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 July 3, 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
-- --
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As of July 31, 2001 there were 9,767,926 shares of Common Stock
outstanding.
FURR'S RESTAURANT GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
July 3, 2001 (Unaudited) and January 2, 2001 3
Unaudited Condensed Consolidated Statements of
Operations - For the thirteen weeks ended
July 3, 2001 and June 27, 2000 5
Unaudited Condensed Consolidated Statements of Operations-
For the twenty-six weeks ended July 3, 2001 and June 27, 2000 6
Unaudited Condensed Consolidated Statement of Changes in
Stockholders' Equity (Deficit) - For the twenty-six weeks ended
July 3, 2001 7
Unaudited Condensed Consolidated Statements of
Cash Flows - For the twenty-six weeks ended
July 3, 2001 and June 27, 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 15
Item 4. Submission of Matters to a Vote of Security Holders 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 3, 2001 AND JANUARY 2, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(Unaudited)
July 3, January 2,
2001 2001
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 5,694
Accounts and notes receivable, net 1,759 1,260
Inventories 7,511 6,908
Prepaid expenses and other 2,357 887
----------------- -----------------
Total current assets 11,627 14,749
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET 47,422 54,876
DEFERRED TAX ASSETS 18,861 19,178
DEFERRED LOAN COSTS, NET 2,549 -
OTHER ASSETS 621 628
----------------- -----------------
TOTAL ASSETS $ 81,080 $ 89,431
================= =================
(Continued)
3
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 3, 2001 AND JANUARY 2, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
(Unaudited)
July 3, January 2,
2001 2001
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,550 $ 3,000
Trade accounts payable 6,920 6,051
Other payables and accrued expenses 15,256 15,859
Derivative liability, current 187 -
Reserve for store closings, current 717 795
---------------- ----------------
Total current liabilities 27,630 25,705
---------------- ----------------
RESERVE FOR STORE CLOSINGS, NET OF CURRENT
MATURITIES 2,080 2,270
LONG-TERM DEBT, NET OF CURRENT PORTION 36,450 52,219
OTHER PAYABLES 9,856 10,197
DERIVATIVE LIABILITY, NET OF CURRENT PORTION 151 -
EXCESS OF FUTURE LEASE PAYMENTS OVER FAIR VALUE,
NET OF AMORTIZATION 1,288 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 (3,738) (3,521)
Accumulated deficit (49,142) (55,397)
---------------- ----------------
Total stockholders' equity (deficit) 3,625 (2,434)
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 81,080 $ 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 JULY 3, 2001 AND JUNE 27, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Thirteen weeks ended
------------------------------------
July 3, June 27,
2001 2000
---------------- ----------------
Sales $ 47,555 $ 48,188
Costs and expenses:
Cost of sales (excluding depreciation) 13,970 14,189
Selling, general and administrative 29,174 28,779
Depreciation and amortization 3,048 2,667
---------------- ----------------
46,192 45,635
---------------- ----------------
Operating income 1,363 2,553
Loss (gain) on disposal of assets 95 (485)
Interest expense 1,085 87
---------------- ----------------
Earnings before income taxes and extraordinary gain 183 2,951
Income tax expense (benefit) (101) 523
---------------- ----------------
Earnings before extraordinary item 284 2,428
Extraordinary gain on retirement of debt 3,640 -
---------------- ----------------
Net income $ 3,924 $ 2,428
================ ================
Weighted average number of shares of common stock outstanding:
Basic 9,767,926 9,757,918
================ ================
Diluted 9,770,066 9,757,918
================ ================
Earnings before extraordinary item per share:
Basic $ 0.03 $ 0.25
================ ================
Diluted $ 0.03 $ 0.25
================ ================
Extraordinary item per share:
Basic $ 0.37 $ -
================ ================
Diluted $ 0.37 $ -
================ ================
Net income per share:
Basic $ 0.40 $ 0.25
================ ================
Diluted $ 0.40 $ 0.25
================ ================
See accompanying notes to condensed consolidated financial statements.
