SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-10725
FURR'S RESTAURANT GROUP, INC.
INCORPORATED IN DELAWARE IRS EMPLOYER IDENTIFICATION
NO. 75-2350724
3001 E. PRESIDENT GEORGE BUSH HWY., SUITE 200, RICHARDSON, TEXAS 75082
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 808-2923
--------------------------------------------------------------------------------
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.
YES _X_ NO __
--------------------------------------------------------------------------------
As of November 2, 2001 there were 9,767,926 shares of Common Stock
outstanding.
1
FURR'S RESTAURANT GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 2, 2001 (Unaudited) and January 2, 2001 3
Unaudited Condensed Consolidated Statements of Operations
- For the thirteen weeks ended October 2, 2001
and September 26, 2000 5
Unaudited Condensed Consolidated Statements of
Operations- For the thirty-nine weeks ended October 2, 2001
and September 26, 2000 6
Unaudited Condensed Consolidated Statement of Changes
in Stockholders' Equity (Deficit) - For the thirty-nine weeks
ended October 2, 2001 7
Unaudited Condensed Consolidated Statements of
Cash Flows - For the thirty-nine weeks ended
October 2, 2001 and September 26, 2000 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 2001 AND JANUARY 2, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(Unaudited)
October 2,
2001 January 2, 2001
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 5,694
Accounts and notes receivable, net 2,077 1,260
Inventories 7,476 6,908
Prepaid expenses and other 2,819 887
----------------- -----------------
Total current assets 12,372 14,749
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET 45,840 54,876
DEFERRED TAX ASSETS 19,321 19,178
DEFERRED LOAN COSTS, NET 2,611 -
OTHER ASSETS 628 628
----------------- -----------------
TOTAL ASSETS $ 80,772 $ 89,431
================= =================
(Continued)
3
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 2001 AND JANUARY 2, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(Unaudited)
October 2, January 2,
2001 2001
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,825 $ 3,000
Trade accounts payable 9,201 6,051
Other payables and accrued expenses 12,329 15,859
Derivative liability, current 470 -
Reserve for store closings, current 714 795
---------------- ----------------
Total current liabilities 27,539 25,705
---------------- ----------------
RESERVE FOR STORE CLOSINGS, NET OF CURRENT
MATURITIES 1,853 2,270
LONG-TERM DEBT, NET OF CURRENT PORTION 35,675 52,219
OTHER PAYABLES 9,671 10,197
DERIVATIVE LIABILITY, NET OF CURRENT PORTION 174 -
EXCESS OF FUTURE LEASE PAYMENTS OVER FAIR VALUE,
NET OF AMORTIZATION 1,195 1,474
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value; 5,000,000 shares authorized,
none issued - -
Common Stock, $.01 par value; 15,000,000 shares authorized,
9,767,926 shares issued and outstanding 98 98
Additional paid-in capital 56,407 56,386
Accumulated other comprehensive loss (3,933) (3,521)
Accumulated deficit (47,907) (55,397)
---------------- ----------------
Total stockholders' equity (deficit) 4,665 (2,434)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 80,772 $ 89,431
================ ================
See accompanying notes to condensed consolidated financial statements.
4
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED OCTOBER 2, 2001 AND SEPTEMBER 26, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Thirteen weeks ended
--------------------------------------
October 2, September 26,
2001 2000
---------------- -----------------
Sales $ 45,351 $ 49,597
Costs and expenses:
Cost of sales (excluding depreciation) 13,040 14,644
Selling, general and administrative 27,965 30,149
Depreciation and amortization 2,354 2,734
---------------- -----------------
43,359 47,527
---------------- -----------------
Operating income 1,992 2,070
Gain on disposal of assets (22) (100)
Interest expense 1,128 87
---------------- -----------------
Earnings before income taxes 886 2,083
Income tax expense (benefit) (349) 361
---------------- -----------------
Net income $ 1,235 $ 1,722
================ =================
Weighted average number of shares of common stock outstanding:
Basic 9,767,926 9,757,918
================ =================
Diluted 9,771,203 9,758,558
================ =================
Net income per share:
Basic $ 0.13 $ 0.18
================ =================
Diluted $ 0.13 $ 0.18
================ =================
See accompanying notes to condensed consolidated financial statements.
