August 17, 1998 OFIS Filer Support SEC Operations Center 6842 General Green Way Alexandria, VA 22312-2413 Dear Sirs: Pursuant to regulations of the Securities and Exchange Commission, submitted herewith for filing on behalf of Family Steak Houses of Florida, Inc. is the Company's Quarterly Report on Form 10-Q for the Fiscal Quarter ended July 1, 1998. This filing is being effected by direct transmission to the Commission's Edgar System. Very truly yours, Loretta C. Abbey Controller UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended July 1, 1998 Commission File No. 0-14311 FAMILY STEAK HOUSES OF FLORIDA, INC. Incorporated under the laws of IRS Employer Identification Florida No. 59-2597349 2113 FLORIDA BOULEVARD NEPTUNE BEACH, FLORIDA 32266 Registrant's Telephone No. (904) 249-4197 Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Title of each class Number of shares outstanding Common Stock 2,370,200 $0.01 par value As of August 6, 1998 FAMILY STEAK HOUSES OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 1, 1998 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q, and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the thirteen and twenty-six week periods ended July 1, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 1998. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany profits, transactions and balances have been eliminated. Note 2. Earnings Per Share Basic earnings per share for the thirteen weeks ended July 1, 1998 and July 2, 1997 were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive shares are represented by shares under option and stock warrants. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Quarter Ended July 1, 1998 versus July 2, 1997 The Company experienced an increase in total sales during the second thirteen weeks of 1998 compared to the second thirteen weeks of 1997. Same-store sales (average unit sales in restaurants that have been open for at least 18 months and operating during comparable weeks during the current and prior year) in the second quarter of 1998 increased 1.1% from the same period in 1997, compared to a decrease of 8.9% from 1997 as compared to 1996. In addition to the same-store sales increase, total sales increased due to the opening of a new store in June 1998. Management believes that the increase in same-store sales is primarily due to significant increases in sales at certain restaurants remodeled by the Company. These remodels included installation of scatter bars at three restaurants, which resulted in same-store sales gains at these locations in excess of 20%. These increases were somewhat offset by decreases in sales at other Company restaurants caused by the effects of increasing competition, including several new or remodeled restaurants opened by competitors in areas close to Company restaurants. Management is seeking to improve sales trends by focusing on improved restaurant operations, retraining restaurant employee staffs, remodeling one additional restaurant, and devising competitive strategies to offset the effects of new competition. 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 reduce long-term debt or build new restaurants with more competitive facilities in superior locations. 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 continue to evaluate 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. Historically, the third and fourth quarters of each fiscal year are less profitable for the Company than the first and second quarters. If year-to-date sales trends continue, the Company would likely incur losses in the third and/or fourth quarters. The costs and expenses of the Company's restaurants include food and beverage, payroll, payroll taxes and employee benefits, depreciation and amortization, repairs, maintenance, utilities, supplies, advertising, insurance, property taxes and rents. The Company's food, beverage, payroll and benefit 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 decreased to 87.1% in the second quarter of 1998, from 89.0% in the same quarter of 1997, primarily due to a decrease in payroll and benefits costs as a percentage of sales. Food and beverage costs as a percentage of sales decreased to 39.2% in the second quarter of 1998 from 39.5% in the same period of 1997, primarily due to sales price increases implemented by the Company. Payroll and benefits as a percentage of sales decreased from 29.1% in the second quarter of 1997 to 27.8% in the same quarter of 1998, primarily due to improved results in the Company's workers' compensation experience. Other operating expenses as a percentage of sales decreased to 15.6% in the second quarter of 1998 from 15.9% in 1997, primarily due to a reduction in costs for rented equipment. Depreciation and amortization remained consistent at 4.6% as a percentage of sales in the second quarter of 1998 compared to 1997. General and administrative expenses as a percentage of sales were 6.4% in the second quarter of 1998, compared to 7.9% in the same quarter of 1997. The decrease was due to costs