10-K/A 1 t10ka-5304.txt 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 28, 2004 or, [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26396 BENIHANA INC. ------------------------ (Exact name of registrant as specified in its charter) DELAWARE 65-0538630 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8685 NORTHWEST 53RD TERRACE, MIAMI, FLORIDA 33166 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): (305) 593-0770 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $.10 per share Class A Common Stock, par value $.10 per share Preferred Share Purchase Right Indicate by check mark whether the registrant (1) 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is NOT contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- As of June 7, 2004, 3,018,979 shares of Common Stock and 6,134,225 shares of Class A Common Stock were outstanding, and the aggregate market value of the common equity of Benihana Inc. held by non-affiliates based upon the closing sale price on The Nasdaq Stock Market of $14.58 and $14.61, respectively, was approximately $106,152,000. As of October 12, 2003, the last day of our second fiscal quarter, the aggregate market value of common equity held by non-affiliates was $69,949,000. EXPLANATORY NOTE RESTATEMENT Subsequent to the issuance of the financial statements for the year ended March 28, 2004, the Company determined that those financial statements contained certain errors related to the accounting for leases and leasehold improvements. Following a February 2005 review of the accounting adjustments cited in several recent Form 8-K filings by other restaurants and retail companies and a letter by the Chief Accountant of the Securities and Exchange Commission to the Chairman of the Center for Public Company Audit Firms of the AICPA dated February 7, 2005, we determined that the adjustments in those filings and the subject matter of the SEC's Chief Accountant in his letter relating to the treatment of lease accounting and leasehold depreciation applied to us, and that it was appropriate to adjust certain of our prior financial statements. As a result, we have restated our consolidated financial statements for the fiscal years through 2004 (the "Restatement"). Previously, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciate buildings, leasehold improvements and other long-lived assets on those properties over a period that includes both the initial non-cancelable lease term and in certain instances the option periods provided for in the lease (or the useful life of the assets if shorter). Rent holidays occur, in certain situations, when leases provide that rental payments are not made for a certain period that approximates the time frame that our restaurants are under construction. We previously did not include these rent holiday periods when calculating straight-line rent expense. Although the Company does not believe that this error resulted in a material misstatement of the Company's consolidated financial statements for any annual or interim periods as presented below, the effects of correcting the error currently would have had a material effect on the Company's results of operations for fiscal 2005. The financial statements have been restated to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty and including the rent holiday period. This Amendment No. 2 on Form 10-K/A ("Form 10-K/A") to our Annual Report on Form 10-K for the year ended March 28, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on June 24, 2004 (the "Original Filing") and amended on December 14, 2004, is being filed to reflect restatements of (i) our consolidated balance sheets at March 28, 2004 and March 30, 2003 and (ii) our consolidated statements of earnings, changes in stockholders' equity and cash flows, for each of the three years in the period ended March 28, 2004 and the notes related thereto. For a more detailed description of these restatements, see Note 2, "Restatement of Previously Issued Financial Statements" to the accompanying condensed consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-K/A. This Form 10-K/A only amends and restates Items 6, 7, 8 and 9A of Part II of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the Original Filings is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain currently dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2 respectively. Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed in our amended Quarterly Report on Form 10-Q/A for the quarterly period ended July 18, 2004 and/or our Quarterly Report on Form 10-Q/A for the quarterly period ended October 10, 2004 which are being filed concurrently with the filing of this Form 10-K/A and any reports filed with the SEC subsequent to the date of this filing. Previously the Company filed an amended Quarterly Report on Form 10-Q/A for the quarterly period ended January 2, 2005. We have not amended and do not intend to amend our previously-filed Annual Reports on Form 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to March 28, 2004. For this reason, the consolidated financial statements, auditors' reports and related financial information for the affected periods contained in such reports should no longer be relied upon. PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS Subsequent to the issuance of the financial statements for the fiscal year ended March 28, 2004, the Company determined that those financial statements contained certain errors related to the accounting for leases and leasehold improvements. Following a February 2005 review of the accounting adjustments cited in several recent Form 8-K filings by other restaurant and retail companies and a letter by the Chief Accountant of the Securities and Exchange Commission to the Chairman of the Center for Public Company Audit Firms of the AICPA dated February 7, 2005, we determined that the adjustments in those filings and the subject matter of the SEC's Chief Accountant in his letter relating to the treatment of lease accounting and leasehold depreciation applied to us, and that it was appropriate to adjust certain of our prior financial statements. As a result, we have restated our consolidated financial statements as of March 28, 2004 and March 30, 2003 and for each of the three years in the period ended March 28, 2004 included herein (the "Restatement"). Previously, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciate buildings, leasehold improvements and other long-lived assets on those properties over a period that includes both the initial non-cancelable lease term and in certain instances the option periods provided for in the lease (or the useful life of the assets if shorter). Rent holidays occur, in certain situations, where leases provide that rental payments are not made for a certain period that approximates the time frame that our restaurants are under construction. We previously did not include these rent holiday periods when calculating straight-line rent expense. Although the Company does not believe that this error resulted in a material misstatement of the Company's consolidated financial statements for any annual or interim periods as presented below, the effects of correcting the error currently would have had a material effect on the Company's results of operations for fiscal 2005. The financial statements have been restated to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty and including the rent holiday period. The cumulative effect of the Restatement as of March 28, 2004 is an increase in deferred rent liability of $3.6 million and a decrease in deferred income tax liability of $1.4 million. As a result, retained earnings at the end of fiscal 2004 decreased by $2.2 million. Rent expense for the fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002 increased by $0.4 million, $0.3 million and $0.3 million, respectively. The Restatement decreased diluted earnings per share $0.03, $0.02 and $0.02, respectively. The Restatement had no impact on our previously reported cash flows, sales or same-restaurant sales or on our compliance with any covenant under our credit facility or other debt instruments. The consolidated financial statements for the fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002 included in this Form 10-K/A have been restated to reflect the adjustments described above. The Restatement of prior period interim financial statements will be made in amendments to our previously filed Form 10-Q/A for the quarter ended July 18, 2004, and Form 10-Q/A for the quarter ended October 10, 2004. OVERVIEW SUMMARY OF RESULTS Summary highlights of our fiscal 2004 year compared to the previous year: o the twelfth consecutive year of total sales increases, o opened four new Benihana teppanyaki-style restaurants in Scottsdale, Arizona; Alpharetta, Georgia; Bethesda, Maryland and Westbury, New York, o opened three new RA Sushi restaurants in Tucson, Arizona; San Diego, California and Chicago, Illinois, o earnings per diluted share of $.98 compared to $.99 in the prior fiscal year, and o restaurant operating profit (restaurant sales less cost of food and beverage sales and restaurant operating expenses) increased 6.9% to approximately $31.7 million. 1 OUR BUSINESS We have operated teppanyaki-style Japanese restaurants in the United States for over 39 years, and we believe we are the largest operator of teppanyaki-style restaurants in the country. Our core concept, the traditional Benihana restaurant, offers teppanyaki-style Japanese cooking in which fresh steak, chicken and seafood is prepared by a Benihana chef on a steel grill which forms a part of the table on which the food is served. Our Haru concept offers an extensive menu of Japanese fusion dishes in a high energy, urban atmosphere. In addition to traditional, high quality sushi and sashimi creations, Haru offers raw bar items and Japanese cuisine. Our RA Sushi concept offers sushi and a full menu of Pacific-Rim dishes in a high-energy environment featuring upbeat design elements and music. Our one Doraku restaurant offers sushi and other Japanese items. At March 28, 2004 we: o owned and operated 56 Benihana teppanyaki-style Japanese dinnerhouse restaurants, o franchised others to operate 22 additional Benihana restaurants, o owned and operated five Haru restaurants in New York City, o owned and operated seven RA Sushi restaurants, and o owned and operated one Doraku restaurant in Miami Beach, Florida. OUTLOOK We continued to grow in fiscal 2004, despite a challenging environment. We opened four teppanyaki restaurants and three RA Sushi restaurants. We believe that our revenues will increase next year due to the newly opened restaurants and from continuing increases in customer counts at restaurants open for longer than one year. Additionally, our revenues will increase from the planned openings of two new teppanyaki restaurants in Carlsbad, California and Coral Gables, Florida; two new Haru restaurants - one in Philadelphia, Pennsylvania