5
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 2001 AND SEPTEMBER 26, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Thirty-nine weeks ended
--------------------------------------
October 2, September 26,
2001 2000
--------------- ------------------
Sales $ 140,393 $ 145,549
Costs and expenses:
Cost of sales (excluding depreciation) 40,332 42,869
Selling, general and administrative 86,179 87,387
Depreciation and amortization 8,002 8,047
--------------- ------------------
134,513 138,303
--------------- ------------------
Operating income 5,880 7,246
Gain on disposal of assets (366) (585)
Interest expense 2,307 259
--------------- ------------------
Earnings before income taxes and extraordinary item 3,939 7,572
Income tax expense 89 1,326
--------------- ------------------
Earnings before extraordinary item 3,850 6,246
Extraordinary gain on retirement of debt 3,640 -
=============== ==================
Net income $ 7,490 $ 6,246
=============== ==================
Weighted average number of shares of common stock outstanding:
Basic 9,759,345 9,757,918
=============== ==================
Diluted 9,761,169 9,761,262
=============== ==================
Earnings before extraordinary item per share:
Basic $ 0.40 $ 0.64
=============== ==================
Diluted $ 0.40 $ 0.64
=============== ==================
Extraordinary item per share:
Basic $ 0.37 $ -
=============== ==================
Diluted $ 0.37 $ -
=============== ==================
Net income per share:
Basic $ 0.77 $ 0.64
=============== ==================
Diluted $ 0.77 $ 0.64
=============== ==================
See accompanying notes to condensed consolidated financial statements.
6
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 2001
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other
Preferred Common Paid-In Comprehensive Accumulated
Stock Stock Capital Loss Deficit Total
----------- -------- ------------ --------------- ------------- ----------
BALANCE, JANUARY 2, 2001 $ - $ 98 $ 56,386 $ (3,521) $ (55,397) $ (2,434)
Change in fair value of estimated cash
flows related to interest rate swap,
net of tax (430) (430)
Reclassification of interest rate swap
to earnings, net of tax 18 18
Stock issued 21 21
Net income - - - - 7,490 7,490
----------- -------- ------------ --------------- ------------- ----------
BALANCE, OCTOBER 2, 2001 $ - $ 98 $ 56,407 $ (3,933) $ (47,907) $ 4,665
=========== ======== ============ =============== ============= ==========
See accompanying notes to condensed consolidated financial statements.
7
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Thirty-nine weeks ended
----------------------------------
October 2, September 26,
2001 2000
--------------- ------------------
Cash flows from operating activities:
Net income $ 7,490 $ 6,246
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,002 8,047
Amortization of deferred loan costs 313 -
Deferred tax expense 89 1,326
Gain on disposal of assets (366) (585)
Extraordinary gain on debt refinancing (3,640) -
Changes in operating assets and liabilities:
Accounts and notes receivable (703) (334)
Inventories (568) (168)
Prepaid expenses and other (2,270) (439)
Reserve for store closings (498) (576)
Trade accounts payable, other payables, accrued
expenses and other liabilities (2,952) (2,836)
--------------- ------------------
Net cash provided by operating activities 4,897 10,681
--------------- ------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,968) (11,577)
Proceeds from the sale of property, plant and equipment 2,975 718
--------------- ------------------
Net cash provided by (used in) investing activities 1,007 (10,859)
--------------- ------------------
Cash flows from financing activities:
Payment of indebtedness (11,079) (2,746)
Payment of loan costs (2,924) -
Increase in cash overdraft 2,384 -
Issuance of stock 21 -
--------------- ------------------
Net cash used in financing activities (11,598) (2,746)
--------------- ------------------
Decrease in cash and cash equivalents (5,694) (2,924)
Cash and cash equivalents at beginning of period 5,694 5,172
--------------- ------------------
Cash and cash equivalents at end of period $ - $ 2,248
=============== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest (including $3,364 in 2001 and $2,746 in 2000
classified as payment of indebtedness.) $ 4,790 $ 3,006
=============== ==================
Cash paid for income taxes $ - $ -
=============== ==================
Noncash investing and financing activities:
Receivable related to involuntary equipment conversion $ 114 $ -
=============== ==================
See accompanying notes to condensed consolidated financial statements.
8
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto included
in the Company's Form 10-K for the year ended January 2, 2001. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of interim financial position and
results of operations.
Interim results of operations may not be indicative of the results that
may be expected for a full fiscal year.
