depreciation of Corporate property and equipment and amortization of goodwill,
as applicable. Depreciation and amortization expense decreased as a percentage
of revenue to 0.2% for the three-month period ended July 1, 2002 as compared to
0.8% for the comparable period in 2001. For the six months ended July 1, 2002,
amortization of intangibles decreased to 0.2% from 0.9% for the comparable
period in 2001. These decreases were the result of the elimination of goodwill
amortization effective January 1, 2002 under FAS 142. Goodwill amortization for
the three and six months ended June 25, 2001 was $356,672 and $713,384,
respectively, and total amortization of intangibles would have been $441,672 and
$889,384 for the three and six month periods ended July 1, 2002, respectively,
as adjusted for the elimination of this goodwill amortization expense.
General and administrative expenses increased as a percentage of revenue to 4.1%
for the three months ended July 1, 2002, compared with 3.7% for the comparable
period in 2001. For the six months ended July 1, 2002, general and
administrative expenses increased as a percentage of revenue to 4.0% from 3.7%
for the comparable period in 2001. The increases were primarily due to increases
in salaries and benefits and travel related to the building of the Bamboo Club
management and operational infrastructure. Other increases resulted from
increases in technology related costs, higher rent expense related to additional
office space and higher legal costs.
Preopening expenses increased as a percentage of revenue to 0.8% for the three
months ended July 1, 2002 from 0.2% for the comparable period in 2001. For the
six month period ended July 1, 2002, preopening expenses increased as a
percentage of revenue to 0.8% from 0.5% for the comparable period in 2001. The
increase in preopening expenses was the result of opening four new stores during
the three-month period ended July 1, 2002 versus no new store openings during
the comparable period in 2001. The increase in the six-month period ended July
1, 2002 was the result of opening one additional store during the period as
compared to the prior year and the timing of expenses. The majority of
preopening expenses occur during the two months prior to opening a new store.
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. New manager training expenses increased as a
percentage of revenue for the three-month period ended July 1, 2002 to 0.8% from
0.7% for the comparable period in 2001. For the six month period ended July 1,
2002 and for the comparable period in 2001, new manager training expenses
remained constant at 0.7% of revenue. These increases were the result of opening
of four new restaurants during the period ended July 1, 2002.
Under Management Agreements, we manage four stores in Northern California and
one store in El Paso Texas and are entitled to a management fee if certain cash
flow levels are achieved. Based on the cash flow provisions of the Management
Agreement, we were unable to record management fee income during the three and
six month periods ended July 1, 2002 compared to $145,000 and $285,000, or 0.3%
of revenue, for the three and six month periods in 2001, respectively.
Interest expense decreased as a percentage of revenue to 1.3% for the three
months ended July 1, 2002, compared with 1.8% for the comparable quarter in
2001. For the six-month period ended July 1, 2002, interest expensed decreased
as a percentage of revenue to 1.5% from 1.9% for the comparable period in 2001.
We have obtained new permanent financing of $9,610,000 from Bank of America
since the period ended June 25, 2001. The interest related to the increased
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borrowing has been offset by obtaining more favorable interest rates on our
variable interest rate debt combined with refinancing of a portion of our higher
rate debt.
Income tax expense as a percentage of revenue was 0.5% for both the three and
six-month periods ended July 1, 2002. In prior years, we did not have an income
tax provision due to the utilization of tax loss and tax credit carry forwards.
Although we still have tax loss and tax credit carryforwards available, the law
limits the amount we can realize in 2002; accordingly, we have estimated our
effective tax rate during 2002 to be 18%.
LIQUIDITY AND CAPITAL RESOURCES
Our current liabilities exceed our current assets because of the longer payment
terms on trade payable, inventories and other current liabilities (payment terms
are normally 15 to 30 days). Comparatively, the restaurant sales cycle is short
as we receive substantially immediate payment for all sales transactions. As of
July 1, 2002, we had a cash balance of $8,846,000 and monthly cash receipts have
been sufficient to pay all obligations as they become due.
As of July 1, 2002, we had long-term debt of $51,983,000, net of current portion
of $3,168,000. During the period ended July 1, 2002, we obtained new permanent
financing of $7,435,000 from Bank of America for the refinance of two existing
T.G.I. Friday's locations (Cerritos, California and Oxnard, California) and the
financing one new T.G.I. Friday's location (Porter Ranch, California).
During the quarter ended July 1, 2002, we opened three new restaurants (one
T.G.I. Friday's, one Bamboo Club and one Redfish) and converted our former
Cleveland, Ohio Redfish location into an Alice Cooper'stown restaurant under a
license agreement. We have plans to open between three and six additional new
Bamboo Club restaurants during the remainder of 2002. New store openings through
the remainder of 2002 will be financed by our current cash on hand and
internally generated funds from operations. The Company is currently negotiating
for additional debt financing to fund future Bamboo Club locations. We currently
retain exclusive development rights in our T.G.I. Friday's markets outside of
California, where we are current with our development obligations. In
California, we share co-development rights with T.G.I. Friday's and have
recently renegotiated our co-development obligations. Pursuant to the terms of
our amended development agreements, we are now required to open one restaurant
in our Northern California territory, two restaurants in our Southern California
territory, two restaurants in our Southwest territory, and two restaurants in
our Midwest territory by December 31, 2003.