and one in the Gramercy Park section of Manhattan; and one new RA Sushi restaurant in Las Vegas, Nevada. We also have a signed lease for another RA Sushi restaurant to open in fiscal 2006 in Huntington Beach, California. We have undertaken a design initiative to develop a prototype teppanyaki restaurant to improve unit-level economics while shortening construction time and improving decor. This program should be completed in fiscal 2005 and implemented late in the fiscal year for new units that will be under construction by year's end. The initiative will also assist us in restaurant refurbishing. We also continue to manage commodity costs and will institute a menu price increase in the second quarter of fiscal 2005 to offset increasing beef costs. We expect labor costs to remain constant in fiscal 2005. OPERATING RESULTS REVENUES Revenues consist of the sales of food and beverages at our restaurants and royalties and licensing fees from franchised restaurants. Revenues are dependent upon the number of patrons that visit our restaurants and franchisees' restaurants and the average check amounts. The following table shows revenues and percentage changes for the past three years: (Dollar amounts are expressed in thousands) Fiscal year ended -------------------------------------------------------------- 2004 2003 2002 -------------------------------------------------------------- Percentage Percentage Percentage change change change from 2003 from 2002 from 2001 ------------------------------------------------------------------------------- Restaurant sales $201,335 7.1% $187,913 10.5% $170,051 5.1% Franchise fees and royalties 1,628 22.3% 1,331 (8.6%) 1,456 5.7% ------------------------------------------------------------------------------- Total revenues $202,963 7.2% $189,244 10.3% $171,507 5.1% ------------------------------------------------------------------------------- 2 The table below shows the amount of the changes in restaurant sales and the nature of the changes. (Dollar amounts are expressed in thousands) Fiscal year ended ---------------------------------- 2004 2003 2002 ------------------------------------------------------------------------------- Amount of increase from prior year $13,422 $17,862 $8,186 Increase in sales from restaurants opened or owned longer than one year 211 7,206 1,808 Increase from new restaurants 7,062 8,897 9,580 Increase from acquired restaurants 7,748 3,226 Increase from sales at existing units while not comparable due to remodeling closures 497 330 Effect of additional week in fiscal 2001 (3,202) Closed units (2,096) (1,797) We believe that the Benihana style of presentation makes us a unique choice for customers. We believe that customers who are seeking greater value for their dining budget appreciate the entertainment value provided by the chef cooking directly at their table. We continued our multi-year program to build capacity in our existing restaurants through adding additional tables and sushi bars. Sales over the past two years have also increased as a result of an increasing trend for sushi as a menu item. We believe that we are the largest restaurant chain offering sushi to consumers nationwide. Sushi bars have been added to most of the Benihana restaurants over the past several years. We also have three sushi concepts. The Haru concept features an extensive menu of Japanese fusion dishes served in a high energy, urban setting. Haru's menu offers traditional sushi and sashimi creations as well as raw bar items and Japanese cuisine. The Haru concept generates exceptionally high volumes as a result of customer acceptance and the high population density of the concept's primary market, New York City. Approximately 40% of Haru's revenues are derived from delivery and takeout sales. The RA Sushi concept is a vibrant, hip restaurant featuring sushi and other Asian menu items in a high-energy environment featuring upbeat design elements and music. RA Sushi's beverage sales account for approximately 34% of restaurant sales. The RA Sushi units are less expensive to build than the Company's other two concepts and offer the Company a growth vehicle that can succeed in most markets. The Company's one Doraku restaurant offers sushi and other Japanese dishes. The Company currently does not plan to expand this concept. 2004 COMPARED TO 2003 Revenues increased 7.2% in fiscal 2004 when compared to fiscal 2003. Restaurant sales increased $13.4 million in fiscal 2004 when compared to fiscal 2003. The increase was mainly attributable to sales from the acquired RA Sushi restaurants of $7.7 million and from sales of new restaurants of $7.1 million. Guest counts increased 569,000 to 8.2 million. The average guest check amount was $23.61 in fiscal 2004 compared to $23.45 in fiscal 2003 at the teppanyaki restaurants, $27.15 in fiscal 2004 compared to $28.22 in fiscal 2003 at the Haru restaurants, $22.29 in fiscal 2004 compared to $20.56 in fiscal 2003 at the Doraku restaurant and $19.06 in fiscal 2004 compared to $19.15 in fiscal 2003 at the RA Sushi restaurants. Comparable restaurant sales growth for restaurants opened longer than one year was $0.2 million in fiscal 2004. Comparable sales for the teppanyaki restaurants decreased by 1.2%, comparable sales for the Haru restaurants increased 8.4%, comparable sales for the RA Sushi restaurants increased 10.3% and for the one Doraku restaurant comparable sales increased 14.5% in fiscal 2004 when compared to fiscal 2003. We closed the Bethesda, Maryland teppanyaki restaurant in October of 2003 and opened at a nearby location two weeks later. In fiscal 2003 we closed two restaurants. The Louisville restaurant closed the last week of fiscal 2003 after its lease expired. The Chicago Doraku restaurant closed in February of 2003 and was converted to a RA Sushi restaurant which opened in January 2004. Franchise fees and royalties increased in fiscal 2004 when compared to fiscal 2003. The increase was mainly attributable to increased fees from the opening of the Edison, New Jersey and Santiago, Chile franchises. 2003 COMPARED TO 2002 3 Revenues increased 10.3% in fiscal 2003 when compared to fiscal 2002. Restaurant sales increased $17,862,000 in fiscal 2003 when compared to fiscal 2002. The increase is mainly attributable to increases in comparable restaurant sales of $7,206,000 and from increases in sales from new restaurants of $8,897,000. Comparable restaurant sales growth for restaurants opened longer than one year was 4.4% in fiscal 2003. Guest counts increased 9.4% to 7.6 million. The average per guest check amount was $23.45 at the teppanyaki restaurants, $28.22 at the Haru restaurants, $20.56 at the Doraku restaurants and $19.15 at the RA Sushi restaurants. Restaurant sales were positively affected by the increase in guest counts in fiscal 2003 when compared to the 9/11 affected fiscal 2002. The increase in customer counts was tempered by a slowing economy, the Iraqi war as well as the inclement weather in the fourth quarter of fiscal 2003. We closed two restaurants in fiscal 2003. The Louisville teppanyaki restaurant closed the last week of fiscal 2003 after its lease expired. The Chicago Doraku restaurant closed in February 2003 and was reopened as a RA Sushi restaurant in January 2004. OPERATING COSTS AND EXPENSES Operating costs and expenses are largely dependent on the number of customers that visit our restaurants and the costs commodities used in food preparation, the number of employees that are necessary to provide a high quality of service to our customers, rents we pay for our restaurant properties, utilities and other necessary costs. The following table shows the amount of change in our restaurant operating costs, costs as a percentage of restaurant sales, and the percentages of change from the preceding years. Fiscal year ended ----------------------------- 2004 2003 2002 ----------------------------- COST AS A PERCENTAGE OF RESTAURANT SALES: Cost of food and beverage sales 25.6% 24.6% 25.1% Restaurant operating expenses 58.7% 59.6% 58.8% Restaurant opening costs 1.0% 0.3% 0.8% Marketing, general and administrative expenses 8.1% 8.3% 7.9% AMOUNT OF CHANGE FROM PRIOR YEAR: Cost of food and beverage sales $5,255 $3,428 $ (547) Restaurant operating expenses 6,133 12,086 10,537 Restaurant opening costs 1,587 (780) (172) Marketing, general and administrative expenses 850 2,139 (317) Interest expense, net (71) (462) (243) PERCENTAGE INCREASE OR (DECREASE) FROM PRIOR YEAR: Cost of food and beverage sales 11.4% 8.0% (1.3%) Restaurant operating expenses 5.5% 12.1% 5.0% Restaurant opening costs 316.8% (60.1%) (11.8%) Marketing, general and administrative expenses 5.5% 16.0% (2.3%) Interest expense, net (13.4%) (46.7%) (19.7%) 2004 COMPARED TO 2003 Cost of food and beverage sales increased in absolute amount and when expressed as a percentage of sales in fiscal 2004 when compared to fiscal 2003. The increase in absolute amount is attributable to the increase in sales. The increase when expressed as a percentage of sales was attributable to increased beef costs in the current fiscal year. Beef costs comprise 40% of our total commodity costs. Average beef costs increased 9.0% in fiscal 2004 when compared to fiscal 2003. Lobster costs which comprise 15% of our total commodity costs increased an average of 15.5% in fiscal 2004 when compared to fiscal 2003. All other commodity cost fluctuations were not significant. Restaurant operating expenses increased in absolute amount but decreased when expressed as a percentage of sales in fiscal 2004 when compared to fiscal 2003. The increase in absolute amount was mainly attributable to the 4 seven new restaurants opened during fiscal 2004. The decrease when expressed as a percentage of sales was attributable to increased labor productivity in fiscal 2004 and from stable health insurance costs in the current fiscal year compared to increased sales. Occupancy costs and depreciation and amortization expenses increased in both absolute amount and when expressed as a percentage of sales primarily from the opening of the seven new restaurants. Utility costs increased due to higher energy costs in the current fiscal year. Restaurant opening costs increased in absolute amount and when expressed as a percentage of sales in fiscal 2004 when compared to fiscal 2003 as a result of the growth in restaurant development activity in the current fiscal year compared to the prior fiscal year. The increase in restaurant opening costs such as rent and labor and related costs was a result of opening seven restaurants and having four other new restaurants under development in the current fiscal year compared to opening two in the prior fiscal year. Marketing, general and administrative costs increased in absolute amount but decreased when expressed as a percentage of sales in fiscal 2004 when compared to fiscal 2003. The increase in absolute amount is due to increased labor and related costs for a full year from additional management personnel who were hired by the Company in connection with the acquisition of the RA Sushi concept. Also contributing to the increase was an increase in planned advertising costs in the current fiscal year compared to the prior fiscal year. The slight decrease when expressed as a percentage of sales was immaterial. Interest expense, net, decreased in fiscal 2004 when compared to fiscal 2003. The decrease was a result of a decrease in the average interest rate in the current fiscal year compared to the comparable prior fiscal year. Our effective tax rate was 33.4% for fiscal 2004 compared to 32.7% for fiscal 2003. The increase was primarily a result of increased minority interest expense which is not deductible for tax purposes. 