SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-14311
FAMILY STEAK HOUSES OF FLORIDA, INC.
(exact name of registrant as specified in its charter)
Florida No. 59-2597349
(State of Incorporation) (I.R.S. Employer
Identification)
2113 Florida Boulevard
Neptune Beach, Florida 32266
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (904) 249-4197
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES [ ] NO [X]
As of March 5, 1998, 2,367,768 shares of Common Stock of the registrant were
outstanding. The aggregate market value of such voting Common Stock (based upon
the closing sale price of the registrant's Common Stock on the NASDAQ National
Market System on March 5, 1998, as reported in The Wall Street Journal) held by
non-affiliates of the registrant was approximately $3,462,823.
Documents Incorporated by Reference
Portions of the registrant's 1997 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Proxy Statement for the registrant's
1998 Annual Meeting of Shareholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
General
Family Steak Houses of Florida, Inc. ("Family" or the "Company"), is the
sole franchisee of Ryan's Family Steak House restaurants ("Ryan's restaurants")
in the State of Florida.
The Company's first Ryan's restaurant was opened in Jacksonville, Florida,
in May 1982. As of December 31, 1997, the Company operated 25 Ryan's restaurants
in Florida, including nine in north Florida and sixteen in central and west
Florida.
A Ryan's restaurant is a family-oriented restaurant serving high-quality,
reasonably-priced food in a casual atmosphere with server-assisted service.
Ryan's restaurants serve lunch and dinner seven days a week and offer a variety
of charbroiled entrees, including various cuts of beef, chicken, and seafood.
Most of the restaurants serve a brunch on weekends only. Each restaurant
features a diverse selection of items from either a series of "scatter bars" or
a 65-foot, self-service, all-you-can-eat Mega Bartm, and a separate fresh bakery
and dessert bar. In addition to traditional salad bar items, the scatter bars or
Mega Barstm offer hot meats, pre-made salads, soups, baked potatoes with
toppings, cheeses and a variety of vegetables.
The Company believes that its operating strategy of selling top-quality
meals at reasonable prices, at food costs to the Company which are higher than
the industry average, creates a perception of value to its customers.
The Company operates its Ryan's restaurants under a Franchise Agreement
with Ryan's Family Steak Houses, Inc., ("Ryan's", or the "Franchisor") which
grants the Company the exclusive right to operate Ryan's Family Steak House
restaurants throughout North and Central Florida.
Company History
The Company was formed by the combination, effective February 1986, of six
limited partnerships, each of which owned and operated a Ryan's restaurant
franchise. In April 1986, the Company issued 4,266,000 shares of its common
stock in exchange for the assets and liabilities of the predecessor partnerships
and 1,134,000 shares of its common stock to Eddie L. Ervin, Jr., in
consideration for Mr. Ervin assigning to the Company all of his rights under the
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Franchise Agreement, as defined below. The Company completed its initial public
offering of 4,500,000 shares of its common stock in 1986 resulting in net
proceeds to the Company of approximately $4,145,000.
Franchise Agreement
The Company operates its Ryan's restaurants under a Franchise Agreement
between the Company and the Franchisor dated as of September 16, 1987, which
Franchise Agreement amended and consolidated all previous franchise agreements
(as amended, the "Franchise Agreement"). The Franchise Agreement extends through
December 31, 2010 and provides for two additional ten-year renewal options. The
renewal options are subject to certain conditions, including the condition that
the Company has fully and faithfully performed its obligations under the
Franchise Agreement during its original term. Under the terms of the Franchise
Agreement, the Company has the right to use the registered mark "Ryan's Family
Steak House" and the right to use the Franchisor's techniques in the operation
of Ryan's Family Steak House restaurants.
In 1996, the Company and the Franchisor amended the Franchise Agreement.
The amended agreement requires the Company to pay a royalty fee of 3.0% through
December 2001 and 4.0% thereafter on the gross receipts of each Ryan's Family
Steak House restaurant. Total royalty fee expenses were $1,108,400, $1,138,600,
and $1,263,200, for the fiscal years ended December 31, 1997, January 1, 1997,
and January 3, 1996, respectively.
The Franchise Agreement requires the Company to operate a minimum number of
Ryan's restaurants on December 31 of each year. The Company has listed six
restaurants for sale. Failure to operate the minimum number of restaurants could
result in the loss of exclusivity rights to the Ryan's concept in the Company's
north and central Florida territory. The following schedule outlines the number
of Ryan's restaurants required to be operated by the Company on December 31 of
each year under the Franchise Agreement:
Number of
Restaurants Required to
End of Fiscal Year be in Operation
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1997 25
1998 26
1999 27
2000 28
2001 and subsequent years Increases by one each year
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Prior to July 1994, the Company held exclusive franchise rights to build
Ryan's restaurants in the State of Florida, with the exception of Panama City,
Florida and Escambia County, Florida, where the Franchisor has the right to
operate Ryan's restaurants. In July 1994 the Company relinquished the franchise
rights to most counties in northwest Florida and south Florida in exchange for
forgiveness of $500,000 in past due royalty fees. The Company has the right to
repurchase the exclusive franchise rights to these counties for $500,000 at any
time prior to June 30, 1998. In addition, the Franchisor agreed not to develop
any Ryan's restaurants in the south Florida territory prior to June 30, 1996.
Ryan's has not developed any restaurants in Florida as of March 13, 1998.
The Franchise Agreement contains provisions relating to the operation of
the Company's Ryan's restaurants. Upon the Company's failure to comply with such
provisions, the Franchisor may terminate the Franchise Agreement if such default
is not cured within 30 days of notice from the Franchisor. Termination of the
Franchise Agreement would result in the loss of the Company's right to use the
"Ryan's Family Steak House" name and concept and could result in the sale of the
physical assets of the Company to the Franchisor pursuant to a right of first
refusal. Termination of the Company's rights under the Franchise Agreement may
result in the disruption, and possibly the discontinuance, of the Company's
operations. The Company believes that it has operated and maintained each of its
Ryan's Family Steak House restaurants in accordance with the operational
procedures and standards set forth in the Franchise Agreement, as amended.
Operations of Ryan's Restaurants
Format. As of March 5, 1998, 24 of the Company's Ryan's restaurants are
located in free-standing buildings which vary in size from 7,500 to 12,000
square feet. One of the Company's Ryan's restaurants is located in a mall. Each
restaurant is constructed of brick or stucco walls, interior and exterior, with
exposed woodwork. The interior of each Ryan's restaurant contains a dining room,
a customer ordering area, and a kitchen. The dining rooms seat a total of
between 270 and 500 persons and highlight centrally located, illuminated scatter
bars or Mega Barstm and a fresh bakery bar. Each Ryan's restaurant has parking
for approximately 100 to 175 cars on lots of overall size of approximately
50,000 to 70,000 square feet.
The Ryan's restaurants operate seven days a week. Typical hours of
operation are from 11:00 a.m. to 9:00 p.m., Sunday through Thursday, and from
11:00 a.m. to 10:00 p.m.,
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Friday and Saturday. Restaurants that serve brunch open at 8:00 a.m. Saturday
and Sunday. In a Ryan's restaurant, the customer enters the restaurant, orders
from the menu, and then enters the dining room. Beverages are brought to the
table by servers. Entrees are cooked to order. The customer ordering the salad
bar is given unlimited access to the scatter bars or Mega Barstm and the bakery
dessert bar. Customers receive table service of the entree and beverage refills.
For the fiscal year ended December 31, 1997, the average weekly customer count
per restaurant was approximately 4,730 and the average meal price (including
beverage) was approximately $6.00.
Restaurant Management and Supervision. The Company manages the Ryan's
restaurants pursuant to a standardized operating and control system together
with comprehensive recruiting and training of personnel to maintain food and
service quality. In each Ryan's restaurant, the management group consists of a
general manager, a manager and one to three assistant managers, depending on
sales volume. The Company requires at least two members of the management group
on duty during all peak serving periods. Management-level personnel usually
begin employment at the manager trainee or assistant manager level, depending on
prior restaurant management experience. All new management-level personnel must
complete the Company's six-week training period prior to being placed in a
management position.
Each restaurant management group reports to a supervisor. Presently, the
supervisors each oversee the operations of six to seven restaurants. The
supervisors report directly to the Director of Operations. Communication and
support from all departments in the Company are designed to assist the
supervisors in responding promptly to local problems and opportunities.
All restaurant managers and supervisors participate in incentive programs
based upon the profitability of their restaurants and upon the achievement of
certain pre-set goals. The Company believes these incentive programs enable it
to operate more efficiently and to attract qualified managers.
Purchasing, Quality and Cost Control. The Company has a centralized
purchase control program which is designed to ensure uniform product quality in
all restaurants. The program also helps to maintain reduced food, beverage, and
supply costs. The Company purchases approximately 95% of the products used by
the Company's restaurants through the centralized purchase control program. USDA
choice grain-fed beef, the Company's primary commodity, is closely monitored by
the Company for advantageous purchasing and quality control. The Company
purchases beef through various producers and brokers both on a contract basis
and on a spot
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basis. Beef and other products are generally delivered directly to the
restaurants three times weekly, except for fresh produce, which is delivered
three to five times per week. The Company believes that satisfactory sources of
supply are available for all the items it regularly uses.
The Franchise Agreement requires that all suppliers to Ryan's restaurants
are subject to approval by the Franchisor. Through its relationship with the
Franchisor, the Company has obtained favorable pricing on the purchase of food
products from several suppliers. In June 1995, the Company renewed its agreement
with Kraft Foodservice, Inc. to serve as its primary supplier. Kraft was
subsequently purchased by Alliant Foodservice, Inc. The Alliant agreement has a
five-year term and is cancellable at any time with 60 days notice.
The Company maintains centralized financial and accounting controls for its
restaurants. On a daily basis, restaurant managers forward customer counts,
sales information and supplier invoices to Company headquarters. On a weekly
basis, restaurant managers forward summarized sales reports and payroll data.
Physical inventories of all food and supply items are taken weekly, and meat is
inventoried daily.
Development
General. The Company operated 25 Ryan's restaurants as of March 17, 1998.
Site Location and Construction. The Company considers the specific location
of a restaurant to be important to its long-term success. The site selection
process focuses on a variety of factors, including trade area demographics (such
as population density and household income level), an evaluation of site
characteristics (such as visibility, accessibility, and traffic volume), and an
analysis of the potential competition. In addition, site selection is influenced
by the general proximity of a site to other Ryan's restaurants in order to
improve the efficiency of the Company's field supervisors and potential
marketing programs. The Company generally locates its restaurants near or
adjacent to residential areas in an effort to capitalize on repeat business from
such areas as opposed to transient business.
The Company generally constructs its Ryan's restaurants using its
contracting subsidiary.
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believes that by performing site selection and restaurant construction
internally or through the Franchisor, the Company can maintain better control of
site selection, real estate cost and construction performance. While the Company
has not required performance and payment bonds, it undertakes to closely
supervise and monitor all construction and confirm payment of subcontractors and
suppliers. New Ryan's restaurants generally are completed within three months of
the date on which construction is commenced.
Management of New Restaurants. When a new Ryan's restaurant is opened, the
principal restaurant management positions are staffed with personnel who have
prior experience in a management position at another of the Company's
restaurants and who have undergone special training. Prior to opening, all staff
personnel at the new location undergo one week of intensive training conducted
by a training team. Such training includes preopening drills in which test meals
are served to the invited public. Both the staff at the new location and
personnel experienced in store openings at other locations participate in the
training and drills.
