UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PUSRSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
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) (Zip Code)
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Number of shares of common stock, $.001 par value, of registrant outstanding at
May 1, 2003: 14,142,000
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 - March 31, 2003
(unaudited) and December 30, 2002 3
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 2003 and April 1, 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2003 and April 1, 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 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 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
CERTIFICATIONS 16
2
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value and Share Data)
MARCH 31, DECEMBER 30,
2003 2002
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 4,031 $ 5,621
Accounts receivable, net ........................................ 1,564 1,997
Inventories ..................................................... 2,815 2,832
Prepaid expenses ................................................ 3,301 2,104
--------- ---------
Total current assets ....................................... 11,711 12,554
Property and equipment, net .......................................... 70,844 71,265
Other assets, net .................................................... 2,408 2,449
Goodwill, net ........................................................ 22,995 22,995
Franchise area goodwill, net ......................................... 934 947
Franchise fees, net .................................................. 2,150 2,185
--------- ---------
Total assets ............................................... $ 111,042 $ 112,395
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............................... $ 3,712 $ 3,502
Accounts payable ................................................ 6,944 8,073
Other accrued liabilities ....................................... 15,702 16,007
--------- ---------
Total current liabilities .................................. 26,358 27,582
Long-term debt, net of current portion ............................... 50,875 51,998
Other liabilities and deferred credits ............................... 3,097 3,205
--------- ---------
Total liabilities .......................................... 80,330 82,785
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized; no
shares issued and outstanding in 2003 and 2002 ..................... -- --
Common stock, $.001 par value, 25,000,000 shares authorized;
14,142,000 shares issued and outstanding in 2003
and 2002 ........................................................... 14 14
Additional paid-in capital ........................................... 53,927 53,927
Accumulated deficit .................................................. (20,755) (21,827)
Other comprehensive loss ............................................. (2,474) (2,504)
--------- ---------
Total stockholders' equity ................................. 30,712 29,610
--------- ---------
Total stockholders' equity and liabilities ........... $ 111,042 $ 112,395
========= =========
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)
MARCH 31, APRIL 1,
2003 2002
------- -------
Revenue .............................................. $57,586 $55,329
------- -------
Restaurant operating expenses
Cost of sales ................................... 15,858 15,183
Payroll and benefits ............................ 17,698 17,134
Depreciation and amortization ................... 2,185 1,832
Other operating expenses ........................ 17,072 15,832
------- -------
Total restaurant operating expenses ........ 52,813 49,981
------- -------
Income from restaurant operations .................... 4,773 5,348
Amortization of intangible assets ............... 149 91
General and administrative expenses ............. 2,136 2,164
Preopening expenses ............................. 165 442
New manager training expenses ................... 98 128
------- -------
Operating income ..................................... 2,225 2,523
Interest expense and other, net ................. 1,154 966
------- -------
Net income before income tax ......................... 1,071 1,557
Income tax expense ............................... -- 289
------- -------
Net Income ........................................... $ 1,071 $ 1,268
======= =======
Basic earnings per share
Net Income ........................................... $ 0.08 $ 0.09
======= =======
Diluted earnings per share
Net Income ........................................... $ 0.08 $ 0.09
======= =======
Weighted average number of shares outstanding
-- Basic ...................................... 14,142 14,053
======= =======
Weighted average number of shares outstanding
-- Diluted .................................... 14,142 14,801
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MAIN STREET AND MAIN INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED
--------------------
(UNAUDITED)
March 31, April 1,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,071 $ 1,268
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,334 1,923
Changes in assets and liabilities:
Accounts receivable, net 433 623
Inventories 17 (24)
Prepaid expenses (1,197) (281)
Other assets, net (5) (245)
Accounts payable (1,129) (2,533)
Other accrued liabilities and deferred credits (382) (701)
------- -------
Cash provided by operating activities 1,142 30
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (1,819) (4,816)
------- -------
Cash used in investing activities (1,819) (4,816)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings -- 5,260
Principal payments on long-term debt (913) (1,859)
Proceeds received from the exercise of stock options -- 26
------- -------
Cash provided (used) by financing activities (913) 3,427
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,590) (1,359)
CASH AND CASH EQUIVALENTS, BEGINNING 5,621 9,466
------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 4,031 $ 8,107
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes 3 31
Cash paid during the period for interest $ 1,214 $ 991
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
MAIN STREET AND MAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(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 our opinion, 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 of America have been omitted
pursuant to such rules and regulations, although we believe that the disclosures
are adequate to make the information presented not misleading. For a complete
description of the accounting policies, see our Form 10-K Annual Report for the
fiscal year ended December 30, 2002.