2003 COMPARED TO 2002 Cost of food and beverage sales increased in absolute amount, but decreased when expressed as a percentage of sales in fiscal 2003 when compared to fiscal 2002. The increase in absolute amount is attributable to the increase in sales. The decrease when expressed as a percentage of sales is attributable to lower commodity prices, principally shrimp, in fiscal 2003. Restaurant operating expenses increased in absolute amount and when expressed as a percentage of sales in fiscal 2003 when compared to fiscal 2002. The increase was attributable to increased labor and related costs, an increase in property and liability insurance expense and increased depreciation and amortization expenses. The increase in labor and related costs relates principally to the increase in health care benefits costs and declining productivity coupled with increasing overtime wages during the first two quarters of fiscal 2003 compared to the equivalent periods of fiscal 2002. Property and liability insurance expense increased from an increase in premiums. Lastly, depreciation and amortization increased due to new restaurant properties placed into service and other capital expenditures made to the existing restaurant portfolio in fiscal 2003 compared to fiscal 2002. Restaurant opening costs decreased in fiscal 2003 when compared to fiscal year 2002 as a result of the relatively large expenses associated with the three Haru openings in the preceding fiscal year. In fiscal year 2003, restaurant opening costs related to the new Benihana restaurants in The Woodlands and Las Colinas, Texas and to the new Benihana in Westbury, New York which opened during the second week of fiscal 2004. Marketing, general and administrative costs increased in absolute amount and when expressed as a percentage of sales in fiscal 2003 when compared to fiscal 2002. The increase was attributable to increased salaries and benefits from additional management personnel who were hired by the Company in connection with the acquisition of the RA Sushi concept. Additionally, advertising expenses increased in fiscal 2003 as a result of increased advertising expenditures. Interest expense, net, decreased in 2003 fiscal year when compared to fiscal 2002. The decrease was a result of lower average borrowings outstanding coupled with lower interest rates in fiscal 2003 compared to fiscal 2002. Our effective income tax rate increased in fiscal 2003 to 32.7% from 31.2% in fiscal 2002. The increase was due to an increase in net pre-tax income coupled with a relatively fixed amount of Federal tax credit for FICA taxes paid on reported tip income. OUR FINANCIAL RESOURCES 5 We have borrowings from Wachovia Bank, National Association ("Wachovia") under a term loan and a revolving line of credit facility, both of which were renegotiated on December 3, 2002. The renegotiated credit agreement increased the term loan facility to $16,000,000. The line of credit facility allows us to borrow up to $15,000,000 through December 31, 2007. At March 28, 2004, we had $6,500,000 available for borrowing under the revolving line of credit. The term loan had $13,000,000 outstanding at March 28, 2004 and is payable in quarterly installments of $750,000 through December 2004 and $833,333 thereafter until the term loan matures in December 2007. The interest rate at March 28, 2004 of both the line of credit and the term loan was approximately 2.10%. We have the option to pay interest at Wachovia's prime rate plus 1% or at libor plus 1%. The interest rate may vary depending upon the ratio that the sum of earnings before interest, taxes, depreciation and amortization has to our total indebtedness. The loan agreements limit our capital expenditures, require that we maintain certain financial ratios and profitability amounts and prohibit the payment of cash dividends on common stock. For the quarter ended March 28, 2004, the Company was not in compliance with a Consolidated EBITDA covenant of the Company's credit agreement with Wachovia. The Company received a waiver from Wachovia to cure its noncompliance on May 25, 2004. Subsequent to the issuance of the Company's fiscal year 2004 consolidated statements contained in the Company's Annual Report on Form 10-K for the year ended March 28, 2004, the Company determined that $18.5 million of bank debt previously classified in long-term liabilities should have been classified in current liabilities because the waiver of the Consolidated EBITDA covenant contained in the credit agreement was extended only as of fiscal year-end rather than through the end of the year ending March 27, 2005. Accordingly, the Company's consolidated balance sheet at March 28, 2004 has been restated from the amounts previously reported to reflect the appropriate classification of the bank debt at March 28, 2004. The Company received a waiver for the Consolidated EBITDA covenant as of the end of its fiscal quarters ended July 18, 2004 and October 10, 2004 and the Company and Wachovia amended the credit agreement on November 19, 2004, such that the Company believes that it will be in compliance with the covenant through October 30, 2005. Since restaurant businesses generally do not need relatively large amounts of inventory and accounts receivable, there is no need to finance them. As a result, many restaurant businesses have deficiencies in working capital. The following table summarizes the sources and uses of cash (in thousands). Fiscal year ended ----------------------------- 2004 2003 ----------------------------- Cash provided by operations $20,449 $18,279 Cash (used in) investing activities (22,042) (38,782) Cash provided by financing activities 1,490 17,740 ----------------------------- Decrease in cash ($103) ($2,763) ============================= The Company has entered into an agreement to sell $20,000,000 aggregate principal amount of Convertible Preferred Stock of which $10,000,000 will be available upon closing with the remaining $10,000,000 to be available beginning on the anniversary date to three years from the anniversary date. The Convertible Preferred Stock will be convertible into common shares of the Company at a conversion price of $19.00 per share, and will carry a cash dividend of 5.0%. The closing of the transaction, which is subject to the execution of definitive documentation and customary closing conditions, is expected to occur in the first quarter of fiscal 2005. We believe that the cash to be provided under the agreement will be sufficient to cover the Company's cash needs for planned unit growth and refurbishing existing units. Contractual obligations and commitments (in thousands):
--------------------------------------------------------------------------------------------------------------------- Total 2005 2006 2007 2008 2009 Thereafter --------------------------------------------------------------------------------------------------------------------- Long-term debt obligations (1) $21,500 $3,000 $3,333 $4,167 $11,000 - - Capital lease obligations 299 273 26 - - - - Operating lease obligations 116,849 8,674 9,008 8,728 8,675 8,756 73,008 Other liabilities (2) 652 652 - - - - - --------------------------------------------------------------------------------------------------------------------- Total $139,300 $12,599 $12,367 12,895 $19,675 $8,756 $73,008 =====================================================================================================================
6 (1) All amounts outstanding under the Company's credit agreement with Wachovia have been restated to be classified as a current liability. (2) Contingent payment from RA Sushi acquisition. OPERATING ACTIVITIES Cash provided by operations increased as a percentage of net income during the year from fiscal 2003 primarily as a result of increases in noncash items such as depreciation and amortization and deferred taxes as well as changes in operating assets and liabilities. 7 INVESTING ACTIVITIES Expenditures for property and equipment were $22,038,000, a decrease of $5,380,000 from the prior fiscal year. Of the $22,038,000 capital expenditures for fiscal 2004, $7,200,000 represented new construction for teppanyaki units, $3,900,000 represented new construction for RA Sushi units, $400,000 represented new construction for Haru restaurants, $2,000,000 represented the purchase of the land and building of the Dallas teppanyaki restaurant and the balance of approximately $8,500,000 was spent on replacements and refurbishments. We expect to expend approximately $15 million for the development of new restaurants during the 2005 fiscal year. We also intend to remodel several restaurants during our 2005 fiscal year. The total costs of these renovations are expected to be approximately $14 million. FINANCING ACTIVITIES Our total indebtedness decreased by $873,000 from the end of fiscal 2003. We had net borrowings of $2,500,000 under the revolving line of credit. We repaid $3,000,000 of the term loan in fiscal 2004 and $373,000 of leases that are considered to be capital in nature. We also realized $2,198,000 from the exercise of stock options and warrants as compared to $1,929,000 in the previous fiscal year. THE IMPACT OF INFLATION The Company does not believe that inflation has had a material effect on sales or expenses during the last three years other than labor costs. The Company's restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of the Company's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, increases in the minimum wage have increased the Company's labor costs in the last two years. To the extent permitted by competition, the Company has mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are exposed to certain risks of increasing interest rates and commodity prices. The interest on our indebtedness is largely variable and is benchmarked to the prime rate in the United States or to the London interbank offering rate. We may protect ourselves from interest rate increases from time-to-time by entering into derivative agreements that fix the interest rate at predetermined levels. We have a policy not to use derivative agreements for trading purposes. We purchase commodities such as chicken, beef, lobster, fish and shrimp for our restaurants. The prices of these commodities may be volatile depending upon market conditions. We do not purchase forward commodity contracts because the changes in prices for them have historically been short-term in nature and, in our view, the cost of the contracts is in excess of the benefits. SEASONALITY OF OUR BUSINESS Our business is not highly seasonal although we do have more diners coming to our restaurants for special holidays such as Mother's Day, Valentine's Day and New Year's. Mother's Day falls in our first fiscal quarter, New Year's in the third fiscal quarter and Valentine's Day in the fourth fiscal quarter of each year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reported period. (See Note 1 of notes to consolidated financial statements included in this Annual Report). 