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Restaurant Cost of Sales Restaurant cost of sales increased 13% to $143.0 million in fiscal 2002 compared to $127.0 million in fiscal 2001. This increase was primarily attributable to the 21% increase in restaurant sales during fiscal 2002. As a percentage of restaurant sales, these costs decreased to 23.7% during fiscal 2002 compared to 25.4% for the prior fiscal year, principally as a result of lower market prices in general for most of the food commodities used in our restaurants, coupled with increased volume purchase discounts that result from our increasing purchasing power. Bakery Cost of Sales Bakery cost of sales were $22.6 million for fiscal 2002 compared to $19.2 million for the prior fiscal year. The increase of $3.4 million was principally attributable to the 23% increase in bakery sales for fiscal 2002. As a percentage of bakery sales, bakery cost of sales decreased to 46.4% for fiscal 2002 compared to 48.4% for fiscal 2001. This decrease was primarily attributable to a shift in the mix of sales to products with slightly lower cost of sales as a percentage of their associated price (but with slightly higher selling expenses, which are included in the “other operating costs and expenses” category). Labor Expenses Labor expenses increased 22.0% to $200.3 million for fiscal 2002 compared to $164.4 million for fiscal 2001. This increase was principally due to the 21% increase in total revenues during fiscal 2002. As a percentage of total revenues, labor expenses increased slightly to 30.7% for fiscal 2002 compared to 30.5% for fiscal 2001 reflecting increased costs for employee health insurance benefits and slightly higher labor costs for our two newest Grand Lux Cafe locations, partially offset by labor productivity improvements. Other Operating Costs and Expenses Other operating costs and expenses increased 24.8% to $150.6 million for fiscal 2002 compared to $120.7 million for fiscal 2001. This increase was principally attributable to the 21% increase in total revenues for fiscal 2002 as well as costs and expenses related to the bakery product withdrawal. As a percentage of total revenues, other operating costs and expenses increased to 23.1% for fiscal 2002 versus 22.4% for fiscal 2001. Costs and expenses associated with the bakery product withdrawal were approximately $2.1 million or 0.3% of total revenues. Other operating expenses were also impacted by higher costs for our insurance arrangements, which increased approximately 0.4% as a percentage of total revenues. General and Administrative Expenses G&A expenses increased 13.6% to $31.7 million for fiscal 2002 compared to $27.9 million for fiscal 2001. This increase was principally due to the planned growth of our supervision and support organizations commensurate with the growth of our restaurant and bakery operations during fiscal 2002. As a percentage of total revenues, G&A expenses decreased to 4.9% for fiscal 2002 compared to 5.2% for the prior fiscal year as the 13.6% increase in these expenses for fiscal 2002 was less than the 21% increase in total revenues for the year. Depreciation and Amortization Expenses Depreciation and amortization expenses increased 30.9% to $22.9 million for fiscal 2002 compared to $17.5 million for fiscal 2001. This increase was principally due to new restaurant openings. As a percentage of total revenues, depreciation and amortization expenses were 3.5% and 3.2% for fiscal 2002 and 2001, respectively. Preopening Costs Preopening costs increased 49.3% to $10.6 million for fiscal 2002 compared to $7.1 million for the prior fiscal year. We opened twelve restaurants during fiscal 2002 compared to nine openings during fiscal 2001. In addition, preopening costs were incurred in both years for restaurant openings in progress. Interest Income, Other Income, Net and Income Taxes Interest income decreased to $3.9 million for fiscal 2002 compared to $4.3 million for fiscal 2001. This decrease was principally due to lower yields on our interest-bearing cash and short-term investments that, in turn, was attributable to the decline in the general level of interest rates during fiscal 2002. Other income for fiscal 2002 was $2.2 million compared to $1.7 million for fiscal 2001. This increase was principally due to higher gains on the sales of investments and marketable securities in order to fund the Company's working capital requirements. Our effective income tax rate was 35.7% for fiscal 2002 compared to 36.0% for fiscal 2001. Liquidity and Capital Resources Our corporate finance strategy is to maintain a strong, conservative balance sheet in order to support our growth plan with financial flexibility; to provide the financial resources necessary to protect and enhance the competitiveness of our restaurant and bakery operations; and to provide a prudent level of financial capacity to manage the risks and uncertainties of conducting our business operations on a much larger scale. Our ongoing capital requirements are principally related to our restaurant expansion plan. Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for substantially all of our restaurant locations. We believe that our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner. However, we are not limited to the use of lease arrangements as our only method of opening new restaurants. While our operating lease obligations are not required to be reflected as indebtedness on our consolidated balance sheet, the minimum rents and related fixed obligations under our lease agreements must be satisfied by cash flows from our ongoing operations. Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure. We also require capital resources to maintain our existing base of restaurants, further expand and strengthen the capabilities of our corporate and information technology infrastructures, and maintain and expand our bakery production capacity. In the past, we have obtained capital from our ongoing operations, public stock offerings, employee stock option exercises and construction contributions from our landlords. Our requirement for working capital is not significant, since our restaurant guests pay for their food and beverage purchases in cash or cash equivalents at the time of sale, and we are able to sell many of our food inventory items before we have to pay our suppliers of such items. The following table presents, for the periods indicated, a summary of the Company's key liquidity measurements.