We operate on fiscal quarters of 13 weeks. The results of operations for the
three months ended March 31, 2003, are not necessarily indicative of the results
to be expected for a full year.
2. STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE. This statement amends prior statements
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. We did not adopt the cost recognition method of recording
stock-based employee compensation under SFAS No. 123, which adoption was and
remains optional.
Had compensation cost for stock options awarded under these plans been
determined consistent with SFAS No. 123, our net income and earnings per share
would have reflected the following pro forma amounts:
MARCH 31, 2003 APRIL 1, 2002
-------------- -------------
Net Income:
As Reported .................. $ 1,071 $ 1,268
Pro Forma .................... $ 842 $ 1,067
Basic EPS:
As Reported .................. $ 0.08 $ 0.09
Pro Forma .................... $ 0.06 $ 0.08
Diluted EPS:
As Reported .................. $ 0.08 $ 0.09
Pro Forma .................... $ 0.06 $ 0.07
The weighted average fair value at the date of grant for options granted during
fiscal 2002 was estimated using the Black-Scholes pricing model with the
following assumptions: weighted average risk-free interest rate of 2.73%;
weighted average volatility of 53.72%; expected life of 4 years; and weighted
average dividend yield of 0.0%. We did not grant any additional options during
the quarter ended March 31, 2003.
3. INCOME TAXES
We did not record an income tax provision for the quarter ended March 31, 2003,
due to the utilization of operating losses and tax loss and credit
carryforwards.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
6
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. Duing the quarter ended March 31, 2003, we adopted the
provisions of SFAS No. 146; its adoption did not have a material effect on our
consolidated financial statements.
In June 2001, FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or normal use of the
assets. We also record a corresponding asset that is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS
No. 143 did not have a material effect on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The adoption of FIN 45 did not have a material effect on
our consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February 1, 2003, the
Interpretation is applied to the enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that we will consolidate or
disclose information about variable interest entities when the Interpretation
becomes effective. We currently have no contractual relationship or other
business relationship with a variable interest entity and therefore the adoption
of this interpretation did not have a material effect on our consolidated
financial statements.
5. DERIVATIVE INSTRUMENTS AND HEDGE ACTIVITY
As of March 31, 2003, we had three interest rate swap agreements. We have only
limited involvement with derivative financial instruments and do not use them
for trading purposes. We utilize interest rate swap agreements to hedge the
effects of fluctuations in interest rates related to our long-term debt
instruments. Amounts receivable or payable due to settlement of the interest
rate swap agreements are recognized as interest expense on a monthly basis. A
mark-to-market adjustment is recorded as a component of stockholders' equity,
net of taxes, to reflect the fair value of the interest rate swap agreements. We
discontinue hedge accounting prospectively if we determine that the derivative
is no longer effective.
The aggregate notional value of our swap agreements was $27,574,000 as of March
31, 2003. All of our swap agreements qualify as cash flow hedges in accordance
with SFAS No. 133. On a periodic basis, we adjust the fair market value of the
swap agreements on the balance sheet and offset the amount of the change to
other comprehensive income. As of March 31, 2003, the fair value liability of
the interest rate swaps was $2,608,686.