8 Critical accounting policies are those that we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments or uncertainties regarding the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. We record all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the assets or the lease terms of the respective leases. The useful life of property and equipment and the determination as to what constitutes a capitalized cost versus a repair and maintenance expense involves judgments by management. These judgments may produce materially different amounts of depreciation expense and repairs and maintenance expense if different assumptions were used. We periodically assess the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of assets is measured by comparing the carrying value of the assets to the future cash flows to be generated by the asset. If the total future cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and an impairment charge is taken against results of operations. We periodically review the recoverability of goodwill based primarily upon an analysis of cash flows of the related investment assets compared to the carrying value or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The analysis involves judgments by management which may produce materially different results if different assumptions are used in the analysis. We are self-insured for a significant portion of our employee health and workers' compensation programs. The Company maintains stop-loss coverage with third party insurers to limit its total exposure. The accrued liability associated with these programs is based on our estimate of the ultimate costs to be incurred to settle known claims and an estimate of claims incurred but not reported to the Company as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted. We estimate certain components of our provision for income taxes. These estimates include, but are not limited to, effective state and local income tax amounts, allowable tax credits for items such as FICA taxes paid on reported tip income and estimates related to depreciation expense allowable for tax purposes. Our estimates are made based on the best available information at the time that we prepare the provision. We usually file our income tax returns many months after our fiscal year-end. All tax returns are subject to audit by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretations of the tax laws or the Company's application of such laws to its business (see Note 11 to our consolidated financial statements). During fiscal 2004, the Internal Revenue Service completed an examination of the Company's fiscal 2000, 2001 and 2002 Federal Income Tax returns. The examination did not result in any material adverse tax or financial consequences. NEW ACCOUNTING PRONOUNCEMENTS THAT MAY AFFECT OUR FINANCIAL REPORTING In December 2003, the Financial Accounting Standards Board ("FASB") revised and re-issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51", which was originally issued in January 2003. FIN No. 46 provides guidance on identifying variable interest entities ("VIE") and assessing whether or not a VIE should be consolidated. Variable interests are contractual, ownership or other monetary interests in an entity that change with changes in the fair value of the entity's net assets exclusive of variable interests. An entity is considered to be a VIE when its capital is insufficient to permit it to finance its activities without additional subordinated financial support or its equity investors, as a group, lack the characteristics of having a controlling financial interest. FIN No. 46 requires the consolidation of entities which are determined to be VIE's when the reporting company determines that it will absorb a majority of the VIE's expected losses, receive a majority of the VIE's residual returns, or both. The company that is required to consolidate the VIE is called the primary beneficiary. As revised, the provisions of FIN No. 46 are to be applied to entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any relationships with or interests in entities considered to be special-purpose entities. The adoption of FIN No. 46 did not have an impact on our consolidated financial statements. 9 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded into other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires than an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on our consolidated financial statements. FORWARD LOOKING STATEMENTS This Annual Report contains various "forward-looking statements" which represent our expectations or beliefs concerning future events, including unit growth, future capital expenditures, and other operating information. A number of factors could, either individually or in combination, cause actual results to differ materially from those included in the forward-looking statements, including changes in consumer dining preferences, fluctuations in commodity prices, availability of qualified employees, changes in the general economy, industry cyclicality, and in consumer disposable income, competition within the restaurant industry, availability of suitable restaurant locations, or acquisition opportunities, harsh weather conditions in areas in which the Company and its franchisees operate restaurants or plan to build new restaurants, acceptance of the Company's concepts in new locations, changes in governmental laws and regulations affecting labor rates, employee benefits, and franchising, ability to complete new restaurant construction and obtain governmental permits on a reasonably timely basis, unstable economy and conditions in foreign countries where we franchise restaurants and other factors that we cannot presently foresee. 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (AS RESTATED, SEE NOTE 2) (In thousands, except per share information) MARCH 28, March 30, March 31, Fiscal year ended 2004 2003 2002 -------------------------------------------------------------------------------- REVENUES Restaurant sales $201,335 $187,913 170,051 Franchise fees and royalties 1,628 1,331 1,456 ------------------------------------------------------------------------------- Total revenues 202,963 189,244 171,507 ------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of food and beverage sales 51,437 46,182 42,754 Restaurant operating expenses 118,183 112,050 99,964 Restaurant opening costs 2,088 501 1,281 Marketing, general and administrative expenses 16,362 15,512 13,373 Impairment charge 438 ------------------------------------------------------------------------------- Total operating expenses 188,070 174,245 157,810 ------------------------------------------------------------------------------- Income from operations 14,893 14,999 13,697 Interest expense, net 457 528 990 ------------------------------------------------------------------------------- Income before income taxes and minority interest 14,436 14,471 12,707 Income tax provision 4,821 4,725 3,964 ------------------------------------------------------------------------------- Income before minority interest 9,615 9,746 8,743 Minority interest 643 477 100 ------------------------------------------------------------------------------- NET INCOME $8,972 $9,269 $8,643 =============================================================================== EARNINGS PER SHARE Basic earnings per common share (1) $1.01 $1.06 $1.14 Diluted earnings per common share (1) $.98 $.99 $1.09 ------------------------------------------------------------------------------- (1) On June 7, 2002, the Board of Directors declared a 15% stock dividend in Class A stock on both the Class A Shares and Common Shares. The stock dividend was paid on August 12, 2002 to holders of record July 15, 2002. As a result, basic and diluted earnings per common share are shown as if the stock dividend had been in existence for each fiscal year presented. See notes to consolidated financial statements 11
BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share information) MARCH 28, March 30, 2004 2003 ----------------------------------------------------------------------------------------------------- ASSETS (As restated, (As restated, CURRENT ASSETS: see Notes 2 and 11) see Note 2) Cash and cash equivalents $2,196 $2,299 Receivables 882 626 Inventories 6,147 5,328 Prepaid expenses 2,426 2,236 ----------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 11,651 10,489 PROPERTY AND EQUIPMENT, NET 98,219 84,482 GOODWILL, NET 27,783 27,131 OTHER ASSETS 4,757 5,207 DEFERRED TAX ASSET, NET 185 2,450 ----------------------------------------------------------------------------------------------------- $142,595 $129,759 ===================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $18,877 $17,990 Current maturity of bank debt 21,500 3,000 Current maturities of obligations under capital leases 273 373 ----------------------------------------------------------------------------------------------------- Total current liabilities 40,650 21,363 LONG-TERM DEBT - BANK 19,000 DEFERRED OBLIGATIONS UNDER OPERATING LEASES 5,460 4,613 OBLIGATIONS UNDER CAPITAL LEASES 26 299 ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 46,136 45,275 MINORITY INTEREST 1,414 771 COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 13) STOCKHOLDERS' EQUITY: Common stock - $.10 par value; convertible into Class A Common stock; authorized - 12,000,000 shares; issued and outstanding - 3,134,979 and 3,184,479 Shares in 2004 and 2003, respectively 313 318 Class A Common stock - $.10 par value; authorized - 20,000,000 shares; issued and outstanding - 5,967,527 and 5,595,084 shares in 2004 and 2003, Respectively 597 560 Additional paid-in capital 50,772 48,444 Retained earnings 43,506 34,534 Treasury stock - 10,828 shares of Common stock at cost (143) (143) ----------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 95,045 83,713 ----------------------------------------------------------------------------------------------------- $142,595 $129,759 =====================================================================================================
See notes to consolidated financial statements 12
BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share information) Total Retained Stockholders' Class A Additional Earnings Equity Preferred Common Common Paid-in (As restated, Treasury (As restated, Stock Stock Stock Capital see Note 2) Stock see Note 2) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, APRIL 1, 2001, as previously reported $1 $358 $259 $14,847 $37,336 $ (116) $52,685 Restatement, Note 2 (1,528) (1,528) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, APRIL 1, 2001, as restated $1 $358 $259 $14,847 $35,808 $ (116) $51,157 Net income 8,643 8,643 Tax benefit from stock options 352 352 Dividend on preferred stock (5) (5) Conversion of 700 shares of preferred stock into 105,267 shares of Class A common stock at $.10 par value (1) 11 (10) Conversion of 316,937 shares of common Stock into Class A common stock at $0.1 par value (31) 31 Issuance of 1,000,000 shares of Class A common Stock, net of offering costs 100 10,517 10,617 Issuance of 14,000 shares of common stock under exercise of options 1 39 40 Issuance of 139,406 shares of Class A common stock under exercise of options 14 1,181 1,195 --------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2002 328 415 26,926 44,446 (116) 71,999 --------------------------------------------------------------------------------------------------------------------------------- Net income 9,269 9,269 Tax benefit from stock options 517 517 Issuance of 1,141,050 shares of Class A common stock for stock dividend 115 19,089 (19,181) (23) Conversion of 100,700 shares of common stock into Class A common stock at $.10 par value (10) 10 Purchase of treasury stock (4) (4) Issuance of 9,000 shares of common stock under exercise of options 43 43 Issuance of 178,865 shares of Class A common stock under exercise of options 18 1,708 1,726 Issuance of 150 shares of Class A common Stock for incentive compensation 3 3 Issuance of 23,000 shares of Class A common Stock under exercise of warrant 2 158 160 --------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 30, 2003 318 560 48,444 34,534 (143) 83,713 --------------------------------------------------------------------------------------------------------------------------------- Net income 8,972 8,972 Tax benefit from stock options 162 162 Conversion of 79,500 shares of common stock into Class A common stock at $.10 par value (8) 8 Issuance of 30,000 shares of common stock under exercise of options 3 214 217 Issuance of 207,000 shares of Class A common stock under exercise of warrants 21 1,420 1,441 Issuance of 85,943 shares of Class A common stock under exercise of options 8 532 540 --------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 28, 2004 $313 $597 $50,772 $43,506 $(143) $95,045 =================================================================================================================================
See notes to consolidated financial statements 13
BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED, SEE NOTE 2) (In thousands, except share information) MARCH 28, March 30, March 31, Fiscal year ended 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $8,972 $9,269 $8,643 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,657 7,375 5,898 Minority interest 643 477 100 Deferred income taxes 2,265 655 886 Issuance of Common stock for incentive compensation 3 Loss on disposal of assets 154 120 207 Write-down of impaired assets 438 Change in operating assets and liabilities that provided (used) cash: Receivables (256) 364 (256) Inventories (819) (1,085) 52 Prepaid expenses (190) 351 (1,408) Other assets (59) (431) (228) Accounts payable and accrued expenses and deferred obligations under operating leases 1,082 1,181 899 -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 20,449 18,279 15,231 -------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Business acquisition, net of cash acquired (11,353) Expenditures for property and equipment (22,038) (27,418) (13,944) Other (4) (11) (15) -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (22,042) (38,782) (13,959) -------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Dividends paid on preferred stock (5) Proceeds from issuance of long-term debt 17,400 34,800 15,000 Repayment of long-term debt and obligations under capital leases (18,270) (19,502) (24,344) Proceeds from issuance of Class A Common stock 10,617 Proceeds from issuance of Common stock and Class A Common stock under exercise of options and warrants 2,198 1,929 1,235 Tax benefit from stock option and warrant exercise 162 517 352 Purchase of treasury stock (4) -------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,490 17,740 2,855 -------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (103) (2,763) 4,127 Cash and cash equivalents, beginning of year 2,299 5,062 935 -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $2,196 $2,299 $5,062 ========================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE FISCAL YEAR FOR: Interest $484 $423 $1,030 Income taxes $2,305 $3,055 $3,831 BUSINESS ACQUISITIONS, NET OF CASH ACQUIRED: Fair value of assets acquired, other than cash $2,346 Liabilities assumed (1,646) Purchase price in excess of the net assets acquired 10,653 -------------------------------------------------------------------------------------------------------------------------- $11,353 ==========================================================================================================================
During fiscal 2004, $652,000 of goodwill was recorded related to contingent payments accrued for the RA Sushi acquisition. During fiscal 2004, 79,500 shares of common stock were converted into 79,500 shares of Class A common stock. During fiscal 2003, 100,700 shares of common stock were converted into 100,700 shares of Class A common stock. During fiscal 2003, a stock dividend of 1,141,050 shares of Class A common stock was paid. 14 During fiscal 2002, 316,937 shares of common stock were converted into 316,937 shares of Class A common stock. During fiscal 2002, 700 shares of preferred stock were converted into 105,267 shares of Class A common stock. See notes to consolidated financial statements 15 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 28, 2004, MARCH 30, 2003 AND MARCH 31, 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS - Benihana Inc., including its majority owned subsidiaries (the "Company"), owned and operated 56 teppanyaki style and 13 sushi restaurants and franchised 22 others as of March 28, 2004. The Company has the rights to open, license and develop Benihana restaurants in the United States, Central and South America and the Caribbean islands. BASIS OF PRESENTATION - The consolidated financial statements include the assets, liabilities and results of operations of the Company's majority-owned subsidiaries. The ownership of other interest holders including attributable income is reflected as minority interest. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates within only one reportable operating segment. The Company has a 52/53-week fiscal year. All fiscal years presented consisted of 52 weeks. The Company's first fiscal quarter consists of 16 weeks and the remaining three quarters are 12 weeks each, except in the event of a fifty-three week year with the final quarter composed of 13 weeks. Because of the differences in length of these accounting periods, results of operations between the first quarter and the later quarters of a fiscal year are not comparable. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates. Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal 2004 classifications. FRANCHISE AND ROYALTIES REVENUE RECOGNITION - The Company recognizes initial franchise fees as income when substantially all of its obligations are satisfied, which generally coincides with the opening of the franchised restaurants. The Company also receives continuing royalties based upon a percentage of each franchised restaurant's gross revenues. Royalties are recognized as income when earned. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. INVENTORIES - Inventories, which consist principally of restaurant operating supplies and food and beverage, are stated at the lower of cost (first-in, first-out method) or market. DEPRECIATION AND AMORTIZATION - Depreciation and amortization are computed by the straight-line method over the estimated useful life (buildings - 30 years; restaurant furniture, fixtures and equipment - 8 years; office equipment - 8 years; personal computers, software and related equipment - 3 years; and leaseholds - lesser of the lease terms, including renewal options, or useful life). The Company capitalizes all direct costs incurred to construct restaurants. Upon opening, these costs are depreciated and charged to expense based upon their useful life classification. The amount of interest capitalized in connection with restaurant construction was approximately $92,000 in fiscal 2004, $0 in fiscal year 2003 and $12,000 in fiscal year 2002. ACCOUNTING FOR LONG-LIVED ASSETS - The Company periodically evaluates its net investment in restaurant properties for impairment for events or changes in circumstances that indicate the carrying amounts of an asset may not be recoverable. During fiscal 2002, the Company recorded an impairment charge of $438,000 for the write-down to fair value of property and equipment at a Doraku restaurant. No impairments occurred in fiscal years 2004 and 2003. ACCOUNTING FOR GOODWILL - The Company periodically reviews goodwill for impairment and writes-down the carrying amount of goodwill to results of operations when the recorded value of goodwill is determined to be 16 more than its fair value. The Company reviewed goodwill for possible impairment during fiscal 2004, 2003 and 2002 and determined that there was no impairment. 17 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE - The Company capitalizes and records in other assets the cost of computer software obtained for internal use and amortizes such costs over a three-year period. INCOME TAXES - The Company uses the asset and liability method which recognizes the amount of current and deferred taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the consolidated financial statements as measured by the provisions of enacted law. DERIVATIVE INSTRUMENTS - The Company does not currently utilize interest rate swap agreements to hedge exposure to fluctuations in variable interest rates. The Company had entered into an interest swap agreement which expired on May 1, 2002. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation under the intrinsic value method of accounting for stock-based compensation. Therefore, the Company generally recognizes no compensation expense with respect to such awards because options are generally granted at the fair market value of the underlying shares on the date of the grant. The Company has disclosed pro forma net income and earnings per share amounts using the fair value method. Had the Company accounted for its stock-based awards under the fair value method, the table below shows the pro forma effect on net income and earnings per share for the three most recent fiscal years. MARCH 28, March 30, March 31, 2004 2003 2002 ------------ ------------ ------------ Net Income As reported $8,972 $9,269 $8,643 Add: Stock-based compensation cost Included in net income 3 Less: Total stock-based employee Compensation expense determined under fair value based method for all awards 564 754 606 ------------ ------------ ------------ Pro forma $8,408 $8,518 $8,037 ============ ============ ============ Basic earnings per share As reported $ 1.01 $ 1.06 $ 1.14 ============ ============ ============ Pro forma $ .95 $ .97 $ 1.06 ============ ============ ============ Diluted earnings per share As reported $ .98 $ .99 $ 1.09 ============ ============ ============ Pro forma $ .92 $ .91 $ 1.01 ============ ============ ============ The following weighted average assumptions were used in the Black-Scholes option-pricing model used in developing the above pro forma information: a risk-free interest rate of 1.9% for fiscal year 2004, 1.8% for fiscal year 2003 and 3.8% for fiscal year 2002, respectively, an expected life of three years, no expected dividend yield and a volatility factor of 50% for fiscal years 2004, 2003 and 2002. SEGMENT REPORTING - Reportable operating segments are components of an enterprise about which separate financial information is available that is evaluated by the chief operating decision maker in deciding how to allocate resources and in evaluating performance. The Company believes its restaurants meet the criteria supporting aggregation of all restaurants into one operating segment. EARNINGS PER SHARE - Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period. The diluted earnings per common share computation includes dilutive common share equivalents issued under the Company's various stock option plans and the dilutive convertible preferred stock outstanding only in fiscal 2002. 18 The computation of basic earnings per common share and diluted earnings per common share for each fiscal year is shown below (in thousands):
MARCH 28, March 30, March 31, 2004 2003 2002 ------------- ------------- ------------ Net income, as reported $8,972 $9,269 $8,643 Less: Accretion of preferred dividends (5) ------------- ------------- ------------ Income for computation of basic earnings per common share 8,972 9,269 8,638 Convertible preferred dividends (See Note 13) 5 ------------- ------------- ------------ Income for computation of diluted earnings per common share $8,972 $9,269 $8,643 ============= ============= ============ Weighted average number of common shares in basic earnings per share 8,887 8,739 7,596 Effect of dilutive securities: stock options and warrants 268 670 336 Convertible preferred shares 14 ------------- ------------- ------------ Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share 9,155 9,409 7,946 ============= ============= ============
During fiscal years 2004, 2003 and 2002, stock options and warrants to purchase 1,502,000, 1,020,000 and 1,424,000 shares, respectively, of common stock were excluded from the calculation of diluted earnings per share since the effect would be considered antidilutive. NEW ACCOUNTING PRONOUNCEMENTS THAT MAY AFFECT OUR FINANCIAL REPORTING - In December 2003, the Financial Accounting Standards Board ("FASB") revised and re-issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51", which was originally issued in January 2003. FIN No. 46 provides guidance on identifying variable interest entities ("VIE") and assessing whether or not a VIE should be consolidated. Variable interests are contractual, ownership or other monetary interests in an entity that change with changes in the fair value of the entity's net assets exclusive of variable interests. An entity is considered to be a VIE when its capital is insufficient to permit it to finance its activities without additional subordinated financial support or its equity investors, as a group, lack the characteristics of having a controlling financial interest. FIN No. 46 requires the consolidation of entities which are determined to be VIE's when the reporting company determines that it will absorb a majority of the VIE's expected losses, receive a majority of the VIE's residual returns, or both. The company that is required to consolidate the VIE is called the primary beneficiary. As revised, the provisions of FIN No. 46 are to be applied to entities no later than the end of the first reporting period that ends after March 15, 2004. The Company does not have any relationships with or interests in entities considered to be special-purpose entities. The adoption of FIN No. 46 did not have an impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded into other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires than an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on our consolidated financial statements. 19 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS Subsequent to the issuance of the financial statements for the fiscal year ended March 28, 2004, the Company determined that those financial statements contained certain errors related to the accounting for leases and leasehold improvements. Following a February 2005 review of the accounting adjustments cited in several recent Form 8-K filings by other restaurants and retail companies and a letter by the Chief Accountant of the Securities and Exchange Commission to the Chairman of the Center for Public Company Audit Firms of the AICPA dated February 7, 2005, we determined that the adjustments in those filings and the subject matter of the SEC's Chief Accountant in his letter relating to the treatment of lease accounting and leasehold depreciation applied to us, and that it was appropriate to adjust certain of our prior financial statements. As a result, we have restated our consolidated financial statements as of March 28, 2004 and March 30, 2003 and for each of the three years in the period ended March 28, 2004 included herein (the "Restatement"). Previously, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began. We depreciate buildings, leasehold improvements and other long-lived assets on those properties over a period that includes both the initial non-cancelable lease term and in certain instances the option periods provided for in the lease (or the useful life of the assets if shorter). Rent holidays occur, in certain situations, where leases provide that rental payments are not made for a certain period that approximates the time frame that our restaurants are under construction. We previously did not include these rent holiday periods when calculating straight-line rent expense. Although the Company does not believe that this error resulted in a material misstatement of the Company's consolidated financial statements for any annual or interim periods as presented below, the effects of correcting the error currently would have had a material effect on the Company's results of operations for fiscal 2005. The financial statements have been restated to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty and including the rent holiday period. The cumulative effect of the Restatement as of March 28, 2004 is an increase in deferred rent liability of $3.6 million and a decrease in deferred income tax liability of $1.4 million. As a result, retained earnings at the end of fiscal 2004 decreased by $2.2 million. Rent expense for fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002 increased by $0.4 million, $0.3 million and $0.3 million, respectively. The Restatement decreased diluted earnings per share $0.03, $0.02 and $0.02, respectively. The Restatement had no impact on our previously reported cash flows, sales or same-restaurant sales or on our compliance with any covenant under our credit facility or other debt instruments. The following is a summary of the impact of the Restatement on our consolidated balance sheets at March 28, 2004 and March 30, 2003 and our consolidated statements of earnings for the fiscal years ended March 28, 2004, March 30, 2003 and March 31, 2002. As Previously As As of March 28, 2004 Reported Adjustments Restated ---------------------------------------------------------------------------- Consolidated Balance Sheet ---------------------------------------------------------------------------- Deferred tax asset, net $ 0 $ 185 $ 185 Total assets 142,410 185 142,595 Accounts payable and accrued expenses 20,730 (1,853) 18,877 Deferred obligations under operating leases 0 5,460 5,460 Deferred tax liability, net 1,237 (1,237) 0 Total liabilities 43,766 2,370 46,136 Retained earnings 45,691 (2,185) 43,506 Total stockholders' equity 97,230 (2,185) 95,045 20
As Previously As As of March 30, 2003 Reported Adjustments Restated -------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet -------------------------------------------------------------------------------------------------------- Deferred tax asset, net $1,172 $1,278 $2,450 Total assets 128,481 1,278 129,759 Accounts payable and accrued expenses 19,407 (1,417) 17,990 Deferred obligations under operating leases 0 4,613 4,613 Total liabilities 42,079 3,196 45,275 Retained earnings 36,452 (1,918) 34,534 Total stockholders' equity 85,631 (1,918) 83,713 Fiscal Year ended March 28, 2004 Reported Adjustments Restated -------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings -------------------------------------------------------------------------------------------------------- Restaurant operating expenses $118,015 $168 $118,183 Restaurant opening costs 1,845 243 2,088 Income before income taxes and minority interest 14,847 (411) 14,436 Income tax provision 4,965 (144) 4,821 Net income 9,239 (267) 8,972 Basic earnings per share 1.04 (0.03) 1.01 Diluted earnings per share 1.01 (0.03) 0.98 As Previously As Fiscal Year ended March 30, 2003 Reported Adjustments Restated -------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings -------------------------------------------------------------------------------------------------------- Restaurant operating expenses $111,725 $325 $112,050 Restaurant opening costs 485 16 501 Income before income taxes and minority interest 14,812 (341) 14,471 Income tax provision 4,862 (137) 4,725 Net income 9,473 (204) 9,269 Basic earnings per share 1.08 (0.02) 1.06 Diluted earnings per share 1.01 (0.02) 0.99 As Previously As Fiscal Year ended March 31, 2002 Reported Adjustments Restated -------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings -------------------------------------------------------------------------------------------------------- Restaurant operating expenses $99,707 $257 $99,964 Restaurant opening costs 1,228 53 1,281 Income before income taxes and minority interest 13,017 (310) 12,707 Income tax provision 4,088 (124) 3,964 Net income 8,829 (186) 8,643 Basic earnings per share 1.16 (0.02) 1.14 Diluted earnings per share 1.11 (0.02) 1.09