Joint Venture
In December 1994, the Company formed a new subsidiary, Family Steak JV,
Inc. which aquired a 50% ownership in a Florida limited liability company, Cross
Creek Barbeqe, L.C. ("Cross Creek"), for the purpose of opening a new
restaurant. The Company contributed certain furnishings, fixtures, and equipment
owned by its Wrangler's Roadhouse, Inc. subsidiary ("Wrangler's") to Cross Creek
and the other 50% owner of Cross Creek contributed the cash necessary to remodel
and open the new Cross Creek restaurant. As a result of unsatisfactory
operational performance, the Company sold its interest in the Cross Creek
restaurant in July 1995. Wrangler's leased the land and building to Cross Creek
until May 1996, when it sold them at a gain of approximately $5,000.
Proprietary Trade Marks
The name "Ryan's Family Steak House," along with all ancillary signs,
building design and other symbols used in conjunction with the name, and the
name "Mega Bar", are the primary trademarks and service marks of the Franchisor.
Such marks are registered in the United States. All of these registrations and
the goodwill associated with the Franchisor's trademarks are of material
importance to the Company's business and are licensed to the Company under the
Franchise Agreement.
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Competition
The food service business in Florida is highly competitive and is often
affected by changes in the taste and eating habits of the public, economic
conditions affecting spending habits, local demographics, traffic patterns and
local and national economic conditions. The principal bases of competition in
the industry are the quality and price of the food products offered. Location,
speed of service and attractiveness of the facilities are also important
factors. The Company's restaurants are in competition with restaurants operated
or franchised by national, regional and local restaurant companies offering a
similar menu, many of which have greater resources than the Company. The Company
also is in competition with specialty food outlets and other vendors of food.
The amount of new competition near Company restaurants increased
significantly in 1997. The increased competition had a significant negative
impact on sales in 1997. Management has developed a plan to attempt to reduce
the negative impact on sales from new competition, but there can be no assurance
that sales trends will improve. In addition, the Franchisor has the right to
operate restaurants in several other west Florida and south Florida counties.
Employees
As of December 31, 1997, the Company employed approximately 1,300 persons,
of whom approximately 50% are considered by management as part-time employees.
No labor unions currently represent any of the Company's employees. The Company
has not experienced any work stoppages attributable to labor disputes and
considers employee relations to be good.
Executive Officers
The following persons were executive officers of the Company effective
December 31, 1997:
Lewis E. Christman, Jr., age 78, has been President and Chief Executive
Officer of the Company since April 1994. Mr. Christman was hired as a consultant
to oversee and direct the Company's purchasing program in January 1994 and has
been a Director of the Company since May 1993. In addition, Mr. Christman serves
as President of each of the Company's subsidiaries. Mr. Christman has been a
partner in East Coast Marketing since 1990. From 1979 to 1989, Mr. Christman
served as Chairman of the Board of Neptune Marketing, Inc., a food brokerage
company.
Edward B. Alexander, age 39, has been Vice President of Finance since
December 1996, and was Secretary and Treasurer
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of the Company from November 1990 to December 1996. In addition, Mr. Alexander
was appointed to the Board of Directors in May 1996, and serves as Secretary of
each of the Company's subsidiaries. Mr. Alexander served as controller of the
Company from January 1989 to April 1990. From April 1985 until December 1988,
Mr. Alexander was employed as controller for Mac Papers, Inc., a wholesale paper
products distributor. Prior to April 1985, Mr. Alexander served as a senior
accountant for the accounting firm of Touche Ross & Co.
Government Regulation
The Company is subject to the Fair Labor Standards Act which governs such
matters as minimum wage requirements, overtime and other working conditions. A
large number of the Company's restaurant personnel are paid at or slightly above
the federal minimum wage level and, accordingly, any change in such minimum wage
will affect the Company's labor costs. The Company is also subject to the Equal
Employment Opportunity Act and a variety of federal and state statutes and
regulations. The Company's restaurants are constructed to meet local and state
building requirements and are operated in accordance with state and local
regulations relating to the preparation and service of food.
The Company believes that it is in substantial compliance with all
applicable federal, state and local statutes, regulations and ordinances and
that compliance has had no material effect on the Company's capital
expenditures, earnings or competitive position, and such compliance is not
expected to have a material adverse effect upon the Company's operations. The
Company, however, cannot predict the impact of possible future legislation or
regulation on its operations.
Sources and Availability of Raw Materials
The Company procures its food and other products from a variety of
suppliers, and follows a policy of obtaining its food and products from several
major suppliers under competitive terms. A substantial portion of the beef used
by the Company is obtained from one supplier, although the Company believes
comparable beef meeting its specifications is available in adequate quantities
from other suppliers. To ensure against interruption in the flow of food
supplies due to unforeseen or catastrophic events, to take advantage of
favorable purchasing opportunities, and to insure that meat received by the
Company is properly aged, the Company maintains a two to six week supply of
beef.
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Working Capital Requirements
Substantially all of the Company's revenues are derived from cash sales.
Inventories are purchased on credit and are converted rapidly to cash. The
Company does not maintain significant receivables and inventories. Therefore,
with the exception of debt service, working capital requirements for continuing
operations are not significant.
In December 1996, the Company entered into a Loan Agreement with FFCA
Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory
Notes payable to FFCA totaling $14,681,400 at December 31, 1997. Each note is
secured by a mortgage on a Company restaurant property. The Promissory Notes
provide for a term of twenty years and an interest rate equal to the thirty-day
LIBOR rate plus 3.75%, adjusted monthly. In November 1997, the Company prepaid
one of the Notes in full in the amount of approximately $440,000. The Loan
Agreement provides for various covenants, including the maintenance of
prescribed debt service coverages.
The Company used the proceeds of the Promissory Notes to retire its notes
with Cerberus Partners, L.P. ("Cerberus") and its loan with the Daiwa Bank
Limited and SouthTrust Bank of Alabama, N.A. The Company realized a discount on
the retirement of the Cerberus notes, which was partially offset by unamortized
debt issuance costs. The resulting gain of $348,500 net of income taxes, was
accounted for in 1996 as an extraordinary item. In addition, the Company retired
warrants for 210,000 shares of the Company's common stock previously held by
Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the
Company's common stock at an exercise price of $2.00 per share.
Also in December 1996, the Company entered into a separate loan agreement
with FFCA under which it may borrow up to an additional $4,640,000. This
additional financing would be evidenced by four additional Promissory Notes
secured by mortgage on four Company restaurant properties. The terms and
interest rate of this loan agreement are identical to the loan agreement
described above. The Company borrowed $1,290,000 under this agreement in
February 1998, secured by a mortgage on one restaurant property. The
availability of new borrowings under this agreement is currently scheduled to
expire in June 1998.
Seasonality
The Company's operations are subject to some seasonal fluctuations.
Revenues per restaurant generally increase from January through April and
decline from September through December.
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Research
The Company relies primarily on the Franchisor to maintain ongoing research
programs relating to the development of new products and evaluation of marketing
activities. Although research and development activities are important to the
Company, no expenditures for research and development have been incurred by the
Company.
Customers
No material part of the Company's business is dependent upon a single
customer or a few customers.
Information as to Classes of Similar Products or Services
The Company operates in only one industry segment. All significant revenues
and pre-tax earnings relate to retail sales of food to the general public
through restaurants owned and operated by the Company. The Company has no
operations outside the continental United States.
ITEM 2. PROPERTIES
Location Date Opened
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Jacksonville May 1982
Jacksonville May 1983
Jacksonville November 1983
Orange Park May 1984
Jacksonville May 1985
Jacksonville July 1985
Ocala September 1986
Neptune Beach November 1986
Lakeland February 1987
Lakeland March 1987
Winter Haven August 1987
Apopka September 1987
Gainesville December 1987
Hudson February 1988
New Port Richey May 1988
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Tampa June 1988
Tallahassee August 1988
Daytona Beach September 1988
Tampa November 1988
Orlando January 1989
Orlando February 1989
Clearwater August 1989
Melbourne November 1989
Lake City March 1991
Brooksville January 1997
In January 1998, the Company entered into a lease agreement for a new
restaurant expected to be opened in June 1998.
As of March 17, 1998, the Company operated 25 Ryan's restaurants. The
specific rate at which the Company is able to open new restaurants will be
determined by its ability to locate suitable sites on satisfactory terms, raise
the necessary capital, secure appropriate governmental permits and approvals and
recruit and train management personnel.
As of December 31, 1997, the Company owned the real property on which 22 of
its restaurants were located. Seventeen of these properties were subject to
mortgages securing the FFCA notes.
The Company leases the real property on which three of its restaurants are
located. Those restaurants are located in Jacksonville, Clearwater and
Brooksville, Florida. The Company also leases two buildings in Jacksonville,
Florida for its executive offices.
On May 13, 1997, the Company received notice from Aetna Life Insurance
Company, the mortgage holder of the mall property at which the Company's
Clearwater, Florida restaurant is located, that Aetna intended to foreclose on
the property due to a default by the landlord on the mortgage. In September
1997, Aetna was granted a Motion for
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Summary Judgement of Foreclosure by the Circuit Court of the Sixth Judicial
Court in Pinellas County. This Motion indicates that Aetna's rights under the
mortgage are superior to the Company's leasehold interest. It is uncertain
whether this action could allow Aetna to evict the Company from the Clearwater
location. An eviction would result in a write-off of approximately $350,000 of
leasehold improvements. The Company intends to vigorously defend its interest in
this matter. However, there can be no assurance that the Company will be
successful in this defense.
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Shareholders is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. The financial statements listed below are filed with this report on
Form 10-K or are incorporated herein by reference from the Company's
1997 Annual Report to Shareholders. With the exception of the pages
listed below, the 1997 Annual Report to Shareholders is not deemed
"filed" as a part of this report on Form 10-K.
Page
Reference
----------------------
Form 1997
10-K Annual Report
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Consent of Independent Certified
Public Accountants F-1
Independent Auditors Report 27
Consolidated Statements of Operations 10
Consolidated Balance Sheets 11
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Consolidated Statements of Share-
holders' Equity 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial
Statements 14
(a)2. No financial statement schedules have been included since the required
information is not applicable or the information required is included
in the financial statements or the notes thereto.
(a)3. The following exhibits are filed as part of this report on Form 10-K,
and this list comprises the Exhibit Index.
No. Exhibit
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3.01 Articles of Incorporation of Family Steak Houses of Florida,
Inc. (Exhibit 3.01 to the Company's Registration Statement
on Form S-1, Registration No. 33-1887, is incorporated
herein by reference.)
3.02 Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.02
to the Company's Registration Statement on Form S-1,
Registration No. 33-1887, is incorporated herein by
reference.)
3.03 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3.03 to the
Company's Registration Statement on Form S-1, Registration
No. 33-1887, is incorporated herein by reference.)
3.04 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3.04 to the
Company's Registration Statement on Form S-1, Registration
No. 33-1887, is incorporated herein by reference.)
3.05 Amended and Restated Bylaws of Family Steak Houses of
Florida, Inc. (Exhibit 4 to the Company's Form 8-A, filed
with the Commission on March 19, 1997, is incorporated
herein by reference.)
3.06 Shareholder Rights Agreement, dated March 19, 1997, by and
between Family Steak Houses of Florida, Inc. and Chase
Mellon Shareholder Services, LLC (Exhibit 1 to the Company's
Form 8-A, filed with the Commission on March 19, 1997, is
incorporated herein by reference.)
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3.07 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3 to the
Company's Form 8-A filed with the Commission on March 19,
1997, is incorporated herein by reference.)
3.08 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the
Company's Form 10-K filed with the Commission on March 31,
1998 is incorporated by reference.)
4.01 Specimen Stock Certificate for shares of the Company's
Common Stock (Exhibit 4.01 to the Company's Registration
Statement on Form S-1, Registration No. 33-1887, is
incorporated herein by reference.)
10.01 Amended Franchise Agreement between Family Steak Houses of
Florida, Inc. and Ryan's Family Steak Houses, Inc., dated
September 16, 1987. (Exhibit 10.01 to the Company's
Registration Statement on Form S-1, filed with the
Commission on October 2, 1987, Registration No. 33-17620, is
incorporated herein by reference.)