EARNINGS PER SHARE
The following table reconciles the denominators of basic and diluted
earnings per share for the periods ended October 2, 2001 and September 26, 2000.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ ------------------------------------
October 2, September 26, October 2, September 26,
2001 2000 2001 2000
-------------- ----------------- -------------- ------------------
Weighted average common shares
outstanding-basic 9,767,926 9,757,918 9,759,345 9,757,918
Options 3,277 640 1,824 3,344
-------------- ----------------- -------------- ------------------
Weighted average common shares
outstanding-diluted 9,771,203 9,758,558 9,761,169 9,761,262
============== ================= ============== ==================
The following table sets forth the options and warrants that were not
included in the computation of diluted earnings per share because their exercise
price was greater than the average market price of the common shares and
therefore, the effect would be anti-dilutive.
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ ------------------------------------
October 2, September 26, October 2, September 26,
2001 2000 2001 2000
-------------- ----------------- -------------- ------------------
Options 531,000 890,415 558,000 840,665
Warrants - 512,246 - 512,246
9
COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income
for the periods ended October 2, 2001 and September 26, 2000:
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ ------------------------------------
October 2, September 26, October 2, September 26,
2001 2000 2001 2000
-------------- ----------------- -------------- ------------------
Net income $1,235 $1,722 $7,490 $6,246
Fair value of estimated cash flows
related to interest rate swap,
net of tax (195) - (412) -
-------------- ----------------- -------------- ------------------
$1,040 $1,722 $7,078 $6,246
============== ================= ============== ==================
INCOME TAXES
The Company has provided income tax expense (benefit) of ($349) and $89
for the thirteen weeks and thirty-nine weeks ended October 2, 2001,
respectively. The effective income tax rate is lower than the statutory Federal
rate of 35% due to interest expense reported as additional debt rather than
interest expense pursuant to Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings" ("SFAS
15"). There is no income tax expense associated with the extraordinary gain as
this represents early disposition of remaining restructured debt interest under
SFAS 15.
DEBT REFINANCING
On April 10, 2001, the Company entered into a new $55,000 Revolving
Credit and Term Loan Agreement (Credit Agreement) with various banks and
lenders. Concurrent with the execution of this new agreement the Company
defeased and gave notice of redemption of its 12% Senior Secured Notes due
December 31, 2001 and repaid in full the $2,600 of 10.5% Notes due December 31,
2001. Accordingly, the balance of these notes, less the current portion of the
new term loan, was classified as long term at January 2, 2001. After the
redemption of the 12% Notes and the repayment in full of the 10.5% Notes, the
Company had $44,000 outstanding under the new Credit Agreement. The Credit
Agreement contains covenants with regard to maintaining certain leverage ratios,
achieving certain levels of EBITDA, operating cash flow and limits on capital
expenditures. In addition there are certain restrictions on the payment of
dividends and additional indebtedness. The Credit Agreement allows the Company
to borrow at either a Federal Funds Rate plus an applicable margin or at a
Eurocurrency Reserve Rate plus an applicable margin.
The Credit Agreement provides that the Company can borrow up to $20,000
on a revolving basis until April 2006, of which $9,000 was drawn at closing,
with the remaining $11,000 of available borrowings to be used for working
capital and capital expenditures. The Credit Agreement contains a $30,000 Term
Loan A and a $5,000 Term Loan B. The Term Loan A and Term Loan B provide for
quarterly amortization through April 2006 and April 2007, respectively, with the
remaining amounts outstanding then due. The Company's obligations under the
Credit Agreement are secured by a security interest in and liens upon
substantially all of the Company's assets.
As a result of retiring the 12% Senior Secured Notes, the Company
reported an extraordinary gain of $3,640 in the second quarter of fiscal 2001.