21 3. ACQUISITION The Company's financial statements and the discussion below reflect the acquisition by the Company of RA Sushi, a privately owned Arizona chain which operated four restaurants, on December 3, 2002. The Company acquired the RA Sushi chain because it believed that the concept is a new and attractive one that would complement its other Asian-themed restaurants and provide further penetration in the market where diners seek attractively priced sushi and other entrees. The purchase price, which was determined based upon arm's length negotiations based principally upon a multiple of RA Sushi's earnings before interest, taxes, depreciation and amortization, paid in cash at closing was approximately $11.4 million, along with the assumption of approximately $1.2 million of debt and other costs of approximately $0.5 million. The purchase agreement also included a contingent purchase price provision, which requires the Company to pay the seller contingent payments based on certain operating results of the acquired business for fiscal years ending 2004, 2005 and 2006. The acquisition has been accounted for using the purchase method of accounting and the operating results of RA Sushi have been included in the Company's consolidated statements of earnings since the date of acquisition. The Company determined that the fair value of the RA Sushi business and its cash flows were in excess of the fair value of the net assets acquired; accordingly, goodwill resulted from the acquisition. The excess of the purchase price over the acquired tangible and intangible net assets of approximately $10.7 million was allocated to goodwill. The Company anticipates that all goodwill recorded in connection with the RA Sushi acquisition will be deductible for tax purposes. In fiscal 2004, the Company recorded $652,000 as additional goodwill for the contingent payment due for fiscal 2004. The contingent payments that will be incurred for results of the fiscal years ending 2005 and 2006 are not estimatable. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable and payable, and accrued liabilities approximate fair value because of the short-term nature of the items. The carrying amounts of the Company's debt and other payables approximate fair value either due to their short-term nature or the variable rates associated with these debt instruments. 5. INVENTORIES Inventories consist of (in thousands): MARCH 28, March 30, 2004 2003 --------------- ------------- Food and beverage $2,090 $1,612 Supplies 4,057 3,716 --------------- ------------- $6,147 $5,328 =============== ============= 22 6. PROPERTY AND EQUIPMENT Property and equipment consist of (in thousands): MARCH 28, March 30, 2004 2003 ------------- ------------- Land $12,324 $ 11,159 Buildings 27,142 21,717 Leasehold improvements 79,417 66,102 Restaurant furniture, fixtures, and equipment 27,526 25,161 Restaurant facilities and equipment under Capital leases 7,040 7,040 ------------- ------------- 153,449 131,179 Less accumulated depreciation and amortization (including accumulated amortization of restaurant facilities and equipment under Capital leases of $6,933 and $6,792 in 2004 and 2003, respectively) 59,653 53,027 ------------- ------------- 93,796 78,152 Construction in progress 4,423 6,330 ------------- ------------- $98,219 $ 84,482 ============= ============= 7. OTHER ASSETS Other assets consist of (in thousands): MARCH 28, March 30, 2004 2003 ------------- ------------- Lease acquisition costs, net $1,897 $2,137 Security deposits 815 1,031 Premium on liquor licenses 1,025 981 Computer software costs, net 359 243 Deferred financing charges, net 219 365 Cash surrender value of life insurance policy 395 391 Long-term receivables 47 59 ------------- ------------- $4,757 $5,207 ============= ============= 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of (in thousands): MARCH 28, March 30, 2004 2003 ----------------- --------------- Accounts payable $5,298 $6,129 Accrued payroll, incentive compensation and related taxes 3,864 3,867 Accrued health insurance costs 808 840 Sales taxes payable 1,138 1,178 Unredeemed gift 1,383 1,161 certificates Accrued percentage rent 1,015 1,078 Accrued property taxes 581 623 Straight-line rent accrual 114 114 Other accrued operating expenses 4,676 3,000 ----------------- --------------- $18,877 $17,990 ================= =============== 23 9. RESTAURANT OPERATING EXPENSES Restaurant operating expenses consist of (in thousands): MARCH 28, March 30, March 31 Fiscal year ended 2004 2003 2002 -------------------------------------------------------------------------------- Labor and related costs $71,812 $70,262 $62,677 Restaurant supplies 3,945 3,630 3,368 Credit card discounts 3,465 3,240 2,884 Utilities 4,854 4,262 3,890 Occupancy costs 11,910 10,667 10,079 Depreciation and amortization 8,313 7,077 5,582 Other restaurant operating expenses 13,884 12,912 11,484 ----------------------------------------- Total restaurant operating expenses $118,183 $112,050 $99,964 ========================================= 10. LEASE OBLIGATIONS The Company generally operates its restaurants in leased premises. The typical restaurant premises lease is for a term of between 15 to 25 years with renewal options ranging from 5 to 25 years. The leases generally provide for the obligation to pay property taxes, utilities, and various other use and occupancy costs. Rentals under certain leases are based on a percentage of sales in excess of a certain minimum level. Certain leases provide for increases based upon the changes in the consumer price index. The Company is also obligated under various leases for restaurant equipment and for office space and equipment. Minimum payments under lease commitments are summarized below for capital and operating leases. The imputed interest rates used in the calculations for capital leases vary from 9.75% to 12% and are equivalent to the rates which would have been incurred at the time to borrow, over a similar term, the amounts necessary to purchase the leased assets. The amounts of operating and capital lease obligations are as follows (in thousands): OPERATING CAPITAL LEASES LEASES ------------ ------------ Fiscal year ending: 2005 $8,674 $289 2006 9,008 26 2007 8,728 2008 8,675 2009 8,756 Thereafter 73,008 ------------ ------------ Total minimum lease payments $116,849 $315 ============ Less amount representing interest 16 ------------ Total obligations under capital leases 299 Less current maturities 273 ------------ Long-term obligations under capitalized leases at March 28, 2004 $26 ============ Rental expense consists of (in thousands): MARCH 28, March 30, March 31, 2004 2003 2002 ---------------------------------- Minimum rental commitments $9,879 $8,516 $8,061 Rental based on percentage of sales 2,324 2,404 2,273 ---------------------------------- $12,203 $10,920 $10,334 ================================== 24 11. LONG-TERM DEBT Long-term debt consists of (in thousands): MARCH 28, March 30, 2004 2003 ------------ ----------- Term loan - bank $13,000 $16,000 Revolving line of credit - bank 8,500 6,000 ------------ ----------- 21,500 22,000 Less current portion 21,500 3,000 ------------ ----------- $ - $19,000 ============ =========== The Company has borrowings from Wachovia Bank, National Association ("Wachovia") under a term loan and a revolving line of credit facility. The line of credit facility allows the Company to borrow up to $15,000,000 through December 31, 2007. At March 28, 2004, the Company had $6,500,000 available for borrowing under the revolving line of credit. The term loan had $13,000,000 outstanding at March 28, 2004 and is payable in quarterly installments of $750,000 through December 2004 and $833,333 thereafter until the term loan matures in December 2007. The interest rate at March 28, 2004 of both the line of credit and the term loan was approximately 2.10%. The Company has the option to pay interest at Wachovia's prime rate plus 1% or libor plus 1%. The interest rate may vary depending upon the ratio that the sum of earnings before interest, taxes, depreciation and amortization has to the Company's total indebtedness. The loan agreements limit the Company's capital expenditures to certain amounts, require that the Company maintain certain financial ratios and profitability amounts and prohibit the payment of cash dividends on common stock. For the quarter ended March 28, 2004, the Company was not in compliance with a Consolidated EBITDA covenant of the Company's credit agreement with Wachovia. The Company received a waiver from Wachovia to cure its noncompliance on May 25, 2004. Subsequent to the issuance of the Company's fiscal year 2004 consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended March 28, 2004, the Company determined that $18.5 million of bank debt previously classified in long-term liabilities should have been classified in current liabilities because the waiver of the Consolidated EBITDA covenant contained in the credit agreement was extended only as of fiscal year-end rather than through the end of the year ending March 27, 2005. Accordingly, the Company's consolidated balance sheet at March 28, 2004 has been restated from the amounts previously reported to reflect the appropriate classification of the bank debt at March 28, 2004. The Company received a waiver for the Consolidated EBITDA covenant as of the end of its fiscal quarters ended July 18, 2004 and October 10, 2004 and on November 19, 2004, the Company and Wachovia amended this credit agreement such that the Company believes that it will be in compliance with the covenant through October 30, 2005. Scheduled principal maturities of long-term debt obligations at March 28, 2004 are as follows: Fiscal year ending 2005 $3,000 2006 3,333 2007 4,167 2008 11,000 --------------- Total $21,500 =============== 12. INCOME TAXES Deferred tax assets and liabilities reflect the tax effect of temporary differences between amounts of assets and liabilities for financial reporting purposes and the amounts of such assets and liabilities as measured by income tax law. A valuation allowance is recognized to reduce deferred tax assets to the amounts that are more likely than not to be realized. 25 The net deferred tax asset (liability) consists of (in thousands):
March 28, 2004 March 30, 2003 Assets Liabilities Total Assets Liabilities Total --------------------------------------------------------------------------------------------------------------- Amortization of gain $ 847 $ 847 $887 $887 Tax loss carryforwards 301 301 733 733 Capital leases 123 $ 46 77 309 $129 180 Income tax credits 1,383 1,383 790 790 Gift certificates 554 554 464 464 Deferred compensation 296 296 241 241 Accelerated depreciation for tax purposes 3,307 (3,307) 1,151 (1,151) Smallware inventory 764 (764) 705 (705) Non-compete and severance agreement 399 (399) 361 (361) Goodwill 379 (379) 94 (94) Deferred obligations under operating leases 1,422 1,422 1,278 1,278 Other 166 12 154 195 7 188 ----------------------------------------------------------------------- Total asset $5,092 $4,907 $185 $4,897 $2,447 $2,450 =======================================================================