10.02 Lease regarding the restaurant located at 3549 Blanding
Boulevard, Jacksonville, Florida (Exhibit 10.03 to the
Company's Registration Statement on Form S-1, Registration
No. 33-1887, is incorporated herein by reference.)
10.03 Lease, dated May 18, 1989, between the Company and
Stoneybrook Associates, Ltd., for a restaurant located in
Clearwater, Florida. (Exhibit 10.25 to the Company's
Registration Statement on Form S-1, filed with the
Commission on September 29, 1989, Registration No. 33-17620,
is incorporated herein by reference.)
10.04 Amended and Restated Warrant to Purchase Shares of Common
Stock, void after October 1, 2003, which represents warrants
issued to The Phoenix Insurance Company, The Travelers
Indemnity Company, and The Travelers Insurance Company,
(subsequently transferred to Cerberus Partners, L.P.)
(Exhibit 10.07 to the Company's Annual Report on Form 10-K,
filed with the Commission on March 28, 1995, is incorporated
herein by reference).
10.05 Warrant to Purchase Shares of Common Stock, void after
October 1, 2003, which represents warrants issued to The
Phoenix Insurance Company, The Travelers Indemnity Company,
and The Travelers Insurance Company. (subsequently
transferred to
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Cerberus Partners, L.P.) (Exhibit 10.08 to the Company's
Annual Report on Form 10-K, filed with the Commission on
March 28, 1995, is incorporated herein by reference).
10.06 Amendment of Franchise Agreement between Ryan's Family Steak
Houses, Inc. and the Company dated July 11, 1994. (Exhibit
10.17 to the Company's Annual Report on Form 10-K, filed
with the Commission on March 28, 1995, is incorporated
herein by reference).
10.07 Agreement between the Company and Kraft Foodservice, Inc.,
as the Company's primary food product distribution. (Exhibit
10.06 to the Company's Quarterly Report on Form 10-Q, filed
with the Commission on August 9, 1995, is incorporated
herein by reference).
10.08 Lease Agreement between the Company and CNL American
Properties Fund, Inc., dated as of September 18, 1996.
(Exhibit 10.02 to the Company's Quarterly Report on Form
10-Q, filed with the Commission on November 18, 1996 is
hereby incorporated by reference).
10.09 Rent Addendum to Lease Agreement between the Company and CNL
American Properties Fund, Inc., dated as of September 18,
1996. (Exhibit 10.04 to the Company's Quarterly Report on
Form 10-Q, filed with the Commission on November 18, 1996 is
hereby incorporated by reference).
10.10 Amendment of Franchise Agreement between the Company and
Ryan's Family Steak Houses, Inc. dated October 3, 1996.
(Exhibit 10.15 to the Company's Annual Report on Form 10-K,
filed with the Commission on April 1, 1997 is hereby
incorporated by reference).
10.11 $15.36m Loan Agreement, between the Company and FFCA
Mortgage Corporation, dated December 18, 1996. (Exhibit
10.18 to the Company's Annual Report on Form 10-K, filed
with the Commission on April 1, 1997 is hereby incorporated
by reference).
10.12 $4.64m Loan Agreement, between the Company and FFCA Mortgage
Corporation, dated December 18, 1996. (Exhibit 10.19 to the
Company's Annual Report on Form 10-K, filed with the
Commission on April 1, 1997 is hereby incorporated by
reference).
-18-
<PAGE>
10.13 Form of Promissory Note between the Company and FFCA
Mortgage Corporation, dated December 18, 1996. (Exhibit
10.20 to the Company's Annual Report on Form 10-K, filed
with the Commission on April 1, 1997 is hereby incorporated
by reference).
10.14 Form of Mortgage between the Company and FFCA Mortgage
Corporation, dated December 18, 1996 (Exhibit 5 to the
Company's Schedule 14D-9, filed with the Commission on March
19, 1997 is hereby incorporated by reference).
10.15 Form of Mortgage between the Company and FFCA Mortgage
Corporation, dated March 18, 1996. (Exhibit 10.22 to the
Company's Annual Report on Form 10-K, filed with the
Commission on April 1, 1997 is hereby incorporated by
reference).
10.16 Employment agreement between the Company and Edward B.
Alexander, dated as of January 26, 1998. (Exhibit 10.16 to
the Company's Annual Report on Form 10-K, filed with the
Commission on March 31, 1998 is hereby incorporated by
reference.)
10.17 Employment agreement between the Company and Lewis E.
Christman, Jr., dated as of January 26, 1998. (Exhibit 10.17
to the Company's Annual Report on Form 10-K, filed with the
Commission on March 31, 1998 is hereby incorporated by
reference.)
10.18 Standstill and Settlement Agreement between the Company and
Bisco Industries, Inc. (and affiliates) dated February 24,
1998. (The Company's Form 8-K filed with the Commission on
March 6, 1998 is hereby incorporated by reference).
10.19 Lease agreement dated January 29, 1998 between the Company
and Excel Realty Trust, Inc. for a new restaurant scheduled
to be opened in 1998. (Exhibit 10.19 to the Company's Annual
Report on Form 10-K, filed with the Commission on March 31,
1998 is hereby incorporated by reference.)
10.20 Contract dated April 29, 1997 between the Company and
sellers for purchase of land for a new restaurant scheduled
to be opened in 1998. (Exhibit 10.20 to the Company's Annual
Report on Form 10-K, filed with the Commission on March 31,
1998 is hereby incorporated by reference.)
13.01 1997 Annual Report to Shareholders.
21.01 Family Rustic Investments, Inc., a Florida corporation,
Steak House Construction Corporation, a Florida corporation,
Wrangler's Roadhouse, Inc., a Florida corporation and Steak
House Realty Corporation, a Florida corporation, are wholly
owned subsidiaries of the Company.
23.0l Consent of Independent Certified Public Accountants -
Deloitte & Touche LLP.
27.00 Financial data schedules (electronic filing only).
-19-
<PAGE>
(b) None.
(c) See (a)3. above for a list of all exhibits filed herewith and the Exhibit
Index.
(d) None.
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in this Annual Report of Family
Steak Houses of Florida, Inc. on Form 10-K of our report dated March 6, 1998,
appearing in the 1997 Annual Report to Shareholders of Family Steak Houses of
Florida, Inc.
We additionally consent to the incorporation by reference in Registration
Statement No. 33-11684 pertaining to the 1986 Employee Incentive Stock Option
Plan of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated
March 6, 1998 appearing in and incorporated by reference in this Annual Report
on Form 10-K of Family Steak Houses of Florida, Inc. for the year ended December
31, 1997.
We further consent to the incorporation by reference in Registration Statement
No. 33-12556 pertaining to the 1986 Stock Option Plan for Non-Employee Directors
of Family Steak Houses of Florida, Inc. on Form S-8 of our report dated March 6,
1998 appearing in and incorporated by reference in this Annual Report on Form
10-K of Family Steak Houses of Florida, Inc. for the year ended December 31,
1997.
We further consent to the incorporation by reference in Registration Statement
No. 33-62101 pertaining to the 1996 Long Term Incentive Plan of Family Steak
Houses of Florida, Inc. on Form S-8 of our report dated March 6, 1998 appearing
in and incorporated by reference in this Annual Report on Form 10-K of Family
Steak Houses of Florida, Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Jacksonville, Florida
April 28, 1998
F-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to its annual report
to be signed on its behalf by the undersigned, thereunto duly authorized.
FAMILY STEAK HOUSES OF FLORIDA, INC.
Date: April 28, 1998 BY: /s/ Lewis E. Christman, Jr.
---------------------------
Lewis E. Christman, Jr., President
FAMILY STEAK HOUSES OF FLORIDA, INC.
CORPORATE PROFILE
About The Company
Family Steak Houses of Florida, Inc. is the sole franchisee of Ryan's Family
Steak House restaurants in the state of Florida. The Company's first restaurant
was opened in Jacksonville, Florida in May 1982. The Company presently operates
25 Ryan's restaurants in Florida, including seven in the Jacksonville area.
A Ryan's Family Steak House restaurant is a family-oriented restaurant serving
high-quality, reasonably priced food in a casual atmosphere with server-assisted
service. The restaurants feature scatter bars or a self-service Mega BarTM,
bakery dessert bars, and table service of meals and drink refills. Each
restaurant serves cuts of charbroiled steaks and hamburgers, seafood and various
chicken entrees. In addition to traditional salad bar items, the scatter bars or
Mega BarsTM include a variety of hot meats and vegetables, as well as a variety
of pre-made salads and cheeses. The bakery bar consists of fresh baked products
such as hot yeast rolls, a variety of muffins, sweet rolls, brownies and
cookies. Other selections include cobblers, fresh fruit, candy, cheesecake,
pudding, ice cream, lowfat yogurt and a wide variety of dessert toppings. The
bakery bar is included in the customer's meal price, and items can also be
purchased for take-home.
Ryan's Locations:
Jacksonville (6) Lakeland (2) Gainesville (1)
Orange Park (1) Apopka (1) Hudson (1)
Ocala (1) Winter Haven (1) New Port Richey(1)
Tampa (2) Tallahassee (1) Daytona Beach (1)
Orlando (2) Melbourne (1) Clearwater (1)
Lake City (1) Brooksville (1)
Ryan's
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1
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Ryan's
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2
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Dear Shareholders:
Family Steak Houses of Florida, Inc. survived a difficult year in which we were
beset with problems; an unsolicited tender offer by Bisco Industries,
exceptionally high store management turnover, severe competition from our
competitors with new and attractive facilities and new regulations by Nasdaq
that required us to effect a reverse split of 1-for-5 shares in order to remain
listed on Nasdaq. We also made the decision to write-down the book value of our
under-performing store located on Orange Blossom Trail in Orlando, Florida, by
$550,000. This, of course, is included as a charge on the Company's profit and
loss statement.
We are pleased to tell you that in spite of our problems, we believe we are
poised for a successful 1998!
The problems with Bisco Industries have been resolved by the execution of a
Standstill and Settlement Agreement for a one-year term. Mr. Glen Ceiley,
President of Bisco, will join the Company's Board of Directors, along with Mr.
Jay Conzen. We are pleased to have the opportunity to use the experience of
these new board members to move our Company forward.
We are implementing a 5-day workweek for our restaurant managers in an effort to
improve quality of life, and by so doing have reduced the turnover in these
ranks. Turnover in these management positions adversely affects the profit and
loss statements for the restaurants in which the turnover occurs. We hired a
number of new managers in order to implement this program. Additionally, the
improved quality of life we now offer to our restaurant managers affords us an
opportunity to recruit and employ highly professional managers.
The entire management team in the restaurants and the corporate office have
committed to raising our standards by increasing efforts to afford our customers
the very best quality of food available. We are also committed and dedicated to
improving service to our customers, which is already second to none.
We are continuing to remodel our restaurants, and we have enjoyed outstanding
success in the restaurants we have recently remodeled. The remodeled restaurants
have recorded more than a 20% gain so far over the prior year's sales.
We are in the process of opening a new restaurant in Leesburg, Florida, which we
plan to open by June 1998.
The Company is continuing to market under-performing restaurants, and as these
are sold we plan to replace them with new restaurants on sites that offer much
higher volume and profit potential. Ryan's, Inc. has been invaluable with their
assistance in locating new and viable sites for the Company's new restaurants.
The Company is also marketing all land held for sale. We currently have a
contract on a parcel located in Titusville, Florida, and plan to make good use
of the funds that have been lying fallow in property unsuited for our
restaurants.
Finally, the Company has engaged J.H. Chapman Group LLC, an investment banking
firm, to explore all strategic opportunities that will increase shareholder
value. J.H. Chapman is located in Chicago, Illinois, and specializes in the
restaurant industry nationally.