incurred in 1997 in response to an unsolicited tender offer. Interest expense increased to $412,900 during the second quarter of 1998 from $398,400 in 1997. The increase was due primarily to the borrowing of $1.3 million under the Company's credit facility in February 1998. The effective income tax rates for the quarters ended July 1, 1998 and July 2, 1997 were 20.0% and (20.0%), respectively. Net earnings for the second quarter of 1998 were $23,400, compared to a net loss of $254,100 in 1997. Earnings per share were $0.01 for 1998, compared to net loss per share of $.12 in 1997. The loss in the second quarter of 1997 was primarily due to the costs associated with the unsolicited tender offer, and to the decline in same-store sales. Six Months Ended July 1, 1998 versus July 2, 1997 For the six months ended July 1, 1998, total sales decreased 1.6% compared to the same period of 1997. Same-store sales decreased 1.0% for the six months ended July 1, 1998. Management believes the decrease was primarily due to increased competition. Food and beverage costs for the six month period ended July 1, 1998 was 39.0%, compared to 39.1% for the same period in 1997. Payroll and benefits decreased from 28.2% in 1997 to 27.7% in 1998. The decrease was primarily due to improved results in the Company's workers' compensation experience. For the six months ended July 1, 1998, other operating expenses increased to 15.2% from 15.1% in 1997, primarily due to higher advertising costs. Depreciation and amortization increased as a percentage of sales for the six month period ended July 1, 1998, compared to the same period of 1997, due to additions to property and equipment over the past year. For the six months ended July 1, 1998, general and administrative expenses decreased to 6.1% of sales from 6.7% for the same period in 1997, due to costs incurred in 1997 associated with an unsolicited tender offer. Interest expense increased for the first six months of 1998 to $808,400 from $788,900 for the same period in 1997, due to additional interest cost from the borrowing of $1.3 million under the Company's credit facility in February 1998. The effective income tax rates for the six-month periods ended July 1, 1998 and July 2, 1997 were 20.0% and (20.0%), respectively. Net earnings for the six months ended July 1, 1998 were $188,000, or $.08 per share, compared to net earnings of $98,700, or $.04 per share for the same period in 1997. 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. Operatiing results for the quarter ended July 1, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 1998. Recent Developments 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 Securities and Exchange Commission approved changes to the listing and maintenance requirements of the National Market. The Company's qualification 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 August 12, 1998 the Company received notice from Nasdaq that it was not in compliance with the public float requirement. According to Nasdaq, if the Company's public float does not reach the required $5.0 million for 10 consecutive trading days before November 9, 1998, the Company's stock will be delisted from the Nasdaq market. The Company may request a hearing to attempt to maintain its listing prior to the November 9th deadline. There can be no assurance that such a hearing would be successful, or that the Company will be able to maintain its listing on Nasdaq. If the Company is unable to satisfy the Nasdaq National Market's maintenance requirements, the Company's securities may be delisted from the Nasdaq National Market. In such event, trading, if any, in the Common Stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the National Association of Securities Dealers, Inc.'s "Electronic Bulletin Board", or, possibly in the Nasdaq SmallCap Market. Consequently, the liquidity of the Company's securities could be impaired, not only in the number of shares that could be bought and sold, but also as a result of delays in the timing of the transactions, a reduction in the number and quality of security analysts' and the news media's coverage of the Company, lower prices for the Company's securities than might otherwise be attained and a larger spread between the bid and asked prices for the Company's securities. In addition, if the Company's securities were to be delisted from the Nasdaq National Market, the Company's securities could become subject to Rule 15g-9 under the Exchange Act relating to penny stocks, which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). Commission regulations define a "penny stock" to be any equity security that is not listed on The Nasdaq Stock Market or a national securities exchange and that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities could be adversely affected. 