6. COMPREHENSIVE INCOME
Our comprehensive income consists of net income and adjustments to derivative
financial instruments. The components of comprehensive income are as follows (in
thousands):
7
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2003 APRIL 1, 2002
-------------- -------------
Net income $1,071 $1,268
Other comprehensive income,
net of taxes;
derivative income,
net of taxes of $0 and $12
for the periods ended March 31, 2003
and April 1, 2002, respectively 30 19
------ ------
Comprehensive income $1,101 $1,287
====== ======
7. EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share, or EPS,
computations for the three months ended March 31, 2003, and April 1, 2002 (in
thousands, except per share amounts):
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31, 2003 APRIL 1, 2002
------------------------- -------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ----- ------ ------ -----
Basic $1,071 14,142 $0.08 $1,268 14,053 $0.09
Effect of stock options
and warrants -- -- -- -- 748 --
------ ------ ----- ------ ------ -----
Diluted $1,071 14,142 $0.08 $1,268 14,801 $0.09
====== ====== ===== ====== ====== =====
At March 31, 2003, the assumed exercise of all of our outstanding stock options
and warrants (covering approximately 3,719,000 shares) have been excluded from
the calculation of diluted earnings per share as their effect would have been
anti-dilutive. For the quarter ended April 1, 2002, approximately 519,000 of our
outstanding stock options and warrants were excluded from the calculation of
diluted earnings per share as their effect would have been anti-dilutive.
8. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
period presentation. Effective January 1, 2003, we began charging the costs of
training new managers related to the replacement of existing managers to the
payroll and benefits account. In previous years, this expense was included in
the new manager training account.
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. THESE FORWARD-LOOKING STATEMENTS INCLUDE THOSE REGARDING ANTICIPATED
RESTAURANT OPENINGS, ANTICIPATED COSTS AND SIZES OF FUTURE RESTAURANTS, AND THE
ADEQUACY OF ANTICIPATED SOURCES OF CASH TO FUND OUR FUTURE CAPITAL REQUIREMENTS.
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 30, 2002, AS FILED WITH THE SECURITIES AND EXCHANGE
8
COMMISSION. WORDS SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," "INTENDS,"
"PLANS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS.
OVERVIEW
As of March 31, 2003, we owned 56 and managed four T.G.I. Friday's restaurants,
owned nine Bamboo Club restaurants, and owned five Redfish Bar and Grill
restaurants. In addition, we own and operate one Alice Cooper'stown restaurant
pursuant to a license agreement we entered into 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.
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. Bamboo Club
restaurants are full-service, fine dining, upscale restaurants that feature an
extensive and diverse menu of innovative and tantalizing Pacific Rim cuisine.
Redfish Seafood Bar and Grill restaurants are full-service, casual dining
restaurants that feature a broad selection of New Orleans style fresh seafood,
Creole and seafood cuisine, and traditional southern dishes, as well as a
"Voodoo" style lounge, all under one roof. Alice Cooper'stown restaurants are
rock and roll and sports themed restaurants and feature a connection to the
music celebrity Alice Cooper.
Our strategy is to capitalize on the brand-name recognition and goodwill
associated with T.G.I. Friday's restaurants and expand our restaurant operations
through development of additional T.G.I. Friday's restaurants in our existing
development territories and the development of additional Bamboo Club
restaurants in major metropolitan areas throughout the United States.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us 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 our financial condition and results of operations, in that they
require us to make our 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, asset write-offs or asset impairments,
goodwill, and to other identifiable intangible assets, valuation of deferred tax
assets, reserves related to self-insurance for workers' compensation and general
liability, and recognition of stock-based employee compensation. For further
information, refer to the consolidated financial statements and notes thereto
for the fiscal year ended December 30, 2002, included in our Form 10-K. These
policies are summarized as follows:
(1) We periodically perform asset impairment analysis of long-lived assets
related to our restaurant locations, goodwill, and other identifiable intangible
assets. We perform these tests whenever we experience a "triggering" event, such
as a decision to close a location or major change in the location's operating
environment, or other event that might impact our ability to recover our asset
investment if the location was one that was acquired.