We believe we are on course for a successful year in 1998, and we sincerely
appreciate the support of our shareholders during a difficult year in 1997.
Sincerely,
/s/ Lewis E. Christman, Jr.
Lewis E. Christman, Jr.
President and Chief Executive Officer
Ryan's
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3
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five Year Financial Summary
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995(1) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Income Statement Data: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $ 36,978 $ 37,978 $ 42,105 $ 44,849 $ 48,525
Cost and expenses:
Food and beverage 14,642 15,090 16,591 18,174 19,534
Payroll and benefits 10,516 10,538 11,412 12,097 13,372
Depreciation and amortization 1,751 1,663 1,720 1,961 2,560
Other operating expenses 6,070 5,953 6,313 6,412 7,055
General and administrative expenses 2,681 2,220 2,452 2,899 2,159
Franchise fees 1,108 1,139 1,263 1,561 2,207
Asset valuation charge 550 -- -- -- --
(Income) costs from closed restaurants -- -- (303) 1,392 2,557
Loss on disposition of equipment 146 57 198 86 21
-------- -------- -------- -------- --------
37,464 36,660 39,646 44,582 49,465
(Loss) earnings from operations (486) 1,318 2,459 267 (940)
Interest and other income 438 465 536 123 79
Gain on sale of restaurant -- -- 159 -- --
Gain on sale of property held for sale -- -- 31 -- --
Write-down of properly held for sale -- -- -- (465) (91)
Interest expense (1,577) (1,516) (1,694) (1,980) (2,110)
-------- -------- -------- -------- --------
(Loss) earnings before income taxes,
and extraordinary item (1,625) 267 1,491 (2,055) (3,062)
(Benefit) provision for income taxes (201) 53 147 (274) (978)
-------- -------- -------- -------- --------
Net (loss) earnings before extraordinary item (1,424) 214 1,344 (1,781) (2,084)
Extraordinary item - gain on early extinguishment
of debt, net of income taxes of $88,700 -- 348 -- -- --
-------- -------- -------- -------- --------
Net (loss) earnings $ (1,424) $ 562 $ 1,344 $ (1,781) $ (2,084)
======== ======== ======== ======== ========
Basic earnings per share: (2)
(Loss) earnings before extraordinary item $ (0.65) $ 0.10 $ 0.62 $ 0.83 $ (0.98)
Extraordinary item - gain on early
extinguishment of debt -- 0.16 -- -- --
-------- -------- -------- -------- --------
Net (loss) earnings $ (0.65) $ 0.26 $ 0.62 $ 0.83 $ (0.98)
======== ======== ======== ======== ========
Diluted earnings per share: (2)
(Loss) earnings before extraordinary item $ (0.65) $ 0.09 $ 0.57 $ 0.83 $ (0.98)
Extraordinary item - gain on early
extinguishment of debt -- 0.15 -- -- --
-------- -------- -------- -------- --------
Net (loss) earnings $ (0.65) $ 0.24 $ 0.57 $ 0.83 $ (0.98)
======== ======== ======== ======== ========
Selected Balance Sheet Data:
Land and net property and equipment $ 26,300 $ 26,350 $ 26,837 $ 26,896 $ 29,505
Total assets 30,333 32,803 31,260 32,809 35,095
Long-term debt 14,403 15,107 14,420 16,305 14
Current portion of long-term debt 279 333 1,580 851 17,269
Shareholders' equity 10,644 11,998 11,460 9,993 11,743
Selected Operating Data:
Current ratio 0.6 0.9 0.4 0.6 0.1
Working capital (deficit) $ (1,795) $ (617) $ (3,285) $ (2,673) $(20,089)
Cash provided by operating activities 626 1,645 2,135 3,096 3,979
Property and equipment additions 2,304 1,768 2,600 1,796 1,558
</TABLE>
- ----------------
(1) Fifty-three week period.
(2) Per share amounts have been retroactively adjusted to reflect a 1-for-5
reverse stock split effected in March, 1998.
Ryan's
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4
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Shown for the years indicated are (i) items in the statements of operations as a
percent of sales, (ii) operating expense items in the statements of operations
as a percent of sales and (iii) the number of restaurants open at the end of
each year.
- --------------------------------------------------------------------------------
Percentage
Change Versus
Prior Year
---------------
1997 1996
vs vs
1997 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Sales $36,977,800 $37,977,600 $42,105,400 (2.6)% (9.8)%
=========== =========== =========== ==== ====
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Change
In Percentage
---------------------
Percent of Sales 1997 1996
----------------------------------- vs vs
1997 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost and expenses:
Operating expenses 89.1% 87.6% 85.6% 1.5 2.0
General and administrative expenses 7.3 5.8 5.8 1.5 --
Asset valuation charge 1.5 -- -- 1.5 --
Franchise fees 3.0 3.0 3.0 -- --
Closed restaurant costs -- -- (0.7) -- 0.7
Loss on disposition of property
and equipment 0.4 0.1 0.5 0.3 (0.4)
----- ----- ----- ----- -----
101.3 96.5 94.2 4.8 2.3
----- ----- ----- ----- -----
(Loss) earnings from operations (1.3) 3.5 5.8 (4.8) (2.3)
Interest and other income 1.2 1.2 1.3 -- (0.1)
Gain on sale of restaurant and property
held for sale -- -- 0.5 -- (0.5)
Interest expense (4.3) (4.0) (4.0) (0.3) --
----- ----- ----- ----- -----
(Loss) earnings before income taxes
and extraordinary item (4.4) 0.7 3.6 (5.1) (2.9)
(Benefit) provision for income taxes (0.5) 0.1 0.4 (0.6) (0.3)
----- ----- ----- ----- -----
Net (loss) earnings before extraordinary
item (3.9) 0.6 3.2 (4.5) (2.6)
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes of $88,700 -- 0.9 -- (0.9) 0.9
----- ----- ----- ----- -----
Net (loss) earnings (3.9)% 1.5% 3.2% (5.4)% (1.7)%
===== ===== ===== ===== =====
Operating expenses:
Food and beverage 39.6% 39.7% 39.4% (0.1)% 0.3%
Payroll and benefits 28.4 27.8 27.1 0.6 0.7
Depreciation and amortization 4.7 4.4 4.1 0.3 0.3
Other operating expenses 16.4 15.7 15.0 0.7 0.7
----- ----- ----- ----- -----
89.1% 87.6% 85.6% 1.5 % 2.0%
===== ===== ===== ===== =====
Restaurants open at end of year 25 24 24
===== ===== =====
</TABLE>
Ryan's
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5
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1997 Compared to 1996
For the year ended December 31, 1997, total sales decreased 2.6% compared to
1996. The sales decline in 1997 compared to 1996 consisted of the following
components:
- --------------------------------------------------------------------------------
% Change
from 1996
1997 1996 Change Total Sales
- --------------------------------------------------------------------------------
Same-Store Sales $34,936,600 $37,977,600 $(3,041,000) (8.0%)
New Restaurant 2,041,200 2,041,200 5.4%
----------- ----------- ----------- ----
Total Sales $36,977,800 $37,977,600 $ (999,800) (2.6%)
=========== =========== =========== ====
Management believes that the decrease in same-store sales (sales in restaurants
that have been open for at least 18 months during comparable weeks during the
current and prior year) is primarily due to the effects of increasing
competition, including several new restaurants opened by competitors in areas
close to Company restaurants.
Due primarily to the negative effects of increasing competition on the Company's
sales and profitability, in March 1998 the Company announced that it had
retained an investment banking firm specializing in the restaurant industry to
assist the Company in identifying and evaluating strategic opportunities which
would enhance shareholder value. The Company intends to evaluate any strategic
opportunities recommended by the investment banking firm, and to pursue such
strategies it deems appropriate. However, there can be no assurance that a
restructuring or transaction will result from this process.
Management plans to sell restaurants which are not meeting sales and profit
expectations, and has listed six restaurants for sale. Proceeds from any sales
of restaurants would be used either to build new restaurants with more
competitive facilities in superior locations, or to reduce long-term debt.
Management also plans to improve sales trends by focusing on improving
restaurant operations and by remodeling certain restaurants. Three restaurants
have been remodeled with new scatter bars since October 1997, and have resulted
in same-store sales gains at these restaurants in excess of 20% since the
remodeling. There can be no assurance, however, that this increase in sales will
be maintained. Management is considering remodeling two additional restaurants
in 1998 with scatter bars. Currently, 18 of the Company's 25 restaurants have
scatter bars.
In January 1998, the Company entered into a lease agreement for a new restaurant
expected to be opened in June 1998. Management intends to continue to search for
new restaurant sites and develop and open new restaurants, subject to available
financing (see "Liquidity and Capital Resources").
The operating expenses of the Company's restaurants include food and beverage,
payroll and benefits, depreciation and amortization, and other operating
expenses, which include repairs, maintenance, utilities, supplies, advertising,
insurance, property taxes, rents and licenses. The Company's food, beverage,
payroll and benefits costs are believed to be higher than the industry average
as a percentage of sales as a result of the Company's philosophy of providing
customers with high value of food and service for every dollar a customer
spends. In total, food and beverage, payroll and benefits, depreciation and
amortization and other operating expenses as a percentage of sales increased to
89.1% in 1997 from 87.6% in 1996, primarily due to the decline in same-store
sales.
Ryan's
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6
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Food and beverage costs as a percentage of sales decreased from 39.7% in 1996 to
39.6% in 1997. Payroll and benefits as a percentage of sales increased from
27.8% in 1996 to 28.4% in 1997. The Company experienced unusually high
management turnover in 1997, resulting in higher than expected training costs
for new manager hires, as well as operational difficulties. In an attempt to
reduce turnover, management decided to increase the number of restaurant
managers in order to provide the Company's managers with a five-day work week
and a higher quality of life, and therefore improve management retention and
customer service. This increase in number of restaurant managers contributed to
higher payroll and benefits costs in 1997 as compared to 1996. In addition, the
decline in same store sales resulted in an increase in payroll as a percentage
of sales, since a significant amount of payroll cost is a fixed cost.
Other operating expenses as a percentage of sales increased from 15.7% in 1996
to 16.4% in 1997, primarily due to increased fixed operating expenses (as a
percentage of sales) resulting from the decline in same store sales.
Depreciation and amortization increased as a percentage of sales in 1997
compared to 1996, as a result of additions to property and equipment over the
last 24 months and to the decline in comparable store sales.
General and administrative expenses as a percentage of sales increased to 7.3%
in 1997 from 5.8% in 1996. The increase was primarily due to approximately
$375,000 in costs associated with the Bisco takeover attempt (see Note 13 to the
consolidated financial statements), sales tax expenses incurred and accrued for
under a Florida sales tax audit, and the decline in same-store sales. The
expenses incurred in opposing the Bisco takeover attempt relate to, among other
things, the preparation and mailing of materials in opposition to the Bisco
consent solicitation and tender offer and the Ceiley shareholder proposal,
litigation filed by the Company against Bisco, and the attendant fees paid for
legal advice and proxy solicitation. As discussed in Note 13, in February 1998,
the Company entered into a Standstill and Settlement Agreement with Bisco.
The Company recognized an asset valuation charge of $550,000 in 1997 in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The charge was based upon a financial review of all Company-owned
restaurants and applied to one underperforming restaurant held for sale.
Interest expense increased from $1,516,300 during 1996 to $1,576,700 in 1997.
The increase was due to interest costs associated with a new restaurant opened
in January 1997.
The effective income tax rates for the year ended December 31, 1997 and January
1, 1997 were (12.4%) and 20.1%, respectively. The increase in the valuation
allowance in deferred tax assets in 1997 and the use of certain deferred tax
assets which had previously been reserved in 1996 resulted in the lower than
statutory effective rates for those periods.