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. As a result, working capital requirements for continuing operations are not significant. At July 1, 1998, the Company had a working capital deficit of $1,638,700, compared to a working capital deficit of $1,794,700 at December 31, 1997. The decrease in the working capital deficit during the first six months in 1998 was due primarily to cash generated from operations. Cash provided by operating activities increased to $1,959,200 in the first six months of 1998 from $1,151,800 in the same period of 1997 This increase is primarily due to decreases in certain current assets and to increases in certain current liabilities in 1998. The Company spent approximately $2,342,900 in the first six months of 1998 for land, leasehold improvements, and restaurant equipment and improvements. Total capital expenditures for 1998, based on present costs and plans for expansion, are estimated to be $4,800,000. The Company projects that cash generated from operations plus additional borrowing of $1,300,000 under the Company's credit facility will be sufficient to fund these improvements. In December 1996, the Company entered into a $15.36 million Loan Agreement with FFCA Mortgage Corporation ("FFCA"). The Loan Agreement governs eighteen Promissory Notes payable to FFCA. 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. The Loan Agreement provides for various covenants, including the maintenance of prescribed debt service coverages. As of July 1, 1998, the outstanding balance due under the loan was $14,506,700. 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. 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 was entitled to 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 conditions of this loan agreement are substantially identical to those of the loan agreement described above. The Company borrowed $1,290,000 under the agreement in February 1998, secured by a mortgage on one restaurant property. The Company expects to borrow an additional $1,300,000 under the agreement in August 1998, secured by two restaurant properties. As of July 1, 1998, the outstanding balance under this loan was $1,283,500. The Company's ability to initiate any additional borrowing (after the $1,300,000 in August 1998) under the $4.6 million loan agreement has expired. The Company's ability to build additional new restaurants or make other capital improvements is dependent on its ability to secure new financing. 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 identified and in process 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 capital 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 accrued. The costs of the project and the expected completion dates are based on management's best estimates. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On June 26, 1998, the Company held its annual meeting of shareholders to elect directors to serve for the upcoming year. (b) The following table sets forth the number of votes for and against each of the nominees for director. Nominee For Withheld Edward B. Alexander 1,977,308 38,166 Glen F. Ceiley 1,972,572 42,902 Lewis E. Christman, Jr 1,974,796 40,678 Jay Conzen 1,974,306 41,168 Joseph M. Glickstein, Jr. 1,973,706 41,768 Richard M. Gray 1,976,480 38,988 G. Alan Howard 1,977,506 37,968 All nominees for director were elected by affirmative vote of a majority of the 2,015,474 shares of the Company's common stock represented in person or by proxy at the annual meeting of shareholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report on Form 10-Q, and this list comprises the Exhibit Index. No. Exhibit 27.01 Financial Data Schedule. 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. FAMILY STEAK HOUSES OF FLORIDA, INC. (Registrant) /s/ Lewis E.Christman, Jr. --------------------------------- Date: August 12, 1998 Lewis E. Christman, Jr. President and CEO /s/ Edward B. Alexander --------------------------------- Date: August 12, 1998 Edward B. Alexander Vice President of Finance (Principal Financial and Accounting Officer) Family Steak Houses of Florida, Inc. Consolidated Results of Operations (Unaudited) For The Quarters Ended ------------------------ July 1, July 2, 1998 1997 ----------- ----------- Sales $9,703,800 $9,447,200 Cost and expenses: Food and beverage 3,803,500 3,728,700 Payroll and benefits 2,695,000 2,748,000 Depreciation and amortization 444,000 430,100 Other operating expenses 1,510,400 1,497,500 General and administrative expenses 619,300 744,200 Franchise fees 290,600 283,200 Loss from disposition of equipment 42,300 61,000 ----------- ----------- 9,405,100 9,492,700 ----------- ----------- Earnings (loss) from operations 298,700 (45,500) Interest and other income 143,500 126,400 Interest expense (412,900) (398,400) ----------- ----------- Earnings (loss) before income taxes 29,300 (317,500) Provision (benefit) for income taxes 5,900 (63,400) ----------- ----------- Net earnings (loss) $23,400 ($254,100) =========== =========== Basic earnings per share $0.01 ($0.12) =========== =========== Diluted earnings per share $0.01 ($0.11) =========== =========== See accompanying notes to consolidated financial statements. Family Steak Houses of Florida, Inc. Consolidated Results of Operations (Unaudited) For The Six Months Ended ------------------------ July 1, July 2, 1998 1997 ----------- ----------- Sales $19,694,400 $20,006,300 Cost and expenses: Food and beverage 7,671,000 7,816,900 Payroll and benefits 5,460,000 5,645,400 Depreciation and amortization 882,300 845,200 Other operating expenses 3,000,300 3,014,700 General and administrative expenses 1,203,700 1,332,000 Franchise fees 590,200 599,800 Loss from disposition of equipment 83,500 78,300 ----------- ----------- 18,891,000 19,332,300 ----------- ----------- Earnings (loss) from operations 803,400 674,000 Interest and other income 239,900 238,400 Interest expense (808,400) (788,900) ----------- ----------- Earnings (loss) before income taxes 234,900 123,500 Provision (benefit) for income taxes 46,900 24,800 ----------- ----------- Net earnings (loss) $188,000 $98,700 =========== =========== Basic earnings per share $0.08 $0.04 =========== =========== Diluted earnings per share $0.08 $0.04 =========== =========== See accompanying notes to consolidated financial statements. Family Steak Houses of Florida, Inc. Consolidated Balance Sheets (Unaudited) July 1, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $1,796,700 $696,000 Investments 644,000 600,300 Receivables 68,700 93,200 Current portion of mortgages receivable 68,000 124,900 Income taxes receivable -- 297,900 Inventories 264,500 280,500 Prepaid and other current assets 293,600 311,200 ----------- ----------- Total current assets 3,135,500 2,404,000 Mortgages receivable 273,900 308,700 Property and equipment: Land 9,678,500 9,088,300 Buildings and improvements 22,004,700 19,908,900 Equipment 12,454,200 13,151,600 ----------- ----------- 44,137,400 42,148,800 Accumulated depreciation (16,439,300) (15,848,500) ----------- ----------- Net property and equipment 27,698,100 26,300,300 Property held for sale 539,600 552,800 Other assets, principally deferred charges, net of accumulated amortization 850,100 767,000 ----------- ----------- $32,497,200 $30,332,800 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,877,400 $1,287,000 Accrued liabilites 2,534,600 2,630,300 Income taxes payable 54,200 -- Current portion of long-term debt 305,000 278,900 Current portion of obligation under capital lease 3,000 2,500 ----------- ----------- Total current liabilities 4,774,200 4,198,700 Long-term debt 15,485,200 14,402,800 Obligation under capital lease 1,054,300 1,056,000 Deferred revenue 27,500 30,800 ----------- ----------- Total liabilities 21,341,200 19,688,300 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 2,370,200 in 1998 and 2,216,200 shares in 1997 24,100 22,200 Additional paid-in capital 8,577,600 8,256,100 Retained earnings 2,554,300 2,366,200 ----------- ----------- Total shareholders' equity 11,156,000 10,644,500 ----------- ----------- $32,497,200 $30,332,800 =========== =========== See accompanying notes to consolidated financial statements. Family Steak Houses of Florida, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended ------------------------ July 1, July 2, 1998 1997 ----------- ----------- Operating activities: Net earnings $188,000 $98,700 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 882,300 845,200 Directors' fees in the form of stock options 7,500 10,000 Amortization of loan fees 11,900 11,000 Loss on disposal of equipment 83,500 78,300 Decrease (increase) in: Receivables 24,500 (40,400) Income taxes receivable 297,900 (83,000) Inventories 16,000 (28,900) Prepaids and other current assets 17,600 (138,700) Other assets (115,600) (50,900) Increase (decrease) in: Accounts payable 590,400 437,200 Accrued liabilities (95,700) 86,600 Income taxes payable 54,200 (84,800) Deferred revenue (3,300) -- Deferred income taxes -- 11,500 ----------- ------------ Net cash provided by operating activities 1,959,200 1,151,800 ----------- ------------ Investing activities: Proceeds from notes receivable 91,700 59,000 (Sale) purchase of investments (43,700) 492,800 Proceeds from sale of property held for sale 13,200 -- Capital expenditures (2,342,900) (1,436,500) ----------- ------------ Net cash used by investing activities (2,281,700) (884,700) ----------- ------------ Financing activities: Payments on long-term debt (181,500) (211,500) Construction draw on capital lease -- 500,100 Proceeds from issuance of long-term debt 1,290,000 -- Payments on capital lease (1,200) (1,400) Proceeds from the issuance of common stock 315,900 30,600 ----------- ------------ Net cash provided by financing activities 1,423,200 317,800 ----------- ------------ Net increase in cash and cash equivalents 1,100,700 584,900 Cash and cash equivalents-beginning of period 696,000 1,750,800 ----------- ------------ Cash and cash equivalents-end of period $1,796,700 $2,335,700 =========== ============ Supplemental disclosures of cash information: Cash paid during the period for interest $915,800 $719,100 =========== ============ Cash paid during the period for income taxes $0 $181,000 =========== ============ See accompanying notes to consolidated financial