(2) Periodically we record (or reduce) the valuation allowance against our
deferred tax assets to the amount that is more likely than not to be realized,
based upon recent past financial performance, tax reporting positions and
expectations of future taxable income.
(3) We use an actuarial-based methodology utilizing our historical
experience factors to periodically adjust self-insurance reserves for workers'
compensation and general liability claims and settlements. Estimated costs are
accrued on a monthly basis and progress against this estimate is reevaluated
based upon actual claim data received each quarter.
9
(4) We use the method of accounting for employee stock options allowed
under APB Opinion 25 and have adopted the disclosure provisions of SFAS No. 123,
which require pro forma disclosure of the impact of using the fair value at date
of grant method of recording stock-based employee compensation.
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.
During the fourth quarter 2002, we accrued lease cancellation charges of
$665,000 for three Bamboo Club locations that we elected not to open and
$1,300,000 for one location where we decided to cancel a lease early. During the
quarter ended March 31, 2003, we paid $165,000 of the accrued amount as
settlement for one of those Bamboo Club locations. We did not accrue any
additional amounts related to any of these locations during the quarter ended
March 31, 2003.
In addition, there are two other locations being evaluated and negotiated for
which there are no amounts accrued for termination fees. On May 13, 2003, we
were notified that we have been named in a lawsuit for non-performance related
to one of these locations. We are carefully evaluating this matter, and we
intend to vigorously defend ourselves. No amounts have been accrued for either
of these locations since we have been negotiating various options that we
believed would be acceptable.
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
------------------------------
MARCH 31, 2003 APRIL 1, 2002
-------------- -------------
Revenue 100.0% 100.0%
RESTAURANT OPERATING EXPENSES:
Cost of sales 27.5 27.4
Payroll and benefits 30.8 31.0
Depreciation and amortization 3.8 3.3
Other operating expenses 29.6 28.6
----- -----
Total restaurant operating expenses 91.7 90.3
----- -----
Income from restaurant operations 8.3 9.7
OTHER OPERATING EXPENSES:
Amortization of intangible assets 0.3 0.2
General and administrative expenses 3.7 3.9
Preopening expenses 0.3 0.8
New manager training expenses 0.2 0.2
----- -----
Operating income 3.9 4.6
Interest expense and other, net 2.0 1.8
----- -----
Net income before income taxes 1.9 2.8
Income taxes -- 0.5
----- -----
Net income 1.9% 2.3%
===== =====
10
THREE MONTHS ENDED MARCH 31, 2003, COMPARED WITH THREE MONTHS ENDED APRIL 1,
2002
Revenues are exclusively derived from the sales of food and beverages at our
restaurants. Revenues for the three months ended March 31, 2003, increased by
4.1% to $57,586,000 compared with $55,329,000 for the comparable quarter in
2002. The increase for the three months ended March 31, 2003, from the
comparable quarter in 2002 resulted from the opening of seven new restaurants
since the first quarter of 2002. Same-store sales decreased to 1.2% for the
quarter compared with an increase of 2.4% for the comparable quarter in 2002.
The same-store sales decline was a result of lower customer traffic due to soft
economic conditions in our key markets and uncertainties surrounding the
geopolitical environment.
Cost of sales includes the cost of food and beverages and as a percentage of
revenue increased to 27.5% for the three months ended March 31, 2003, compared
with 27.4% for the comparable quarter in 2002. The increase in cost of sales
from the comparable period in 2002 was primarily a result of increased meat and
seafood costs related to our T.G.I. Friday's promotions and higher beverage
costs related to the introduction of a new wine list and various happy hour
promotions during the quarter. These increases were offset by lower poultry,
produce, and grocery costs resulting from product mix changes and overall supply
chain purchasing efficiencies.
Payroll and benefit costs consist of restaurant management salaries, hourly
payroll expenses and other payroll related benefits. Payroll and benefits
expenses decreased as a percentage of revenue to 30.8% for the three months
ended March 31, 2003, compared with 31.0% for the comparable quarter in 2002.