In December 1996, the Company realized a gain on early extinguishment of debt of
$348,500, net of income taxes. The gain was accounted for as an extraordinary
item (see Note 6 to the consolidated financial statements).
Net loss for 1997 was $1,423,900, compared to net earnings of $562,200 in 1996.
Loss per share assuming dilution was $.65 for 1997, compared to net earnings per
share assuming dilution of $.24 in 1996.
Ryan's
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7
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1996 Compared to 1995
For the year ended January 1, 1997, total sales decreased 9.8% compared to 1995,
due to declines in same-store sales and one less week in fiscal year 1996
compared to 1995. The sales decline in 1996 compared to 1995 consisted of the
following components:
- --------------------------------------------------------------------------------
% Change
from 1995
1996 1995 Change Total Sales
- --------------------------------------------------------------------------------
Same-Store Sales $37,977,600 $41,361,900 $(3,384,300) (8.0%)
Extra Week Sales* 0 743,500 (743,500) (1.8%)
----------- ----------- ----------- ----
Total Sales $37,977,600 $42,105,400 $(4,127,800) (9.8%)
=========== =========== =========== ====
- ----------
*1995 was a 53-week period, 1996 was a 52-week period.
Food and beverage costs as a percentage of sales increased to 39.7% in 1996 from
39.4% in 1995, primarily due to higher produce and dairy product costs. Payroll
and benefits as a percentage of sales increased from 27.1% in 1995 to 27.8% in
1996, primarily due to the decline in same-store sales. Other operating expenses
as a percentage of sales increased from 15.0% in 1995 to 15.7% in 1996,
primarily due to higher repair and maintenance costs and the decline in
same-store sales. Depreciation and amortization increased as a percentage of
sales in 1996 compared to 1995, as a result of the decline in same-store sales.
General and administrative expenses as a percentage of sales were 5.8% in 1996
and 1995. Franchise fees were 3.0% of sales in 1996 and 1995 in accordance with
the Company's amended Franchise Agreement with Ryan's Family Steak Houses, Inc.
(the "Franchisor"). (See Note 4 to the consolidated financial statements.)
In 1995, the Company recognized $303,200 in income from the favorable settlement
of two closed restaurant leases. The remaining lease costs at the time of store
closure were included in closed restaurant costs in 1993. No such events
occurred in 1996.
During the first week of fiscal 1995, the Company closed and sold a restaurant
located in Jacksonville, Florida. The Company received approximately 20% of the
purchase price in cash and recorded a mortgage receivable for the balance of the
sale. The Company recognized a gain on this sale of approximately $152,000 in
1995. Total gains on sales of property were $159,000 in 1995. There were no
significant sales of real estate in 1996.
Interest expense decreased from $1,693,800 during 1995 to $1,516,300 in 1996.
The decrease was due primarily to lower outstanding principal balances,
resulting from principal payments made throughout 1996.
The effective income tax rates for the year ended January 1, 1997 and January 3,
1996 were 20.1% and 9.9%, respectively. Certain deferred tax assets were
utilized in both years, resulting in the lower than statutory effective rates
for 1995 and 1996.
In December 1996, the Company realized a gain on early extinguishment of debt of
$348,500, net of income taxes. The gain was accounted for as an extraordinary
item (see Note 6 to the consolidated financial statements).
Net earnings for 1996 were $562,200 compared to $1,344,200 in 1995. Earnings per
share assuming dilution were $.24 for 1996, compared to $.57 in 1995.
Ryan's
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8
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from cash sales.
Inventories are purchased on credit and are converted rapidly to cash.
Therefore, the Company does not carry significant receivables or inventories
and, other than the repayment of debt, working capital requirements for
continuing operations are not significant.
At December 31, 1997, the Company had a working capital deficit of $1,794,700
compared to a working capital deficit of $616,800 at January 1, 1997. The
increase in the working capital deficit in 1997 was primarily due to the net
loss incurred by the Company in 1997.
Cash provided by operating activities decreased to $626,100 in 1997 from
$1,645,000 in 1996, primarily due to the net loss in 1997, compared to net
earnings in 1996. Cash provided by operating activities decreased from
$2,135,300 in 1995 to $1,645,000 in 1996 due to lower earnings in 1996.
The Company spent approximately $2,741,000 in 1997, $1,356,000 in 1996 and
$2,600,000 in 1995 for new restaurant construction, restaurant remodeling and
equipment. Capital expenditures for 1998, based on present costs and plans for
capital improvements, are estimated to be $3,400,000. The Company projects that
proceeds from the Company's financing agreements (described below), and cash
generated from operations will be sufficient to fund these improvements.
In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage
Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes
payable to FFCA totalling $14,681,400 at December 31, 1997. Each Promissory Note
is secured by a mortgage on a Company restaurant property. The Promissory Notes
provide for a term of twenty years and an interest rate equal to the thirty-day
LIBOR rate plus 3.75%, adjusted monthly. In November 1997 the Company prepaid
one of the Promissory Notes in full in the amount of approximately $440,000. The
Loan Agreement provides for various covenants, including the maintenance of
prescribed debt service coverages.
The Company used the proceeds of the FFCA loan to retire its Notes with Cerberus
Partners, L.P. ("Cerberus") and its loan with the Daiwa Bank Limited and
SouthTrust Bank of Alabama, N.A. The Company realized a discount on the
retirement of the Cerberus Notes, which was partially offset by unamortized debt
issuance costs. The resulting gain of $348,500, net of income taxes, was
accounted for in 1996 as an extraordinary item. In addition, the Company retired
warrants for 210,000 shares of the Company's common stock previously held by
Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the
Company's common stock at an exercise price of $2.00 per share.
Also in December 1996, the Company entered into a separate loan agreement with
FFCA under which it may borrow up to an additional $4,640,000. This additional
financing would be evidenced by four additional Promissory Notes secured by
mortgages on four Company restaurant properties. The term and interest rate of
this loan agreement are identical to the loan agreement described above. The
Company borrowed $1,290,000 under this agreement in February 1998, secured by a
mortgage on one restaurant property. The availability of new borrowings under
this agreement is currently scheduled to expire in June 1998.
Ryan's
================================================================================
9
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
IMPACT OF INFLATION
Costs of food, beverage, and labor are the expenses most affected by inflation
in the Company's business. Although inflation in recent years has been low and
accordingly has not had a significant impact on the Company in the past, there
can be no assurance that inflation will not increase and impact the Company in
the future. A significant portion of the Company's employees are paid by the
federally established statutory minimum wage. On August 8, 1996, President
Clinton signed into law a bill which raised the federally mandated minimum wage
by $.50 per hour on October 1, 1996, and by an additional $.40 per hour on
September 1, 1997. Future changes in the federal minimum wage may impact the
Company's payroll and benefits costs.
The Company raised sales prices approximately 1.0% in 1997 in order to offset
the effect of higher payroll and benefit costs. Sales prices were increased
approximately 3.0% in 1996 and 2.5% in 1995.
INFORMATION SYSTEMS AND THE YEAR 2000
The Company initiated the process of preparing its computer systems and
applications for the year 2000 in January 1998. This process involves modifying
or replacing certain hardware and software maintained by the Company as well as
communicating with external service providers to ensure that they are taking the
appropriate action to remedy their Year 2000 issues. Management expects to have
substantially all of the system and application changes completed by the end of
1999 and believes that its level of preparedness is appropriate.
The Company estimates that the total cumulative cost of the project could range
as high as $500,000, which includes both internal and external personnel costs
related to modifying the systems as well as the cost of purchasing or leasing
certain hardware and software. Purchased hardware and software will be
capitalized in accordance with normal policy. Personnel and all other costs
related to the project are being expensed as incurred.
The costs of the project and the expected completion dates are based on
management's best estimates.
Ryan's
================================================================================
10
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
For The Years Ended
--------------------------------------------
December 31, January 1, January 3,
1997 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $36,977,800 $37,977,600 $42,105,400
Cost and expenses:
Food and beverage 14,642,500 15,089,500 16,591,300
Payroll and benefits 10,516,000 10,537,500 11,411,700
Depreciation and amortization 1,750,700 1,662,500 1,719,900
Other operating expenses 6,069,700 5,953,400 6,313,000
General and administrative expenses 2,680,900 2,220,200 2,452,300
Franchise fees 1,108,400 1,138,600 1,263,200
Asset valuation charge 550,000 -- --
Income from closed restaurants -- -- (303,200)
Loss on disposition of equipment 146,200 57,400 197,800
------------ ------------ ------------
37,464,400 36,659,100 39,646,000
------------ ------------ ------------
(Loss) earnings from operations (486,600) 1,318,500 2,459,400
Interest and other income 437,900 465,100 535,600
Gain on sale of restaurant -- -- 158,600
Gain on sale of property held for sale -- -- 31,500
Interest expense (1,576,700) (1,516,300) (1,693,800)
------------ ------------ ------------
(Loss) earnings before income taxes and extraordinary item (1,625,400) 267,300 1,491,300
(Benefit) provision for income taxes (201,500) 53,600 147,100
------------ ------------ ------------
Net (loss) earnings before extraordinary item (1,423,900) 213,700 1,344,200
Extraordinary item - gain on early extinguishment
of debt, net of income taxes of $88,700 -- 348,500 --
------------ ------------ ------------
Net (loss) earnings ($1,423,900) $562,200 $1,344,200
============ ============ ============
Basic earnings per share:
Net (loss) earnings before extraordinary item ($0.65) $0.10 $0.61
Extraordinary item - gain on early extinguishment of debt -- $0.16 --
------------ ------------ ------------
Net (loss) earnings ($0.65) $0.26 $0.61
============ ============ ============
Diluted earnings per share:
Net (loss) earnings before extraordinary item ($0.65) $0.09 $0.57
Extraordinary item - gain on early extinguishment of debt -- $0.15 --
------------ ------------ ------------
Net (loss) earnings ($0.65) $0.24 $0.57
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's
================================================================================
11
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 January 1, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $696,000 $1,750,800
Investments 600,300 1,093,100
Receivables 93,200 566,100
Income taxes receivable 297,900 --
Current portion of mortgages receivable 124,900 120,600
Inventories 280,500 202,300
Prepaids and other current assets 311,200 247,200
------------ ------------
Total current assets 2,404,000 3,980,100
Mortgages receivable 308,700 1,089,100
Property and equipment:
Land 9,088,300 9,089,200
Buildings and improvements 19,908,900 19,676,500
Equipment 13,151,600 12,240,400
------------ ------------
42,148,800 41,006,100
Accumulated depreciation (15,848,500) (14,656,200)
------------ ------------
Net property and equipment 26,300,300 26,349,900
Property held for sale 552,800 552,800
Other assets, principally deferred charges,
net of accumulated amortization 767,000 831,600
------------ ------------
$30,332,800 $32,803,500
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,287,000 $1,183,000
Accounts payable - construction -- 411,800
Accrued liabilities 2,630,300 2,582,100
Income taxes payable -- 84,800
Current portion of long-term debt 278,900 332,700
Current portion of obligation under capital lease 2,500 2,500
------------ ------------
Total current liabilities 4,198,700 4,596,900
Long-term debt 14,402,800 15,107,200
Obligation under capital lease 1,056,000 1,058,600
Deferred revenue 30,800 43,100
------------ ------------
Total liabilities 19,688,300 20,805,800
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock of $.01 par; authorized 10,000,000 shares; none issued -- --
Common stock of $.01 par; authorized 4,000,000 shares; outstanding
2,216,200 in 1997 and 2,184,140 shares in 1996 22,200 21,800
Additional paid-in capital 8,256,100 8,185,800
Retained earnings 2,366,200 3,790,100
------------ ------------
Total shareholders' equity 10,644,500 11,997,700
------------ ------------
$30,332,800 $32,803,500
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's
================================================================================
12
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the Years ended December 31, 1997, January 1, 1997 and January 3, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 28, 1994 10,725,200 $107,300 $8,002,300 $1,883,700 $9,993,300
Net earnings 1,344,200 1,344,200
Exercise of stock options 119,800 1,200 1,200
Issuance of warrants 81,000 81,000
Directors' fees in the form of stock options 40,000 40,000
----------- ----------- ----------- ----------- -----------