5
FURR'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 2001 AND JUNE 27, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Twenty-six weeks ended
--------------------------------------
July 3, June 27,
2001 2000
----------------- -----------------
Sales $ 95,042 $ 95,952
Costs and expenses:
Cost of sales (excluding depreciation) 27,292 28,225
Selling, general and administrative 58,214 57,238
Depreciation and amortization 5,648 5,313
----------------- -----------------
91,154 90,776
----------------- -----------------
Operating income 3,888 5,176
Gain on disposal of assets (344) (485)
Interest expense 1,179 172
----------------- -----------------
Earnings before income taxes and extraordinary item 3,053 5,489
Income tax expense 438 965
----------------- -----------------
Earnings before extraordinary item 2,615 4,524
Extraordinary gain on retirement of debt 3,640 -
================= =================
Net income $ 6,255 $ 4,524
================= =================
Weighted average number of shares of common stock outstanding:
Basic 9,767,926 9,757,918
================= =================
Diluted 9,769,267 9,761,122
================= =================
Earnings before extraordinary item per share:
Basic $ 0.27 $ 0.46
================= =================
Diluted $ 0.27 $ 0.46
================= =================
Extraordinary item per share:
Basic $ 0.37 $ -
================= =================
Diluted $ 0.37 $ -
================= =================
Net income per share:
Basic $ 0.64 $ 0.46
================= =================
Diluted $ 0.64 $ 0.46
================= =================
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 TWENTY-SIX WEEKS ENDED JULY 3, 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 interest rate
swap, net of tax (225) (225)
Reclassification of interest rate swap to
earnings, net of tax 8 8
Stock issued 21 21
Net income - - - - 6,255 6,255
---------- ---------- ------------ ----------------- ------------ ----------
BALANCE, JULY 3, 2001 $ - $ 98 $ 56,407 $ (3,738) $ (49,142) $ 3,625
========== ========== ============ ================= ============ ==========
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)
Twenty-six weeks ended
----------------------------
July 3, June 27,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 6,255 $ 4,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,648 5,313
Amortization of deferred loan costs 135 -
Deferred tax expense 438 965
Gain on disposal of assets (344) (485)
Extraordinary gain on debt refinancing (3,640) -
Changes in operating assets and liabilities:
Accounts and notes receivable (385) (261)
Inventories (603) (434)
Prepaid expenses and other (1,463) (1,544)
Reserve for store closings (268) (593)
Trade accounts payable, other payables, accrued
expenses and other liabilities 446 60
------------- -------------
Net cash provided by operating activities 6,219 7,545
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,155) (8,229)
Proceeds from the sale of property, plant and equipment 3,005 567
------------- -------------
Net cash provided by (used in) investing activities 1,850 (7,662)
------------- -------------
Cash flows from financing activities:
Payment of indebtedness (10,579) (2,747)
Payment of loan costs (2,684) -
Increase in cash overdraft (521) -
Issuance of stock 21 -
------------- -------------
Net cash used in financing activities (13,763) (2,747)
------------- -------------
Decrease in cash and cash equivalents (5,694) (2,864)
Cash and cash equivalents at beginning of period 5,694 5,172
------------- -------------
Cash and cash equivalents at end of period $ - $ 2,308
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest (including $3,364 in 2001 and $2,747 in 2000
classified as payment of indebtedness.) $ 4,794 $ 2,919
============= =============
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 3, 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 July 3, 2001 and June 27, 2000.