10
BUSINESS SEGMENTS
Following is a summary of segment information of the Company for the
thirteen weeks ended October 2, 2001 and September 26, 2000:
CAFETERIAS DYNAMIC FOODS TOTAL
---------- ------------- -----
2001:
External revenues $ 44,857 $ 494 $ 45,351
Intersegment revenues - 12,764 12,764
Depreciation and amortization 2,096 258 2,354
Segment profit 1,744 270 2,014
2000:
External revenues $ 49,130 $ 467 $ 49,597
Intersegment revenues - 15,386 15,386
Depreciation and amortization 2,463 271 2,734
Segment profit 1,951 219 2,170
Following is a summary of segment information of the Company for the
thirty-nine weeks ended October 2, 2001 and September 26, 2000:
CAFETERIAS DYNAMIC FOODS TOTAL
---------- ------------- -----
2001:
External revenues $ 139,068 $ 1,325 $ 140,393
Intersegment revenues - 42,539 42,539
Depreciation and amortization 7,220 782 8,002
Segment profit 5,137 1,109 6,246
2000:
External revenues $ 144,339 $ 1,210 $ 145,549
Intersegment revenues - 45,523 45,523
Depreciation and amortization 7,261 786 8,047
Segment profit 7,196 635 7,831
Following is a reconciliation of reportable segments to the Company's
consolidated totals for the periods ended October 2, 2001 and September 26,
2000:
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------ ----------------------------
October 3, September 26, October 2, September 26,
2001 2000 2001 2000
---------- ------------- ---------- -------------
Revenues
Total revenues of reportable
segments $ 58,115 $ 64,983 $ 182,932 $ 191,072
Elimination of inter-segment
revenue (12,764) (15,386) (42,539) (45,523)
--------- --------- --------- ---------
Total consolidated revenues $ 45,351 $ 49,597 $ 140,393 $ 145,549
========= ========= ========= =========
11
INTEREST RATE RISK MANAGEMENT
The Company uses variable-rate debt to finance its operations. In
particular, it has borrowed money under a Credit Agreement providing for
variable-rate interest to retire the bonds and notes due December 31, 2001. This
debt obligation exposes the Company to variability in interest payments due to
changes in interest rates. If interest rates increase, interest expense
increases and conversely, if interest rates decrease, interest expense also
decreases.
Management believes it is prudent to limit the variability of a portion
of its interest payments. It is the Company's objective to hedge between 50 and
70 percent of its variable-rate long-term note interest payments. The Company's
Credit Agreement also requires that the Company hedge at least $20,000 for a
period of two years.
To meet this requirement, the Company has entered into a derivative
instrument, in the form of an interest rate swap, to manage fluctuations in cash
flows resulting from interest rate risk. The interest rate swap changes the
variable-rate cash flow exposure to fixed-rate cash flows by entering into a
receive-variable, pay-fixed interest rate swap. Under the interest rate swap,
which has a notional amount of $20,000 and a two-year term, the Company receives
variable interest rate payments based on LIBOR and makes fixed interest rate
payments at 4.99%. The Company accounts for the interest rate swap in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
SFAS No. 133 requires that all derivative instruments be recorded in the balance
sheet at fair value. The interest rate swap is a cash flow hedge under SFAS No.
133 and, accordingly, changes in fair value are reported in other comprehensive
income and such amounts are reclassified into interest expense as a yield
adjustment in the same period in which the related expense on the variable rate
debt affects operations.
The Company does not enter into derivative instruments for any purpose
other than cash flow hedging purposes. That is, the Company does not speculate
using derivative instruments.
The Company assesses interest rate cash flow risk by identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 2, 2001 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 26, 2000:
Sales for the third fiscal quarter of 2001 were $45.4 million, a
decrease of $4.2 million from the same quarter of 2000. Operating income for the
third quarter of 2001 was $2.0 million compared to $2.1 million in the
comparable period in the prior year. Net income for the third quarter of 2001
was $1.2 million compared to $1.7 million in the third quarter 2000.
SALES. Restaurant sales in comparable units (units open a minimum of 16
months) decreased $1.0 million, or 2.24%, in the third quarter of 2001 over the
same quarter of 2000. Two factors contributed to the slightly more negative
sales in this quarter. First, sales were temporarily impacted in the days
immediately following the tragedies of September 11, and secondly, the Company
did not promote the same price discount strategy as it did during the prior
year. Sales of nine units closed subsequent to the third quarter of 2000 were
$2.7 million during the third quarter of 2000 accounting for almost two-thirds
of the sales decrease in the third quarter of 2001. Sales by Dynamic Foods to
third parties were $494 thousand in the third quarter of 2001, $27 thousand
higher than third quarter of 2000.
12
COST OF SALES. Cost of sales was 28.8% of sales for the third quarter
of 2001, a 70 basis point improvement from the 29.5% of sales for the third
quarter of 2000. Cost of sales in third quarter of 2000 was negatively impacted
by the price discounting promotions run during that quarter.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expense was lower in the aggregate by $2.2 million in
the third quarter of 2001 as compared to 2000, principally due to fewer
restaurants in operation in the current year. The change in SG&A expense
included decreases of $1.4 million in labor related expenses, $.2 million in
repairs and maintenance, $.2 million in supplies expense and $.3 million in
other store expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was lower by $392 thousand in the third quarter of 2001 due to the closure of
nine units since third quarter 2000.