Balance, January 3, 1996 10,845,000 108,500 8,123,300 3,227,900 11,459,700
Net earnings 562,200 562,200
Exercise of stock options 75,700 700 18,100 18,800
Retirement of warrants (63,000) (63,000)
Directors' fees in the form of stock options 20,000 20,000
----------- ----------- ----------- ----------- -----------
Balance, January 1, 1997 10,920,700 109,200 8,098,400 3,790,100 11,997,700
Net loss (1,423,900) (1,423,900)
Exercise of stock options 32,060 1,600 49,100 50,700
Common stock 1-for-5 reverse split (8,736,560) (88,600) 88,600 --
Directors' fees in the form of
stock options 20,000 20,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 2,216,200 $22,200 $8,256,100 $2,366,200 $10,644,500
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's
================================================================================
13
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
-----------------------------------------------------
December 31, 1997 January 1, 1997 January 3, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net (loss) earnings ($ 1,423,900) $ 562,200 $ 1,344,200
Adjustments to reconcile net (loss) earnings to net cash provided
by operating activities:
Depreciation and amortization 1,750,700 1,662,500 1,719,900
Asset valuation charge 550,000 -- --
Directors' fees in the form of stock options 20,000 20,000 40,000
Amortization of loan fees 22,200 89,800 85,400
Loss on disposition of property and equipment 146,200 57,400 197,800
Amortization of loan discount -- 51,000 74,700
Gain on early extinguishment of debt -- (437,200) --
Gain on disposition of restaurants and property held for sale -- -- (493,300)
Loss from joint venture -- -- 5,400
Decrease (increase) in:
Receivables (3,200) (16,100) 27,800
Inventories (78,200) 45,100 63,100
Income taxes receivable (297,900) -- 332,200
Prepaid and other current assets (64,000) 9,400 218,900
Other assets (50,900) (492,500) (275,900)
Increase (decrease) in:
Accounts payable 104,000 (67,700) (212,200)
Accrued liabilities 48,200 88,000 (794,000)
Income taxes payable (84,800) 79,400 5,400
Deferred revenue (12,300) (6,300) (5,800)
Other non-current liabilities -- -- (198,300)
------------ ------------ ------------
Net cash provided by operating activities 626,100 1,645,000 2,135,300
------------ ------------ ------------
Investing activities:
Capital expenditures (2,740,700) (1,356,400) (2,599,600)
Principal receipts on notes receivable 776,100 208,700 84,400
Sale (purchase) of investments 492,800 (492,800) 110,400
Proceeds from sale of property and equipment 900 548,600 107,900
Proceeds from sale of property held for sale -- -- 518,000
------------ ------------ ------------
Net cash used by investing activities (1,470,900) (1,091,900) (1,778,900)
------------ ------------ ------------
Financing activities:
Payments on long-term debt and obligation under capital lease (760,800) (15,414,500) (1,249,300)
Construction draw on building under capital lease 500,100 585,000 --
Proceeds from the exercise of stock options 50,700 18,800 1,200
Retirement of warrants -- (63,000) --
Proceeds from the issuance of long-term debt -- 15,360,000 --
------------ ------------ ------------
Net cash provided (used) by financing activities (210,000) 486,300 (1,248,100)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,054,800) 1,039,400 (891,700)
Cash and cash equivalents-- beginning of year 1,750,800 711,400 1,603,100
------------ ------------ ------------
Cash and cash equivalents-- end of year $ 696,000 $ 1,750,800 $ 711,400
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 181,000 $ 63,000 $ 139,200
============ ============ ============
Cash paid during the year for interest $ 1,323,100 $ 1,386,600 $ 1,670,800
============ ============ ============
Noncash transactions:
Notes receivable as partial proceeds $ -- $ -- $ 932,800
Interest forgiven in lieu of loan closing costs incurred -- -- 251,600
Warrants issued in connection with loan restructure -- -- 81,000
Accrued interest reclassed to long-term debt -- -- 100,000
</TABLE>
See accompanying notes to consolidated financial statements.
Ryan's
================================================================================
14
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was organized under the laws of the State of Florida in September
l985 and is the sole franchisee of Ryan's Family Steak House restaurants in the
State of Florida.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Steak House Construction, Family Rustic
Investments, Steak House Realty Corporation, and Wrangler's Roadhouse, Inc. All
significant intercompany transactions and balances have been eliminated.
Fiscal Year
The fiscal year consists of a fifty-two or fifty-three week period ending on the
Wednesday nearest to December 31. Fiscal year 1995 consisted of fifty-three
weeks. Fiscal years 1996 and 1997 consisted of fifty-two weeks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company has a cash management program which provides for the investment of
excess cash balances in short-term investments. These investments are stated at
cost which approximates market value and consist of money market instruments.
Investments
Investments represent certificates of deposit or bankers' acceptances with
maturities of less than one year. These investments are pledged with various
entities to support the Company's workers' compensation liability. Interest
rates on the certificates vary from 4.83% to 5.50%.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of ingredients and supplies.
Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and betterments
which do not enhance the value of or increase the life of the assets are charged
to costs and expenses as incurred. Depreciation is provided for financial
reporting purposes principally on the straight-line method over the following
estimated lives: buildings - 25 years, land improvements - 25 years and
equipment - 5-8 years. Leasehold improvements are amortized over the life of the
related lease.
Property Held For Sale
Property held for sale consists of property parcels stated at the lower of cost
or estimated net realizable value.
Ryan's
================================================================================
15
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Deferred Charges
Certain costs incidental to the opening of a restaurant, consisting primarily of
employee training costs, are capitalized for each store opened and are amortized
over one year. Other deferred charges and related amortization periods are as
follows: financing costs - term of the related loan, and initial franchise
rights - 40 years.
Income Taxes
Deferred income taxes are provided for temporary differences between financial
reporting basis and tax basis of the Company's assets and liabilities using
presently enacted income tax rates.
New Accounting Standards
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"(SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to all entities with publicly held common
stock or potential common stock. SFAS 128 replaces the presentation of primary
EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. The
Company adopted the requirements of SFAS No. 128 in the year ended December 31,
1997 (Note 8). All periods presented have been restated to conform to this
presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"), effective for fiscal years beginning after December 15, 1997. SFAS
130 requires all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 does
not require a specific format for that financial statement but requires an
entity to display an amount representing total comprehensive income for the
period in that financial statement. SFAS 130 requires an entity to classify
items or other comprehensive income by their nature in a financial statement. In
addition, the accumulated balance of other comprehensive income must be
displayed separately from retained earnings and additional paid in capital in
the equity section of a statement of financial position. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. The Company is in the process of determining the impact that the
adoption of SFAS 130 will have on its financial statements.
Reclassifications
Certain items in the prior year financial statements have been reclassified to
conform to the 1997 presentation.
NOTE 2. CLOSED RESTAURANT COSTS
In 1995, the Company recognized $303,200 in income from favorable settlements of
two closed restaurant leases. These closed restaurant costs had been recorded in
1993, when the decision to close the respective restaurants was made.
Ryan's
================================================================================
16
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
NOTE 3. ASSET VALUATION CHARGE
In accordance with SFAS No. 121, the Company recognized a $550,000 asset
valuation charge in 1997. This charge was based upon a financial review of all
Company-owned restaurants and applied to one underperforming unit, which the
Company intends to sell in 1998.
The charge was based on the difference between the unit's net book value and
estimated fair value, which equaled the estimated proceeds from disposal as
determined by management. Considerable management judgement is necessary to
estimate proceeds from disposal and, accordingly, actual proceeds could vary
significantly from such estimates. Management plans to actively market this
restaurant, but currently cannot estimate its expected disposal date. For the
year ended December 31, 1997, this unit had an after-tax loss of $116,500.
NOTE 4. FRANCHISE AGREEMENT
In October 1996, the Company amended its Franchise Agreement with Ryan's Family
Steak Houses, Inc. The amended agreement requires the Company to pay a monthly
royalty fee of 3.0% through December 2001, and 4.0% thereafter of the gross
receipts of each Ryan's Family Steak House restaurant. Total royalty fee
expenses were $1,108,400, $1,138,600 and $1,263,200 for the years ended December
31, 1997, January 1, 1997 and January 3, 1996.
The Franchise Agreement requires the Company to operate a minimum number of
Ryan's restaurants on December 31 of each year. The Company has listed six
restaurants for sale. Failure to operate the minimum number could result in the
loss of exclusive franchise rights to the Ryan's concept in North and Central
Florida.
The following schedule outlines the number of Ryan's restaurants required to be
operated by the Company as of December 31 each year under the amended franchise
agreement:
- --------------------------------------------------------------------------------
Number of
Restaurants Required to
End of Fiscal Year be in Operation
- --------------------------------------------------------------------------------
1997 25
1998 26
1999 27
2000 28
2001 and subsequent years Increases by one each year
Prior to July 1994 the Company held exclusive franchise rights to build Ryan's
restaurants in the State of Florida, with the exception of Panama City, Florida
and Escambia County, Florida, where the Franchisor has the right to operate
Ryan's restaurants. Under the Franchise Agreement, as amended in July 1994, the
Company relinquished the franchise rights to most counties in northwest Florida
and south Florida to the Franchisor for $500,000 in forgiveness of past due
royalty fees. The Company has the right to repurchase the exclusive franchise
rights to those counties for $500,000 at any time prior to June 30, 1998.
In conjunction with the execution of the July 1994 amendment to the Franchise
Agreement, the Company executed and delivered a note to the Franchisor for
payment of $800,000 in past due royalty fees. (See Note 6).
Ryan's
================================================================================
17
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
- --------------------------------------------------------------------------------
December 31, 1997 January 1, 1997
- --------------------------------------------------------------------------------
Payroll and payroll taxes $ 549,200 $ 561,500
Workers' compensation claims 1,260,500 1,427,000
Other 820,600 593,600
---------- ----------
$2,630,300 $2,582,100
========== ==========
The Company self-insures workers' compensation losses up to certain limits. The
estimated liability for workers' compensation claims represents an estimate for
the ultimate cost of uninsured losses which are unpaid as of the balance sheet
date. These estimates are continually reviewed and adjustments to the Company's
estimated claim liabilities, if any, are reflected in current operations.
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
December 31, 1997 January 1, 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Secured notes payable to FFCA Mortgage
Corporation, monthly principal and interest
payments totaling $141,100 effective
December 1997, interest at thirty day LIBOR
rate +3.75% (9.44% at December 31, 1997) $ 14,681,400 $ 15,360,000
Unsecured note payable to Franchisor, monthly
principal payments of $25,000, interest at 6.0% 75,000
Other 300 4,900
------------ ------------
14,681,700 15,439,900
Less current portion: (278,900) (332,700)
------------ ------------
$ 14,402,800 $ 15,107,200
============ ============
Total maturities of long-term debt are as follows:
1998 $ 278,900
1999 307,300
2000 338,900
2001 373,600
2002 411,900
Thereafter 12,971,100
-----------
$14,681,700
===========
</TABLE>
Ryan's
================================================================================
18
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
In December 1996, the Company entered into a Loan Agreement with FFCA Mortgage
Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes
payable to FFCA totalling $14,681,400 at December 31, 1997. Each Promissory Note
is secured by a mortgage on a Company restaurant property. The Promissory Notes
provide for a term of twenty years and an interest rate equal to the thirty-day
LIBOR rate plus 3.75%, adjusted monthly. In November 1997 the Company prepaid
one of the Promissory Notes in full in the amount of approximately $440,000. The
Loan Agreement provides for various covenants, including the maintenance of
prescribed debt service coverages.