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------- ------------------------------
July 3, June 27, July 3, June 27,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
Weighted average common shares
outstanding-basic 9,767,926 9,757,918 9,767,926 9,757,918
Options 2,140 - 1,341 3,204
-------------- ------------- ------------- -------------
Weighted average common shares
outstanding-diluted 9,770,066 9,757,918 9,769,267 9,761,122
============== ============= ============= =============
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 Twenty-six Weeks Ended
------------------------------- ------------------------------
July 3, June 27, July 3, June 27,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
Options 758,000 699,413 758,000 647,663
Warrants - 512,246 - 512,246
9
COMPREHENSIVE INCOME
The following table sets for the components of comprehensive income
for the periods ended July 3, 2001 June 27, 2000:
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------- ------------------------------
July 3, June 27, July 3, June 27,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
Net income $3,924 $2,428 $6,255 $4,524
Fair value of interest rate swap, net of
tax (217) - (217) -
-------------- ------------- ------------- -------------
$3,707 $2,428 $6,038 $4,524
============== ============= ============= =============
INCOME TAXES
The Company has provided income tax expense of ($101) and $438 for
the thirteen weeks and twenty-six weeks ended July 3, 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
has been legally released as obligors and 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 July 3, 2001 and June 27, 2000:
CAFETERIAS DYNAMIC FOODS TOTAL
---------- ------------- -----
2001:
External revenues $ 47,134 $ 421 $ 47,555
Intersegment revenues - 15,531 15,351
Depreciation and amortization 2,787 261 3,048
Segment profit 1,818 328 2,146
2000:
External revenues $ 47,771 $ 417 $ 48,188
Intersegment revenues - 15,038 15,038
Depreciation and amortization 2,406 261 2,667
Segment profit 2,803 235 3,038
Following is a summary of segment information of the Company for the
twenty-six weeks ended July 3, 2001 and June 27, 2000:
CAFETERIAS DYNAMIC FOODS TOTAL
---------- ------------- -----
2001:
External revenues $94,212 $ 830 $ 95,042
Intersegment revenues - 29,775 29,775
Depreciation and amortization 5,124 524 5,648
Segment profit 4,271 839 5,110
2000:
External revenues $95,209 $ 743 $ 95,952
Intersegment revenues - 30,137 30,137
Depreciation and amortization 4,798 515 5,313
Segment profit 5,245 416 5,661
Following is a reconciliation of reportable segments to the Company's
consolidated totals for the periods ended July 3, 2001 and June 27, 2000:
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ -------------------------------
July 3, June 27, July 3, June 27,
2001 2000 2001 2000
------------- ------------- ------------- --------------
Revenues
Total revenues of reportable segments $ 62,906 $ 63,226 $124,817 $126,089
Elimination of inter-segment revenue (15,351) (15,038) (29,775) (30,137)
------------- ------------- ------------- --------------
Total consolidated revenues $ 47,555 $ 48,188 $ 95,042 $ 95,952
============= ============= ============= ==============
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
11
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 JULY 3, 2001 COMPARED TO THIRTEEN WEEKS ENDED JUNE 27,
2000:
Sales for the second fiscal quarter of 2001 were $47.6 million, a
decrease of $.6 million from the same quarter of 2000. Operating income for
the second quarter of 2001 was $1.4 million compared to $2.6 million in the
comparable period in the prior year. Net income for the second quarter of
2001 was $3.9 million compared to $2.4 million in the second quarter 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 increased $.7 million,
or 1.6%, in the second quarter of 2001 over the same quarter of 2000 due to
two units opened during the second quarter of 2000 now included in the
comparable unit category. Second quarter 2001 sales for the new units opened
since second quarter 2000 were $394 thousand, while the second quarter 2000
sales of the units that were closed after second quarter 2000 were $1.7
million, resulting in a net decrease of $1.3 million in second quarter 2001
sales. Sales by Dynamic Foods to third parties were $421 thousand in the
second quarter of 2001, $4 thousand higher than second quarter of 2000.
COST OF SALES. Excluding depreciation, cost of sales was 29.4% of
sales for the both second quarter of 2001 and 2000. Cost of sales in second
quarter 2001 was negatively impacted by the increased cost associated with
the six week "All you can eat steak" promotion run during the quarter.
12
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expense was higher in the aggregate by $.4 million in
the second quarter of 2001 as compared to 2000. The change in SG&A expense
included an increase of $441 thousand in utility expense, $97 thousand in
marketing expense and $123 thousand in other store expense. We had decreases
of $101 thousand in repairs and maintenance and $151 thousand in supplies
expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was higher by $381 thousand in the first quarter of 2001. Included in
depreciation for the second quarter of 2001 is a $583 thousand write down of
impaired assets.
INCOME TAXES. Income tax (benefit) expense of ($101) thousand and
$523 thousand was provided in the second 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.