INTEREST EXPENSE. Interest expense was $1.0 million higher in the third
quarter of 2001 due to the interest associated with the 12% Senior Secured Notes
reported as additional debt rather than interest expense during 2000 pursuant to
SFAS 15.
INCOME TAXES. Income tax expense (benefit) of ($349) thousand and $361
thousand was provided in the third quarter of 2001 and 2000, respectively. Our
effective tax rate is lower than the statutory Federal rate of 35% due to
interest expense on restructured debt, which is reported as additional debt
rather than interest expense pursuant to SFAS 15. The third quarter 2001 income
tax benefit is due to a reduction in the estimated effective income tax rate for
fiscal 2001 compared to the previous estimate which is accounted for
prospectively during the fiscal year.
THIRTY-NINE WEEKS ENDED OCTOBER 2, 2001 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 26, 2000:
Sales for the first thirty-nine weeks of 2001 were $140.4 million, a
decrease of $5.2 million from the same period of 2000. Operating income for the
first thirty-nine weeks of 2001 was $5.9 million compared to $7.2 million in the
comparable period in the prior year. Net income for the first thirty-nine weeks
of 2001 was $7.5 million compared to $6.2 million in the same period of 2000 and
includes an extraordinary gain of $3.6 million realized as a result of early
retirement of debt and the associated interest that had been classified as
additional debt pursuant to SFAS 15.
SALES. Restaurant sales in comparable units (units open a minimum of 16
months) decreased $2.2 million, or 1.6%, in the first thirty-nine weeks of 2001
over the same period of 2000. The nine closed units represented year-to-date
sales of $6.2 million in the prior year. New units represented additional sales
of $2.7 million for 2001. Sales by Dynamic Foods to third parties were $115
thousand higher in the first thirty-nine weeks of 2001 than that of the
comparable period of 2000.
COST OF SALES. Cost of sales was 28.7% of sales for the first
thirty-nine weeks of 2001, a 70 basis point improvement from the 29.4% of sales
for the same period of 2000. As a percentage of sales, cost of sales during 2000
was negatively impacted by price discounting promotions run periodically
throughout the year.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expense was lower in the aggregate by $1.2 million in
the first thirty-nine weeks of 2001 as compared to 2000. The change in SG&A
expense included increases of $866 thousand in utility expense and $361 thousand
in marketing expense, and decreases of $1.9 million in labor and related
expenses, $359 thousand in repairs and maintenance and $498 thousand in supplies
expense.
INTEREST EXPENSE. Interest expense was $2.0 million higher for the
first 39 weeks of 2001 due to the interest associated with the 12% Senior
Secured Notes reported as additional debt rather than interest expense during
2000 pursuant to SFAS 15.
13
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was lower by $45 thousand in the first thirty-nine weeks of 2001. Included in
depreciation for the first thirty-nine weeks of 2001 is a $583 thousand write
down of impaired assets.
INCOME TAXES. Income tax expense of $89 thousand and $1,326 thousand
was provided in the thirty-nine weeks of 2001 and 2000, respectively. Our
effective tax rate is lower than the statutory Federal rate of 35% due to
interest expense on restructured debt, which is reported as additional debt
rather than interest expense pursuant to SFAS 15. During the third quarter 2001,
the Company reduced its estimated effective tax rate for fiscal 2001, the effect
of which is accounted for prospectively during the fiscal year.
EXTRAORDINARY GAIN ON RETIREMENT OF DEBT. As a result of retiring the
12% senior Secured Notes, the Company reported an extraordinary gain of $3.6
million in the second quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the thirty-nine weeks ended October 2, 2001, cash provided by
operating activities was $4.9 million compared to $10.7 million in the same
period of 2000. We made capital expenditures of $2.0 million during the first
thirty-nine weeks of 2001 compared to $11.6 million during the same period of
2000. The $11.6 million spent in 2000 included capital expenditures on three new
units and expenditures on the final phase of our re-imaging program. Due to the
cash management provision under our new revolving credit facility, cash and
temporary investments were $0 and cash overdraft (included in accounts payable)
was ($2.4) million at October 2, 2001 compared to cash and temporary investments
of $2.2 million at September 26, 2000 and $5.7 million at January 2, 2001. Our
current ratio was .45:1 at October 2, 2001 compared to .46:1 at September 26,
2000 and .57:1 at January 2, 2001. Total assets at October 2, 2001 aggregated
$80.8 million, compared to $88.9 million at September 26, 2000 and $89.4 million
at January 2, 2001.