We estimate that our total cost of opening a new T.G.I. Friday's restaurant
currently ranges from $2,450,000 to $2,800,000, exclusive of annual operating
expenses and assuming that we obtain the underlying real estate under a lease
arrangement. These costs include approximately (a) $1,650,000 to $2,000,000 for
building, improvements, and permits, including liquor licenses, (b) $600,000 for
furniture, fixtures, and equipment, (c) $150,000 in pre-opening expenses,
including hiring expenses, wages for managers and hourly employees, and
supplies, and (d) $50,000 for the initial franchise fee. Actual costs, however,
may vary significantly depending upon a variety of factors, including the site
and size of the restaurant and conditions in the local real estate and
employment markets.
We estimate that our total cost of opening a new Redfish restaurant currently
ranges from $2,400,000 to $2,600,000, exclusive of annual operating expenses and
assuming that we obtain the underlying real estate under a lease arrangement.
These costs include approximately (a) $1,650,000 to $1,850,000 for building,
improvements, and permits, including liquor licenses, (b) $600,000 for
furniture, fixtures, and equipment, (c) $150,000 in pre-opening expenses,
including hiring expenses, wages for managers and hourly employees, and
supplies. Actual costs, however, may vary significantly depending upon a variety
of factors, including the site and size of the restaurant and conditions in the
local real estate and employment markets.
We estimate our total cost of opening a new Bamboo Club restaurant ranges from
$1,325,000 to $1,625,000, exclusive of annual operating expenses. These costs
included approximately (a) $550,000 to $825,000, net of a reduction for
landlord's contribution, for building improvements and permits, including liquor
licenses, (b) $600,000 for furniture, fixtures, and equipment, and (c) $175,000
to $200,000 in pre-opening expenses, including hiring expenses, wages for
managers and hourly employees, and supplies. We are currently developing plans
for a freestanding 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.
As of July 1, 2002, we had outstanding long-term debt-related financing
commitments totaling $1,040,000, which represents the unused portion of the
$15,000,000 Bank of America development facility. On July 19, 2002, we amended
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our current development facility to $16,000,000, an increase of $1,000,000,
resulting in an unused balance of $2,040,000. At this time, the Company expects
to expand our current development facility with Bank of America to fund
additional T.G.I. Friday's development over the next 18 months.
Our current $5 million operating line of credit with terms of 1.125% over prime
expired July 15, 2002. As of July 1, 2002, we had no outstanding balance on this
line of credit. We are currently negotiating the renewal of this line.
We believe that our current cash resources, our line of credit, debt financing
commitments, and expected cash flows from operations will be sufficient to fund
our current operations and planned development during the next six to twelve
months. We may be required to obtain capital to fund additional growth in 2003
and beyond. Potential sources of any such capital include bank financing,
strategic alliances, and additional offerings of our equity or debt securities.
We cannot provide assurance that such capital will be available from these or
other potential sources, and the lack of capital could have a material adverse
effect on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of July 1, 2002, we were participating in three derivative financial
instruments for which fair value disclosure is required under Statement of
Financial Accounting Standards No. 133. The fair value liability of the interest
rate swap agreements discussed in note 5 increased to $1,321,537 using "hedge
accounting" per SFAS No. 133.
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 0.5% under prime, 2.75% over LIBOR, 3.20% over LIBOR, 3.50% over the 30-Day
Dealer Commercial Paper Rate, and 2.65% over the 30-Day Dealer Commercial Paper
Rate. As of July 1, 2002, we had outstanding borrowings on these loans of
approximately $31,571,000. Our total net interest expense for the three and six
months ended July 1, 2002 was $770,000 and $1,690,000, respectively, compared to
$948,000 and $1,982,000 for the comparable periods in 2001. A one percent
variation in interest rates would have increased our total interest expense by
approximately $78,000 and $156,000 for the three and six-month periods ended
July 1, 2002, respectively.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were not involved in any material legal proceedings as of July 1, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 24, 2002. There were three
proposals up for approval. The results of voting are as follows:
1). The election of the entire Board of Directors:
Nominees Votes In Favor Votes Withheld
-------- -------------- --------------
John F. Antioco 11,913,715 23,391
Bart A. Brown, Jr. 11,851,215 85,891
William G. Shrader 11,851,715 85,391
Jane Evans 11,913,865 23,241
John C. Metz 11,913,865 23,241
Debra Bloy 11,913,515 23,591
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2). The ratification of the appointment of KPMG LLP as the Company's
independent auditors:
Votes in Favor Votes Against Abstain
-------------- ------------- -------
11,908,247 19,050 9,809
3). To approve the adoption of the Company's 2002 Incentive Stock Option Plan:
Abstain and
Votes in Favor Votes Against Not Voted
-------------- ------------- ---------
7,845,497 254,559 3,837,050
ITEM 5. OTHER INFORMATION
Our Board of Directors elected to increase the number of members of the Board of
Directors. Effective July 17, 2002, the Board appointed Wanda Williams as a new
member of the Board of Directors. Ms. Williams was also appointed to serve as a
member of the Audit Committee. In addition, effective July 17, 2002, Mr. John F.
Antioco resigned as a member of the Audit Committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer of the Registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the Registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAIN STREET AND MAIN INCORPORATED
Dated: August 15, 2002 /s/ Bart A. Brown, Jr.
----------------------------------------
Bart A. Brown Jr.,
Chief Executive Officer
Dated: August 15, 2002 /s/ Michael Garnreiter
----------------------------------------
Michael Garnreiter,
Executive Vice President, CFO,
and Treasurer
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