TWENTY-SIX WEEKS ENDED JULY 3, 2001 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 27,
2000:
Sales for the first twenty-six weeks of 2001 were $95.0 million, a
decrease of $1.0 million from the same period of 2000. Operating income for
the first twenty-six weeks of 2001 was $3.9 million compared to $5.2 million
in the comparable period in the prior year. Net income for the first
twenty-six weeks of 2001 was $6.3 million compared to $4.5 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 increased $1.2 million,
or 1.3%, in the first twenty-six weeks of 2001 over the same period of 2000
due to two units opened during the second quarter of 2000 now included in the
comparable unit category. Year to date sales for the new units opened since
second quarter 2000 was $.9 million, while the year to date 2000 sales of the
units that were closed after second quarter 2000 were $3.6 million, resulting
in a net decrease of $2.7 million in year to date 2001 sales. Sales by
Dynamic Foods to third parties were $87 thousand higher in the first
twenty-six weeks of 2001 than that of the comparable period of 2000.
COST OF SALES. Excluding depreciation, cost of sales was 28.7% of
sales for the first twenty-six weeks of 2001 as compared to 29.4% for the
same period of 2000. The decrease in the percentage of sales was the result
of lower product costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expense was higher in the aggregate by $1.0 million
in the first twenty-six weeks of 2001 as compared to 2000. The change in SG&A
expense included an increase of $953 thousand in utility expense, $392
thousand in marketing expense and $202 thousand in other store expense. We
had decreases of $171 thousand in repairs and maintenance and $306 thousand
in supplies expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was higher by $335 thousand in the first twenty-six weeks of 2000. Included
in depreciation for the first twenty-six weeks of 2001 is a $583 thousand
write down of impaired assets.
INCOME TAXES. Income tax expense of $438 thousand and $965 thousand
was provided in the twenty-six 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.
13
LIQUIDITY AND CAPITAL RESOURCES
During the twenty-six weeks ended July 3, 2001, cash provided by
operating activities was $6.2 million compared to $7.5 million in the same
period of 2000. We made capital expenditures of $1.2 million during the first
twenty-six weeks of 2001 compared to $8.2 million during the same period of
2000. The $8.2 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 $0 and cash overdraft (included in
accounts payable) was ($.5) million at July 3, 2001 compared to cash and
temporary investments of $2.3 million at June 27, 2000 and $5.7 million at
January 3, 2001. Our current ratio was .42:1 at July 3, 2001 compared to
.48:1 at June 27, 2000 and .57:1 at January 2, 2001. Total assets at July 3,
2001 aggregated $81.1 million, compared to $90.3 million at June 27, 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.
As a result of retiring the 12% Senior Secured Notes, we have been
legally released as obligors and 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 June
30, 2001, there is no impact to the
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Company's financial statements as we have not entered into any business
combinations and have not acquired goodwill.
Also, the FASB has voted to issue Statement No. 143 "Accounting for
Asset Retirement Obligations" which establishes requirements for the
accounting of removal-type costs associated with asset retirements. The
standard is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company is currently assessing the impact
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Items 2 and 3 are not applicable and have been intentionally omitted.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2001 Annual Meeting of Stockholders was held on May 22, 2001. At
the meeting, Stockholders voted to elect seven directors to serve one-year
terms.
Following is a summary of the votes cast for each Director nominee:
FOR AGAINST WITHHELD
--------- ------- --------
Margaret B. Hampton 8,367,895 - 12,602
Damien Kovary 8,367,889 - 10,748
Robert N. Dangremond 8,366,041 - 10,754
Max Pine 8,366,883 - 11,760
Phillip Ratner 8,366,876 - 11,767
Barry W. Ridings 8,366,866 - 11,777
Robert Sullivan 8,366,396 - 12,247
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Item 5. is not applicable and has been intentionally omitted.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 15, 2001 FURR'S RESTAURANT GROUP, INC.
/S/ PAUL G. HARGETT
-----------------------------------------------------
Paul G. Hargett
Executive Vice President and Chief Financial Officer
/S/ NANCY ELLEFSON
-----------------------------------------------------
Nancy Ellefson
Principal Accounting Officer
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