These decreases were a result of lower labor costs related to improvements in
labor efficiencies at the newer Bamboo Club restaurants. Labor costs of new
restaurants are higher during the initial four to six months of operation.
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 as a
percentage of revenue was 3.8% for the three months ended March 31, 2003,
compared with 3.3% for the comparable quarter in 2002. This increase was
primarily a result of depreciation related to asset acquisitions for new stores
and accelerated depreciation for a California location where the lease will not
be renewed during 2003. These increases were offset partially by the reduction
in depreciation as a result of asset impairments during the third and fourth
quarters of 2002. This increase was also the result of higher amortization
related to the higher cost of liquor licenses at some of our Bamboo Club
restaurants.
Other operating expenses include various restaurant-level costs. Other operating
expenses increased as a percentage of revenue to 29.6% for the three months
ended March 31, 2003, from 28.6% for the comparable quarter in 2002. The
increased costs were principally due to increased marketing fees paid to
Carlson's Restaurants Worldwide for T.G.I. Friday's advertising. We also
experienced higher costs in workers' compensation and general liability
insurance as a result of higher rates in 2003 and higher rent costs for our
Bamboo Club locations.
Depreciation and amortization after income from restaurant operations includes
depreciation of corporate property and equipment and amortization of bank
financing fees and franchise area goodwill, as applicable. Depreciation and
amortization increased as a percentage of revenue to 0.3% for the three months
ended March 31, 2003, from 0.2% for the comparable quarter in 2002. This
increase was primarily a result of additional depreciation related to new
point-of-sale software we purchased in the third quarter of 2002 and the
amortization of franchise area goodwill.
General and administrative expenses are expenses associated with corporate and
administrative functions that support development and restaurant operations and
provide infrastructure to support future growth. These costs consist primarily
of management and staff salaries, employee benefits, travel, legal and
professional fees, and technology. General and administrative expenses decreased
as a percentage of revenue to 3.7% for the three months ended March 31, 2003,
from 3.9% for the comparable quarter in 2002. The decreases were primarily due
to a reduction in salaries, benefits, travel, and moving costs related to Bamboo
Club restaurants resulting from the slow-down in our development schedule. These
decreases were also the result of a focused cost-reduction effort implemented in
the fourth quarter of 2002 in order to reduce costs in 2003. However, we
anticipate higher costs later in the year related to compliance with the
Sarbanes-Oxley Act and related new SEC regulations.
Preopening expenses are costs incurred prior to opening a new restaurant and
consist primarily of manager salaries, and relocation and training costs.
Historically, we have experienced variability in the amount and percentage of
11
revenues attributable to preopening expenses. We typically incur the most
significant portion of preopening expenses associated with a given restaurant
within the two months immediately preceding and in the month the restaurant
opens. Preopening expenses decreased as a percentage of revenue to 0.3% for the
three months ended March 31, 2003, from 0.8% for the comparable quarter in 2002.
The decrease was a result of the timing of new store openings in 2003 compared
to 2002. Expenses during the quarter ended March 31, 2003 were principally
related to one Bamboo Club location (Aventura, Florida) opened in January and
one Bamboo Club location (Novi, Michigan) opened in May 2003, versus expenses
incurred during the comparable quarter in 2002 for four new store openings
during the second quarter of that year.
New manager training expenses are those costs incurred in training newly hired
or promoted managers. New manager training expenses remained constant at 0.2% of
revenue for the three months ended March 31, 2003, and for the comparable
quarter in 2002 as a result of expenses related to one store opening during the
first quarter of 2003 and a second location opened in May 2003 as compared to
expenses incurred during the comparable quarter in 2002 for four new stores
opened during the second quarter of that year.
We manage four T.G.I. Friday's restaurants, under the management agreement, we
are entitled to a management fee if certain cash flow levels are achieved. Based
on the cash flow provisions of the management agreements, we did not record any
management fee income for the quarter ended March 31, 2003.