The Company used the proceeds of the FFCA loan to retire its Notes with Cerberus
Partners, L.P. ("Cerberus") and its loans with the Daiwa Bank Limited and
SouthTrust Bank of Alabama, N.A. The Company realized a discount on the
retirement of the Cerberus Notes, which was partially offset by unamortized debt
issuance costs. The resulting gain of $348,500 net of income taxes, was
accounted for in 1996 as an extraordinary item. In addition, the Company retired
warrants for 210,000 shares of the Company's common stock previously held by
Cerberus. Cerberus continues to hold warrants to purchase 140,000 shares of the
Company's common stock at an exercise price of $2.00 per share.
Also in December 1996, the Company entered into a separate loan agreement with
FFCA under which it may borrow up to an additional $4,640,000. This additional
financing would be evidenced by four additional Promissory Notes secured by
mortgages on four Company restaurant properties. The terms and interest rate of
this loan agreement are identical to the loan agreement described above. The
Company borrowed $1,290,000 under this agreement in February 1998, secured by a
mortgage on one restaurant property. The availability of borrowings under this
agreement is currently scheduled to expire in June 1998.
NOTE 7. INCOME TAXES
The (benefit) provision for income taxes is comprised of the following:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $(201,500) $142,300 $147,100
========= ======== ========
Income taxes for the years ended December 31, 1997, January 1, 1997 and January
3, 1996 differ from the amount computed by applying the federal statutory
corporate rate to earnings before income taxes. The differences are reconciled
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) provision at statutory rate $(568,900) $245,500 $522,000
Increase (decrease) in taxes due to:
Effect of graduated tax rates 16,300 (7,000) (14,900)
State tax net of federal benefit (59,000) 38,600 53,700
Change in deferred tax asset
valuation allowance 377,900 (109,400) (426,000)
Other 32,200 (25,400) 12,300
--------- -------- --------
(Benefit) provision for income taxes $(201,500) $142,300 $147,100
========= ======== ========
</TABLE>
Ryan's
================================================================================
19
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
The components of deferred taxes at December 31, 1997 and January 1, 1997 are
summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
December 31, 1997 January 1, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Capital loss not currently deductible $ 46,100 $ 46,100
Excess tax over book basis:
Property held for sale 164,700 164,700
Asset valuation reserve 207,000 --
Federal and state tax credits 562,500 375,100
Accruals not currently deductible 474,500 547,900
Unearned revenue, previously taxed 16,800 22,500
State net operating loss 44,900 --
----------- -----------
Total deferred tax asset 1,516,500 1,156,300
Valuation Allowance (519,700) (141,800)
----------- -----------
996,800 1,014,500
----------- -----------
Deferred tax liability:
Excess of tax over book depreciation and amortization 996,800 1,014,500
=========== ===========
Net deferred taxes $ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1997 the Company's federal and state tax credit was comprised of
$49,200 in general business credits which expire in 2012 and alternative minimum
tax credits of $513,300 which have no expiration date.
NOTE 8. COMMON SHAREHOLDERS' EQUITY
Stock Split
The Company effected a 1-for-5 reverse stock split of its common stock in March
1998, which was recorded by transferring the aggregate par value of the shares
retired from common stock to additional paid in capital. Accordingly, the
weighted average number of common and equivalent shares, per share amounts for
net earnings, and stock option and warrant data have been retroactively adjusted
to reflect the reverse stock split for all periods presented.
Ryan's
================================================================================
20
<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Earnings per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for net income and net income available to
common shareholders:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ---------------------------------- --------------------------------
Income Shares Per Income Shares Per Income Shares Per
(Numerator) (Denominator) Shares (Numerator) (Denominator) Shares (Numerator) (Denominator) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net (loss) income
available to
common shareholders $(1,423,900) 2,206,000 $(0.65) $ 562,200 2,177,100 $0.26 $ 1,344,200 2,163,400 $0.62
====== ===== =====
Effect of Dilutive
Securities:
Stock Options 49,800 59,100
Warrants 140,700 143,700
Diluted EPS:
Net (loss) income
available to
common shareholders
plus assumed
conversions $(1,423,900) 2,206,000 $(0.65) $ 562,200 2,367,600 $0.24 $ 1,344,200 2,366,200 $0.57
====== ===== =====
</TABLE>
The Company has a stock option plan for non-employee directors pursuant to which
up to an aggregate of 180,000 shares of the common stock are authorized to be
granted. All options expire five years after the date of grant or one year after
completion of term as a director.
The Company also had an employee incentive stock option plan pursuant to which
up to an aggregate of 108,000 shares of the common stock were authorized to be
granted. All options expire ten years after the date of grant or 90 days after
termination of employment. This plan expired as of November 30, 1995. Certain
options outstanding under this plan as of November 30, 1995 remain exercisable
pursuant to terms of the plan.
In 1995 the Company's shareholders approved a new employee long-term incentive
plan pursuant to which an additional 200,000 shares of common stock are
authorized to be granted in the form of stock options or restricted stock. All
options granted under this plan expire no later than ten years after the date of
grant or three months after termination of employment.
If compensation cost for stock option grants had been determined based on the
fair value at the grant dates for 1997, 1996, and 1995 consistent with the
method prescribed by SFAS No. 123, the Company's net earnings and earnings per
share would have been adjusted to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net (Loss) Earnings As reported $(1,423,900) $562,200 $1,344,200
Pro forma (1,477,800) 490,262 1,256,435
Diluted (Loss) Earnings As reported $ (.65) $ .24 $ .57
Per Share Pro forma (.67) .21 .53
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weight-average assumptions used for grants in 1997, 1996 and 1995, respectively:
dividend yield of 0 percent each year, expected volatility of 99, 134 and 128
percent, risk-free interest rates of 5.6, 6.5 and 5.6 percent, and expected
lives of 10 years for each year.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
The following table summarizes the changes in the total number of stock option
shares outstanding during the three years ended December 31, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of year 193,840 $3.00 262,040 $3.11 102,089 $4.03
Options granted 38,104 2.66 27,886 2.66 215,110 2.49
Options exercised (35,304) 1.99 (15,136) 1.25 (23,970) .05
Options forfeited (14,700) 4.23 (80,950) 3.57 (31,189) 3.54
------- ------- -------
Options outstanding
at end of year 181,940 3.08 193,840 3.00 262,040 3.11
======= ======= =======
Options exercisable
at end of year 103,670 3.20 89,810 3.50 94,570 3.55
======= ======= =======
Weighted average
fair value of options
granted during
the year $41,821 $36,163 $326,761
Common shares
reserved for future
grants at end of year 122,437 -- 153,289 -- 149,589 --
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Exercise Options Options Weighted Average
Granted Price $ Outstanding Exercisable Remaining Life
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1988 $18.13 1,100 1,100 .1
1989 14.38 3,000 3,000 1.5
1991 4.06 11,800 11,800 3.3
1992 5.63 4,000 4,000 4.1
1993 3.13 7,400 7,400 5.3
1994 1.25 16,200 12,150 7.0
1995 3.75 30,640 15,320 7.7
1995 2.00 57,500 43,125 7.7
1996 2.81 23,100 5,775 9.0
1997 3.28 27,200 -- 10.0
------- -------
181,940 103,670
======= =======
</TABLE>
Remaining non-exercisable options as December 31, 1997 become exercisable as
follows:
1998 38,660
1999 20,235
2000 12,575
2001 6,800
--------------------------
78,270
==========================
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Cerberus Partners, L.P., hold detachable warrants to purchase 140,000 shares of
the Company's common stock at $2.00 per share at any time prior to October 1,
2003. The estimated fair value of the warrants retired as of December 18, 1996
(the date of the retirement of the Cerberus Notes) of $63,000 was recorded as a
decrease to additional paid-in capital and included in the gain from early
retirement of debt.
The Company's Board of Directors is authorized to set the various rights and
preferences for the Company's Preferred Stock, including voting, conversion,
dividend and liquidation rights and preferences, at the time shares of Preferred
Stock are issued. As of December 31, 1997 there were no shares of Preferred
Stock issued.
RIGHTS PLAN
On March 18, 1997, the Company entered into a Rights Agreement (the "Rights
Agreement") with ChaseMellon Shareholder Services, LLC and declared a dividend
of rights to purchase Junior Participating Preferred Stock of the Company
("Rights") to shareholders of record as of March 19, 1997.
Each Right will initially entitle the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share (a "Unit") of Junior
Participating Preferred Stock of the Company ("Preferred Stock") at $5.00 per
Unit, subject to adjustment (the "Purchase Price"). The description and terms of
the Rights are contained in the Rights Agreement. As long as the Rights are
attached to the common stock of the Company and in certain other circumstances
specified in the Rights Agreement, five Rights (as such number may be adjusted
pursuant to the provisions of the Rights Agreement) shall be deemed to be
delivered with each share of the Company's common stock currently outstanding or
issued or transferred by the Company in the future.
The Rights will be exercisable and will trade separately from the Company's
common stock upon the tenth business day after (i) the date of public
announcement that a person or group have become the beneficial owners of 15%
(other than Bisco and its affiliates, for which the threshold is 20%) or more of
the outstanding shares of the Company's common stock (an "Acquiring Person"), or
(ii) such later date determined by the Board of Directors after the first public
announcement of a tender or exchange offer, which, upon consummation, would
result in a person or a group being the beneficial owner of 15% (other than
Bisco and its affiliates, for which the threshold is 20%) or more of the
outstanding shares of common stock, or (iii) after a majority of the Board who
are not officers of the Company have determined that a person is an Adverse
Person (as defined in the Rights Agreement).
If (i) a person becomes the beneficial owner of 15% (other than Bisco and its
affiliates, for which the threshold is 20%) or more of the then outstanding
shares of the Company's common stock or voting power (except pursuant to certain
business combinations or an offer for all outstanding shares of the Company's
common stock and all other voting securities which the independent and
disinterested directors of the Company determine to be fair to and otherwise in
the best interest of the Company and its shareholders) or (ii) any person is
determined to be an Adverse Person, then each holder of a Right (with the
exception of an Adverse or Acquiring Person) will thereafter have the right to
receive, upon exercise, common stock having a value equal to no less than two
times the exercise price of the Right, which is $5.00, subject to adjustment.
The Company may redeem each Right for $0.001 at any time before the earliest of
(i) ten business days after a person or group becomes an Acquiring Person, (ii)
ten business days after the Board's determination that a person is an Adverse
Person, or (iii) March 17, 2007.
NOTE 9. PROFIT SHARING AND RETIREMENT PLAN
Employees of the Company participate in a profit sharing and retirement plan
covering substantially all full-time employees at least twenty-one years of age
and with more than one year of service. The plan was established
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
in August 1991. Contributions are made to the plan at the discretion of the
Company's Board of Directors. No profit-sharing contributions have been made
since the inception of the plan.
The profit sharing plan includes a 40l(K) feature by which employees can defer,
by payroll deduction only, l% to l5% of their annual compensation not to exceed
$9,500 in 1997.