During fiscal 2003, our total amount of cash and marketable securities on hand increased by $22.5 million to $137.0 million as of December 30, 2003. This increase was principally due to increased cash flow from operations and proceeds from the exercise of employee stock options. In the table above, we also present adjusted net working capital and current ratio calculations that include all marketable securities classified as either current or noncurrent assets. We believe these adjusted calculations provide investors with useful information regarding our overall liquidity position because all marketable securities are readily available to meet our liquidity requirements. We continue to target a weighted average maturity for our marketable securities investment portfolio between one and two years. Accordingly, a substantial portion of our investments are classified as noncurrent assets, but remain available for our liquidity requirements. Effective December 30, 2003, we amended and extended our revolving credit and term loan facility (the “Credit Facility”). The Credit Facility was increased to $35 million from $25 million and expires on December 30, 2005. As of March 4, 2004, there were no borrowings outstanding under the Credit Facility. $11.5 million of the Credit Facility has been reserved to support standby letters of credit for our self-insurance programs. Borrowings under the Credit Facility will bear interest at variable rates based, at our option, on either the prime rate of interest, the lending institution's cost of funds plus 0.75%, or the applicable LIBOR rate plus 0.75%. Upon expiration of the Credit Facility, a maximum of $35 million of any borrowings outstanding under the Credit Facility automatically convert into a four-year term loan, payable in equal quarterly installments at interest rates of 0.5% higher than the applicable revolving credit rates. The Credit Facility is not collateralized and requires us to maintain certain financial ratios and to observe certain restrictive covenants with respect to the conduct of our operations, with which we are currently in compliance. Our new restaurant development model more closely resembles that of a retail business that occupies leased space in shopping malls, office complexes, strip centers, entertainment centers and other real estate developments. We typically seek to lease our restaurant locations for primary periods of 15 to 20 years under operating lease arrangements. Our rent structures vary from lease to lease, but generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example our share of common area maintenance, property tax and insurance expenses). We disburse cash for leasehold improvements and furnishings, fixtures and equipment to build out our leased premises.We may also disburse cash for permanent improvements that we make to leased premises that generally are reimbursed to us by our landlords as construction contributions (also known as tenant improvement allowances) pursuant to agreed-upon terms in the respective leases. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof. We initially record uncollected landlord construction contributions as other receivables. Our balance of other receivables will fluctuate from period to period, depending on the timing of cash collections from landlords and additional receivables recorded from new restaurant development activities. See Note 3, “Other Receivables” to our Consolidated Financial Statements. In the future, we may also develop more freestanding restaurant locations using both ground leases and built-to-suit leases, which are common arrangements used to finance freestanding locations in the restaurant industry. We do not have any current plans to encumber our existing leasehold interests with secured financing. We own substantially all of the equipment, furniture and trade fixtures in our restaurants and currently plan to do so in the future. During fiscal 2003, our cash outlays and accrued liability for capital expenditures were approximately $106 million. Of that amount, approximately $90 million was related to new restaurant openings (including several restaurants under development as of December 30, 2003). The remainder consisted of approximately $11 million for maintenance and capacity addition outlays for our existing restaurants and approximately $5 million for bakery and corporate capital expenditures. For fiscal 2004, we currently estimate our cash outlays for capital expenditures to range between $110 and $115 million, net of agreed-upon landlord construction contributions and excluding $13-$14 million of expected noncapitalizable preopening costs for new restaurants. This estimate contemplates a net outlay of $95-$98 million for as many as 16 new restaurants to be opened during fiscal 2004, estimated construction-in-progress disbursements for anticipated fiscal 2005 openings and estimated collections of tenant improvement allowances from landlords. This estimate also contemplates that two of our planned 16 openings for fiscal 2004 do not have any landlord construction contributions. Not every potential location that we seek to develop into a restaurant may have landlord construction contributions available, and we would therefore not generally incur a contingent rent obligation on such locations. Expected capital expenditures for fiscal 2004 also include approximately $10-$11 million for maintenance and capacity addition expenditures to our existing restaurants; and $5-6 million for additional bakery capacity and corporate infrastructure investments. In October 2002, we entered into a 10-year lease for approximately one-half of an 88,000 square foot office building that is located adjacent to our existing corporate center and bakery production facility. We currently utilize this leased space for our culinary R&D kitchen, management training and other essential operational support activities. In light of our expansion plans and our eventual need for additional staff to support our restaurant and bakery operations, we are evaluating a potential purchase of that entire office building to ensure the long-term availability of expansion space. If consummated, such a purchase would require a capital expenditure of approximately $21 million and would be initially funded from our cash and investments balances on hand. We may seek to obtain long-term mortgage financing for such a purchase. Based on our current expansion objectives, we believe that our cash and short-term investments on hand, combined with expected cash flow provided by operations, available borrowings under our Credit Facility and expected landlord construction contributions should be sufficient in the aggregate to finance our planned capital expenditures and other operating activities through fiscal 2004. We may seek additional funds to finance our growth in the future. However, there can be no assurance that such funds will be available when needed or be available on terms acceptable to us. During fiscal 1998, our Board of Directors authorized the Company to repurchase up to 1,687,500 shares of our common stock for reissuance upon the exercise of stock options under our current stock option plans. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. Under this authorization, we have repurchased a total of 1,077,300 shares for a total cost of $17.2 million through December 30, 2003. Our share repurchase agreement does not require us to repurchase any common stock and may be discontinued at any time. As of March 4, 2004, we had no financing transactions, arrangements or other relationships with any unconsoli-dated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts. |
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