Interest expense was 2.0% of revenue for the three months ended March 31, 2003,
compared with 1.8% for the comparable quarter in 2002. Interest expense
increases were attributable to the additional financing of $4,205,000 from Bank
of America since April 1, 2002. This increase was partially offset by more
favorable interest rates on our variable interest rate debt combined with
refinancing of a portion of our higher rate debt.
We did not record an income tax provision during the period ended March 31,
2003, due to the utilization of operating losses and tax loss and credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
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 March 31, 2003, we had a working capital deficit of approximately
$14,647,000 and a cash balance of $4,031,000 compared to a working capital
deficit of $15,028,000 and a cash balance of $5,621,000 at December 30, 2002.
Net cash flows from operating activities were $1,142,000 for the quarter ended
March 31, 2003, compared with $30,000 for the comparable quarter in 2002.
We use cash primarily to fund operations and to develop and construct new
restaurants. Net cash used in investing activities, which we used primarily to
fund property and equipment purchases for our new restaurants, was $1,819,000
for the quarter ended March 31, 2003, compared with $4,816,000 for the
comparable quarter in 2002.
We opened one new Bamboo Club restaurant in January 2003. Subsequent to the end
of the quarter, we opened a second Bamboo Club location in Novi, Michigan. We
have plans to open two additional restaurants during 2003, one T.G.I. Friday's
at Desert Ridge Mall, Phoenix, Arizona and one new Bamboo Club in the same
development. The stores under construction will be funded primarily from cash on
hand and operating cash flow.
We estimate that our total cost of opening a new T.G.I. Friday's restaurant
currently ranges from $2,475,000 to $2,825,000, 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) $175,000 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 our total cost of opening a new Bamboo Club restaurant ranges from
$1,625,000 to $1,800,000, exclusive of annual operating expenses. These costs
include approximately (a) $900,000 to $1,000,000, net of a reduction for
landlord's contribution, for building improvements and permits, including liquor
licenses, (b) $550,000 to $600,000 for furniture, fixtures, and equipment, and
(c) $175,000 to $200,000 in pre-opening expenses, including hiring expenses,
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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.
Net cash used in financing activities was $913,000 for the quarter ended March
31, 2003, compared with net cash provided by financing of $3,427,000 for the
comparable quarter in 2002. Financing activities for the three months ended
March 31, 2003, represented the normal principal amortization of debt. Financing
activities for the three months ended April 1, 2002 consisted principally of
long-term borrowing and proceeds received for the exercise of employee stock
options, offset by the repayment of debt.
As of March 31, 2003, we had long-term debt of $54,587,000, including a current
portion of $3,712,000.
In October 2002, we secured a $15 million financing commitment through GE
Franchise Finance. The terms include $6 million for financing of equipment and
leasehold improvements for the seven Bamboo Clubs already open and approximately
$9 million for new Bamboo Club development. At March 31, 2003, there were no
amounts borrowed under this commitment.
We are currently in negotiations with Bank of America to finance the T.G.I.
Friday's location being built at Desert Ridge Mall, Arizona.
All of our loan agreements contain various financial covenants that are measured
at the end of each quarter. At March 31, 2003, we met all of the financial
covenants for all debt agreements. If economic trends worsen, the new restaurant
development planned in 2003 and any resulting borrowings to finance the cost of
building these new restaurants could result in our violation of one or more of
these covenants with any one of our lenders at the end of the second quarter of
2003. We believe we will remain in compliance with our current debt agreements
or will receive the necessary modifications, if needed, to our debt covenants.
Our recent operations have been negatively impacted by the economic slow-down,
and resulting same-store sales declines, and the uncertainties surrounding the
geopolitical environment, including the Iraqi war. As a result, we have reduced
new store development, and cancelled certain leases on locations where
construction has not yet begun to reduce the need for capital. During the fourth
quarter 2002, we accrued lease cancellation charges of $665,000 for three Bamboo
Club locations that we elected not to open and $1,300,000 for one location where
we decided to cancel a lease early. During the quarter ended March 31, 2003, we
paid $165,000 of the accrued amount as settlement for one of those Bamboo Club
locations. We did not accrue any additional amounts related to any of these
locations during the quarter ended March 31, 2003.