The plan provides for a Company matching contribution of $.25 per dollar of the
first 6% of employee deferral. The Company's matching contribution was $29,211
in 1997, $32,050 in 1996 and $43,173 in 1995. Employees vest in Company
contributions based on the following schedule:
- --------------------------------------------------------------------------------
Years of Vesting
Service Percentage
- --------------------------------------------------------------------------------
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 l00%
NOTE 10. INVESTMENT IN JOINT VENTURES
In December 1994, the Company formed a new subsidiary, Family Steak JV, Inc.
which acquired a 50% ownership in a limited liability company, Cross Creek
Barbeque, L.C. ("Cross Creek"), for the purpose of opening a new restaurant. The
Company contributed the equipment to Cross Creek and the other 50% owner of
Cross Creek contributed the cash necessary to remodel and open the new Cross
Creek restaurant. As a result of unsatisfactory operating performance, the
Company sold its interest in the Cross Creek restaurant in July 1995. A Company
subsidiary leased the land and building to Cross Creek until May 1996, when it
sold them at a gain of approximately $5,000.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Lease Obligations
At December 31, 1997, the Company is committed under the terms and conditions of
real and personal property operating leases for minimum rentals aggregating
$2,025,400 plus insurance, common area expenses and taxes. The Company has
various renewal options on these leases covering periods of five to twenty
years.
In September 1996, the Company entered into a twenty year lease agreement with
two five year renewal options for a restaurant building. The total net book
value of the assets covered by the lease amount to $1,188,600 at December 31,
1997. Interest is computed at an annual rate of 10.65%.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
Future minimum lease obligations under noncancelable capital leases and
operating leases consist of the following as of December 31, 1997:
- --------------------------------------------------------------------------------
Capital Operating
Leases Leases
- --------------------------------------------------------------------------------
1998 $ 115,400 $ 259,500
1999 115,400 209,900
2000 115,400 162,300
2001 115,400 113,100
2002 129,300 111,700
Future years 2,051,300 1,168,900
----------- ----------
Total minimum lease payments 2,642,200 $2,025,400
==========
Amounts representing interest (1,583,700)
-----------
Present value of net minimum payments 1,058,500
Current portion (2,500)
-----------
Long-term capitalized lease obligations $ 1,056,000
===========
Rental expense for operating leases for the years ended December 31, 1997,
January 1, 1997 and January 3, 1996 was approximately $477,700, $380,500 and
$419,200, respectively. Contingent rental payments for the years ended December
31, 1997, January 1, 1997 and January 3, 1996 were $0, $0 and $5,500,
respectively.
On May 13, 1997, the Company received notice from Aetna Life Insurance Company,
the mortgage holder of the mall property at which the Company's Clearwater,
Florida restaurant is located, that Aetna intended to foreclose on the property
due to a default by the landlord on the mortgage. In September 1997, Aetna was
granted a Motion for Summary Judgement of Foreclosure by the Circuit Court of
the Sixth Judicial Court in Pinellas County. This Motion indicates that Aetna's
rights under the mortgage are superior to the Company's leasehold interest. It
is uncertain whether this action could allow Aetna to evict the Company from the
Clearwater location. An eviction would result in a write-off of approximately
$350,000 of leasehold improvements. The Company intends to vigorously defend its
interest in this matter. However, there can be no assurance that the Company
will be successful in this defense. Due to the uncertainty of this matter, no
provision for loss has been made in the accompanying consolidated financial
statements.
LEGAL MATTERS
The Company, in the normal course of business, is subjected to claims and
litigation with respect to store operations. In the opinion of management, based
on the advice of legal counsel the ultimate disposition of these claims and
litigation will not have a material effect on the financial position or results
of operations of the Company.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents -- For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
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Investments -- The Company's investments consist of certificates of deposit and
bankers' acceptances for which the carrying amount is a reasonable estimate of
fair value.
Mortgage Receivables -- The fair value of mortgage receivables is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The Company believes the carrying amount is a reasonable
estimate of fair value.
Debt -- Interest rates that are currently available to the Company for issuance
of debt with similar terms and remaining maturities are used to estimate fair
value for debt instruments. The Company believes the carrying amount is a
reasonable estimate of such fair value.
NOTE 13. SUBSEQUENT EVENTS
Standstill and Settlement Agreement
On February 24, 1998, the Company entered into a Standstill and Settlement
Agreement with Bisco Industries and its affiliates ("Bisco"). In accordance with
this agreement, Bisco agreed, among other things, to (i) support the Company's
proposed reverse stock split and, for a period of one year, (ii) vote shares of
the Company's stock owned by Bisco in favor of the Company's slate of Director
nominees for the 1998 Annual Meeting of Shareholders, (iii) acquire no more than
19.9% of the total outstanding shares of the Company's common stock, (iv) not to
initiate the solicitation of proxies or any shareholder vote with respect to the
Company's common stock in opposition to the recommendations of the Board of
Directors on any matter (except certain "anti-takeover" measures proposed by the
Board of Directors), or (v) not initiate any legal action against the Company or
its Directors.
In accordance with the Standstill and Settlement Agreement, the Company agreed
for a period of one year, among other things, to (i) appoint two Bisco nominees
to the Company's Board of Directors and nominate and vote for such nominees for
election at the 1998 Annual Meeting of Shareholders, (ii) dismiss without
prejudice litigation claims previously filed against Bisco, (iii) amend the
Company's Rights Agreement (as described above) to increase from 15% to 20%
(with respect to Bisco only) the percentage of the Company's common stock which
would trigger the distribution of Rights under the Rights Agreement, (iv) allow
Bisco to acquire up to 19.9% of the Company's common stock through a purchase of
141,340 shares directly from the Company at the average closing price of the
common stock over the ten trading days preceding the stock sale and (v) grant
Bisco a limited release from claims, damages or actions arising from certain
actions by Bisco prior to the date of the Standstill and Settlement Agreement
subject to certain limitations.
Possible Delisting of Securities from the Nasdaq Stock Market
The Company's common stock is currently listed on the Nasdaq National Market. On
August 22, 1997, the qualifications for continued listing on this market would
require that (i) the Company maintain at least $4.0 million in net tangible
assets, (ii) the minimum bid price of the common stock be $1.00 or more per
share, (iii) there be at least 750,000 shares in the public float, valued at a
minimum of $5.0 million or more, (iv) the common stock have at least two active
market makers and (v) the common stock be held by at least 400 holders. On
February 27, 1998, Nasdaq notified the Company that it was not in compliance
with the $1.00 minimum bid price requirement, and had 90 days to regain
compliance by initiating actions necessary to bring the price above $1.00 for 10
consecutive trading days.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
In order to raise the Company's stock price above the minimum $1.00 bid price,
in January 1998 the Company proposed to shareholders a one-for-five stock split.
The reverse split was approved at a Special Meeting of Shareholders on February
24, 1998, and management implemented the reverse split effective March 4, 1998.
Since March 4, 1998 the trading price of the Company's stock has been
consistently above $1, thereby meeting the revised Nasdaq minimum bid price
requirement for remaining on the National Market.
Based on recent trading prices of the Company's stock, it is possible that it
could fail to meet the new $5.0 million public float requirement. This could
result in the stock dropping to the Nasdaq SmallCap Market. There are certain
disadvantages to trading on the SmallCap Market as opposed to the National
Market. Many local newspapers do not carry listings of SmallCap issues, which is
where the majority of the Company's shareholders follow the stock. The Company
would lose the automatic Blue Sky exemption it currently enjoys from being on a
national market, which could result in additional expenses to the Company for
future stock offerings of any kind, including distributions of the Rights. The
stock would no longer be automatically marginable for most shareholders. Also,
the Company would still be required to meet certain initial requirements for
membership on the SmallCap Market, including payment of an entrance fee.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Family Steak Houses of Florida, Inc.
We have audited the accompanying consolidated balance sheets of Family
Steak Houses of Florida, Inc. and subsidiaries as of December 31, 1997 and
January 1, 1997 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Family Steak Houses of Florida,
Inc. and subsidiaries as of December 31, 1997 and January 1, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Jacksonville, Florida
March 6, 1998
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
COMPANY'S REPORT ON FINANCIAL STATEMENTS
Family Steak Houses of Florida, Inc. has prepared and is responsible for
the accompanying consolidated financial statements and related consolidated
financial information included in this report. These consolidated financial
statements were prepared in accordance with generally accepted accounting
principles and are appropriate in the circumstances. These consolidated
financial statements necessarily include amounts determined using management's
best judgments and estimates.
Family Steak Houses of Florida, Inc. maintains accounting and other control
systems which the Company believes provides reasonable assurance that assets are
safeguarded and that the books and records reflect the authorized transactions
of the Company, although there are inherent limitations in all internal control
structure elements, as well as cost/benefit considerations.
Family Steak Houses of Florida, Inc.'s independent certified public
accountants, Deloitte & Touche LLP, have audited the accompanying consolidated
financial statements for 1997. The objective of their audit, performed in
accordance with generally accepted auditing standards, is to express an opinion
on the fairness, in all material respects, of the Company's consolidated
financial position, results of its operations and its cash flows in accordance
with generally accepted accounting principles. They consider the internal
control structure to the extent considered necessary to determine the audit
procedures required for the purpose of expressing their opinion on the
consolidated financial statements.
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<PAGE>
FAMILY STEAK HOUSES OF FLORIDA, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Corporate Listing Family Steak Houses of Florida, Inc.
<S> <C>
Corporate Officer and Directors Independent Certified Public Accountants
Lewis E. Christman, Jr. Deloitte & Touche LLP
President, Chief Executive Officer, Director Suite 2801, Independent Square
One Independent Drive
Edward B. Alexander Jacksonville, FL 32202-5034
Chief Financial Officer and Director
General Counsel
Robert Martin
Director McGuire Woods Battle & Boothe LLP
Retiree, former Vice President 3300 Barnett Center
of the Company 50 North Laura Street
P.O. Box 4099
Jacksonville, FL 32201
Joseph M. Glickstein, Jr.
Director
Partner, Glickstein & Glickstein
Transfer Agent / Rights Agent
Richard M. Gray
Director Chase Mellon Shareholder Services
Partner, Gray & Kelley Four Station Square
Third Floor
Pittsburgh, PA 15219-1173
Glen F. Ceiley
Director
President & CEO, Bisco Industries, Inc.
Executive Office
Jay Conzen Family Steak Houses of Florida, Inc.
Director 2113 Florida Boulevard
Principal, Jay Conzen Investments Neptune Beach, Florida 32266
Form 10-K
A copy of the Company's Annual Report on
Form 10-K for fiscal 1997, as filed with
the Securities and Exchange Commission,
may be obtained by writing to:
Corporate Secretary
Family Steak Houses of Florida, Inc.
2113 Florida Boulevard
Neptune Beach, FL 32266
</TABLE>
Annual Meeting
Form 10-K
The annual meeting will be held at:
Sea Turtle Inn
One Ocean Boulevard
Atlantic Beach, FL 32233
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<PAGE>
Common Stock Data
The Company's common stock is traded on the NASDAQ National Market System under
the trading symbol "RYFL". As of March 3, 1998, prior to the reverse split,
there were 2,598 shareholders of record, not including individuals holding
shares in street names. The closing sale price for the Company's stock on March
3, 1998 was $2.03.
The Company has never paid cash dividends on its common stock and is not allowed
to pay dividends under its loan agreements. Management of the Company presently
intends to retain all available funds for expansion of the business.
The quarterly high and low closing prices (as adjusted for the reverse stock
split) of the Company's common stock are as shown below:
Market Price of Common Stock
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
Quarter High Low High Low
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First 5 2 1/2 4 27/32 3 1/8
Second 4 3/8 3 7/16 4 17/32 2 13/16
Third 3 29/32 2 21/32 3 3/4 2 21/32
Fourth 3 19/32 2 31/32 3 19/32 2 3/16
</TABLE>
Pursuant to the Standstill and Settlement with Bisco and its affiliates, on
February 27, 1998, the Company sold 141,340 shares of its common stock to Bisco
at a purchase price of $2.16, which was the average closing price of the
Company's common stock for the ten trading days immediately preceding the date
of the sale. The total price paid by Bisco to the Company was $305,312. These
shares of common stock were sold without registration, since the sale did not
involve a public offering within the meaning of Section 4(2) of the Securities
Act of 1933.
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