Our restaurants are a cash business. Funds available from cash sales
are not needed to finance receivables and are not generally needed immediately
to pay for food, supplies and certain other expenses of the restaurants.
Therefore, the business and operations of the Company have not historically
required proportionately large amounts of working capital, which is generally
common among similar restaurant companies.
On April 10, 2001, we entered into a new $55 million Revolving Credit
and Term Loan Agreement (Credit Agreement) with various banks and lenders.
Concurrent with the execution of this new agreement we defeased and gave notice
of redemption of our 12% Senior Secured Notes due December 31, 2001 and repaid
in full the $2.6 million of 10.5% Notes due December 31, 2001. The Credit
Agreement contains covenants with regard to maintaining certain leverage ratios,
achieving certain levels of EBITDA, operating cash flow and limits on capital
expenditures. In addition there are certain restrictions on the payment of
dividends and additional indebtedness. The Credit Agreement allows us to borrow
at either a Federal Funds Rate plus an applicable margin or at a Eurocurrency
Reserve Rate plus an applicable margin. Our obligations under the Credit
Agreement are secured by a security interest in and liens upon substantially all
of our assets.
The Credit Agreement provides that we can borrow up to $20 million on a
revolving basis until April 2006, of which $9 million was drawn at closing, with
the remaining $11 million of available borrowings to be used for working capital
and capital expenditures. The Credit Agreement contains a $30 million Term Loan
A and a $5 million Term Loan B. The Term Loan A and Term Loan B provide for
quarterly amortization through April 2006 and April 2007, respectively, with the
remaining amounts outstanding then due.
14
As a result of retiring the 12% Senior Secured Notes, we reported an
extraordinary pre-tax gain of $3.6 million in the second quarter of fiscal 2001.
In order to hedge exposure to cash flow risk associated with variable
interest rates, we entered into an interest rate swap with a notional amount of
$20 million for a two-year term. Under the interest rate swap, we receive
variable interest rate payments based on LIBOR and make fixed interest rate
payments at 4.99%.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 "Business Combinations" and
No. 142 "Goodwill and Other Intangible Assets." Statement 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method, and Statement 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. As of October 2, 2001,
there is no impact to the Company's financial statements as we have not entered
into any business combinations and have not acquired goodwill.
Also, the FASB has recently issued Statement No. 143 "Accounting for
Asset Retirement Obligations," and Statement No. 144 "Accounting for the
Impairment of Disposal of Long-Lived Assets." Statement 143 establishes
requirements for the accounting of removal-type costs associated with asset
retirements and Statement 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. Statement 143 is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged
and Statement 144 is effective for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years.
The Company is currently assessing the impact of these standards on its
financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk from changes in commodity prices. We
purchase certain commodities used in food preparation. These commodities are
generally purchased based upon market prices established with vendors. These
purchase arrangements may contain contractual features that limit the price paid
by establishing certain price floors or caps. We do not use financial
instruments to hedge commodity prices because these purchase arrangements help
control the ultimate cost paid and any commodity price aberrations are generally
short term in nature.
We are exposed to market risk from changes in interest rates affecting
our variable rate debt. We use an interest rate swap to manage the cash flow
risk on $20 million of our variable rate debt. The impact on our results of
operations for the quarter of a one point interest rate change on the
outstanding balance of our variable rate debt is approximately $100 thousand. We
do not use derivatives for trading purposes.
This market risk discussion contains forward-looking statements. Actual
results may differ materially from this discussion based upon general market
conditions and changes in domestic and global financial markets.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Items 2, 3, 4 and 5 are not applicable and have been intentionally omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
11.1 Employment Agreement, dated as of October 9, 2001,
between Craig S. Miller and Furr's Restaurant Group,
Inc.
11.2 Nonqualified Stock Option Agreement, effective as of
October 9, 2001, between Craig S. Miller and Furr's
Restaurant Group, Inc.
11.3 Stock Grant Agreement, effective as of November 5, 2000,
between Craig S. Miller and Furr's Restaurant Group, Inc.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed on October 17, 2001 with respect
to the appointment of Craig S. Miller as President and Chief
Executive Officer of the Company and his election as a member of
the Company's Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 2001 FURR'S RESTAURANT GROUP, INC.
/s/ Craig S. Miller
-------------------------------------
Craig S. Miller
President and Chief Executive Officer
/s/ Nancy Ellefson
-------------------------------------
Nancy Ellefson
Vice President - Finance
16