We recently opened two new Bamboo Club restaurants, one in Aventura, Florida in
January 2003, and a second location in Novi, Michigan on May 7, 2003; we plan to
open an additional Bamboo Club restaurant during the fourth quarter of 2003.
Other than the one T.G.I. Friday's we currently have under construction (Desert
Ridge Mall, Arizona), we do not anticipate building additional T.G.I. Friday's
during 2003. Our development agreement, however, requires us to develop five
T.G.I. Friday's locations in 2003. We believe, however, based on amendments and
waivers received in prior years, that we will receive the appropriate waivers
for 2003.
Based on limitations as a result of our debt covenants, at March 31, 2003, we
had no significant borrowing capabilities under any of our debt agreements. We
believe, however, that our current cash resources, the new financing commitment
through GE Capital Franchise Finance, and expected cash flows from operations
will be sufficient to fund our planned development during the next 12 months. We
may need to obtain capital to fund additional growth beyond 2003. Potential
sources of such capital include bank financing, strategic alliances, sales of
certain assets 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. Continued depressed economic conditions could prevent us from
having the cash availability to fund new restaurant development, which could
have a material adverse effect on our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2003, 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 decreased to $2,608,686 using "hedge
accounting" per SFAS No. 133.
13
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 3.20% over LIBOR, 2.75% over LIBOR, and 2.65% over "30-Day Dealer Commercial
Paper Rates." At March 31, 2003, we had outstanding borrowings on these loans of
approximately $32,308,844. Our net interest expense for the quarter ended March
31, 2003 was $1,154,000. A one percent variation on any of the variable rates
would have increased or decreased our total interest expense by approximately
$80,750 for the quarter.
ITEM 4. CONTROLS AND PROCEDURES
As of a date within 90 days prior to the date of the filing of this report, our
Chief Executive Officer and Chief Financial Officer have reviewed and evaluated
the effectiveness of our disclosure controls and procedures, which included
inquiries made to certain other of our employees. Based on their evaluation, our
Chief Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are effective and sufficient to ensure that
we record, process, summarize, and report information required to be disclosed
by us in our periodic reports filed under the Securities Exchange Act within the
time periods specified by the Securities and Exchange Commission's rules and
forms. Subsequent to the date of their evaluation, there have not been any
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We were not involved in any material legal proceedings as of March 31, 2003.
On May 13, 2003, we were named in a lawsuit for non-performance under a lease
agreement for a Bamboo Club location in Raleigh, North Carolina. We have been in
discussions about this site with the leasing agent for many months. The lawsuit
seeks both specified and unspecified damages for unpaid rent and associated
costs and other claims, including fraud, and seeks injunctive relief, amounting
to more than $4 million. We are carefully evaluating this matter, and we intend
to vigorously defend ourselves.
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
None
ITEM 5. OTHER INFORMATION
Our Board of Directors elected to increase the number of members of the Board of
Directors. Effective May 6, 2003 the Board appointed Kenda B. Gonzales as a new
independent member of the Board of Directors. Ms. Gonzales was also appointed to
the Audit Committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.42 Employment contract of the Chief Financial Officer of the
Registrant
14
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
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: May 15, 2003 /s/ Bart A. Brown, Jr.
----------------------------------------
Bart A. Brown, Jr.
Chief Executive Officer
Dated: May 15, 2003 /s/ Michael Garnreiter
----------------------------------------
Michael Garnreiter
Executive Vice President, CFO, and
Treasurer
15
CERTIFICATIONS
I, Bart A. Brown, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Main Street and
Main Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Bart A. Brown, Jr.
----------------------------------------
Bart A. Brown, Jr.
Chief Executive Officer
16
I, Michael Garnreiter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Main Street and
Main Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Michael Garnreiter
----------------------------------------
Michael Garnreiter
Chief Financial Officer
17