As of March 28, 2004, the Company had available net operating loss carryforwards as a result of a 1997 acquisition amounting to $752,000 for ordinary income tax purposes and is available to reduce future taxable income. The net operating loss carryforwards are subject to the change of control provisions of the Internal Revenue Code which limit the usage of the net operating loss carryforwards to approximately $1,100,000 per year. The income tax provision consists of (in thousands): MARCH 28, March 30, March 31, Fiscal year ended 2004 2003 2002 ------------------------------------------------------------------------ Current: Federal $1,876 $2,826 $2,069 State 680 1,244 1,009 Deferred: Federal and State 2,265 655 886 ------------------------------------------- Income tax provision $4,821 $4,725 $3,964 ========================================== The income tax provision differed from the amount computed at the statutory rate as follows (in thousands):
MARCH 28, March 30, March 31, Fiscal year ended 2004 2003 2002 ---------------------------------------------------------------------------------------------------- Federal income tax provision at statutory rate of 34% $4,913 $4,781 $4,297 State income taxes, net of federal benefit 899 822 663 Tax credits, net (1,026) (1,000) (893) Other 35 122 (103) -------------------------------------------- Income tax provision $4,821 $4,725 $3,964 ============================================ Effective income tax rate 33.4% 32.7% 31.2% ============================================
13. COMMITMENTS AND CONTINGENCIES ACQUISITIONS - In December 1999, the Company completed the acquisition of 80% of the equity of Haru Holding Corp. ("Haru"). The acquisition was accounted for using the purchase method of accounting. Pursuant to the purchase agreement, at any time during the period of July 1, 2005 through September 30, 2005, the holders of the balance of Haru's equity (the "Minority Stockholders") shall have a one-time option to sell their shares to the Company. Provided that the Minority Stockholders do not exercise their right to sell their shares, then the Company has a one-time option to purchase the shares of the Minority 26 Stockholders between the period of October 1, 2005 and December 31, 2005. The price for both the put and call options will be determined based on a defined cash flow measure for the acquired business. The fair value of the put and call options was insignificant as of March 28, 2004. In December 2002, the Company completed the acquisition of RA Sushi restaurants. The acquisition was accounted for using the purchase method of accounting. Pursuant to the purchase agreement, the Company is required to pay the seller contingent payments based on certain operating results of the acquired business for fiscal years ending 2004, 2005 and 2006. The contingent payments are based upon the achievement of stipulated levels of operating earnings and revenues by the acquired restaurants over a three-year period commencing with the end of fiscal 2004 and are not contingent on the continued employment of the sellers of the restaurants. The minimum contingent payment levels were met in fiscal 2004 and a liability has been recorded for $652,000, which amount is accounted for as an addition to the purchase price. Contingent payments that will be incurred for results for the fiscal years ending 2005 and 2006 are not estimatable. LITIGATION - The Company is not a party to any material litigation matters other than routine claims which are incidental to its business. 14. STOCKHOLDERS' EQUITY PREFERRED STOCK - The Company had a series A preferred stock which was outstanding in fiscal 2002. The preferred stock had a liquidation preference of $1,000 per share, carried a cumulative dividend of 6% and entitled the holder a right to convert into shares of the Company's Class A Common Stock. In fiscal 2002, the holder converted all of the preferred stock to 105,267 shares of Class A Common Stock. COMMON AND CLASS A COMMON STOCK - The Company's Common Stock is convertible into Class A Common Stock on a one-for-one basis. The Class A Common Stock is identical to the Common Stock except that it gives the holder one-tenth (1/10) vote per share, voting together with the Company's Common Stock as a single class on all matters except the election of directors. For election of directors, the Class A Common Stockholders vote as a class to elect 25% of the members of the Board of Directors. STOCK DIVIDEND - On June 7, 2002, the Board of Directors declared a 15% stock dividend in Class A stock on both the Class A shares and Common shares. The stock dividend was paid on August 12, 2002 to holders of record July 15, 2002. STOCK OPTIONS - The Company has various stock option plans: a 1996 Class A Stock Option Plan (1996 Plan), a 1997 Class A Stock Option Plan (1997 Plan), a 2000 Class A Stock Option Plan (2000 Plan), a Directors' Stock Option Plan (Directors' Plan), Directors' Class A Stock Option Plan (Directors' Class A Plan) and a 2003 Directors' Stock Option Plan (2003 Directors' Plan), under all of which a maximum of 3,085,000 shares of the Company's Common Stock and Class A Common Stock were authorized for grant and for all of which options for 1,101,493 shares remain available for grant. Options granted under the 1996, 1997 and 2000 Plans have a term of ten years from date of issuance, and are exercisable ratably over a three-year period commencing with the date of the grant. Options granted under these plans require that the exercise price be at market value on the date of the grant, or for optionees that own more than 10% of the combined voting rights of the Company, at 110% of market value for incentive stock options. There are 17,500 shares of Common stock available for grant under the Directors Plan. There are no shares available for grant under the Directors Class A Plan. Under the 2003 Directors' Plan, options to purchase 10,000 shares of Class A Common Stock are automatically granted to each of the Company's non-employee directors on the date of the Company's annual meeting. Options granted under the 2003 Directors' Plan are exercisable ratably as to one-third of the shares on the date which is six months after the date of grant, one-third of the shares on the first anniversary of the grant of such option and as to the balance of such shares on the second anniversary of grant of such option. 27 The following table summarizes information about fixed-price stock options outstanding at March 28, 2004: Options Outstanding Options Exercisable ----------------------------------- ------------------------ Weighted- Average Weighted Weighted Ranges of Remaining Average Average Exercise Contractual Exercise Exercise Prices Number Life Price Number Price -------------------------------------------------------------------------------- $6.14 - $7.44 344,021 5.8 $7.07 344,021 $7.07 7.83 - 8.31 73,564 2.9 7.96 73,564 7.96 9.89 - 10.65 456,071 4.0 10.35 456,071 10.35 11.03 - 16.78 853,797 7.2 13.34 687,880 13.13 ----------- ------------ 1,727,453 1,561,536 =========== ============ Transactions under the above plans for the years ended are as follows: MARCH 28, March 30, March 31, 2004 2003 2002 -------------------------------------------------------------------------------- Balance, beginning of year 1,762,709 1,435,046 1,426,938 Issued from stock dividend 216,028 Granted 85,000 300,000 220,000 Canceled (28,813) Expired (4,313) (500) (29,673) Exercised (115,943) (187,865) (153,406) ------------------------------------------- Balance, end of year 1,727,453 1,762,709 1,435,046 =========================================== Weighted average fair value of options granted during year $4.15 $5.47 $2.48 STOCK RIGHTS - The Company has a Shareholder Rights Plan under which a Preferred Share Purchase Right (Right) is represented by outstanding shares of the Company's Common and Class A Common Stock. The Rights operate to create substantial dilution to a potential acquirer who seeks to make an acquisition, the terms of which the Company's Board of Directors believes is inadequate or structured in a coercive manner. The Rights become exercisable on the tenth day (or such later date as the Board of Directors may determine) after public announcement that a person or a group (subject to certain exceptions) has acquired 20% or more of the outstanding Common Stock or an announcement of a tender offer that would result in beneficial ownership by a person or a group of 20% or more of the Common Stock. 15. INCENTIVE AND DEFERRED COMPENSATION PLANS The Company has an incentive compensation plan whereby bonus awards are made if the Company attains a certain targeted return on its opening equity or at the discretion of the Compensation Committee. The purpose of the plan is to improve the long-term sustainable results of operations of the Company by more fully aligning the interests of management and key employees with the shareholders of the Company. One-third of the amounts awarded are immediately made available to the employee and the remaining two-thirds become available ratably over the succeeding two years. Amounts allocated under the Plan may be taken in cash or deferred in a non-qualified deferred compensation plan. The target rate, which was 15.0% for 2004, 15.0% for 2003 and 15.5% for 2002, is approved annually based upon a review of the rates of return on equity of other publicly traded restaurant businesses by the Compensation Committee of the Board of Directors. The amount of the awards is capped at 50% of the eligible salary of the employee. The Company recorded $125,000, $350,000 and $300,000 of incentive compensation expense for fiscal years 2004, 2003 and 2002, respectively. The Company has an executive retirement plan whereby certain key employees may elect to defer up to 20% of their salary and 100% of their bonus until retirement or age 55, whichever is later, or due to disability or death. Employees may select from various investment options for their available account 28 balances. Investment earnings are credited to their accounts. 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal quarter ended (in thousands except for per share information) MARCH 28, 2004 March 30, 2003 ----------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First Revenues $50,654 $46,972 $44,235 $61,102 $46,305 $43,822 $41,958 $57,159 Gross profit 37,723 34,511 32,693 44,971 34,693 32,952 31,353 42,733 Net income 2,854 1,848 1,400 2,870 3,019 2,124 1,396 2,729 Basic earnings per share $ .31 $ .21 $ .16 $ .33 $ .35 $ .25 $ .17 $ .32 Diluted earnings per share $ .31 $ .20 $ .15 $ .32 $ .33 $ .24 $ .16 $ .30
17. SUBSEQUENT EVENTS The Company has entered into an agreement to sell $20,000,000 aggregate principal amount of Convertible Preferred Stock ("Convertible Preferred Stock") to BFC Financial Corporation ("BFC") in a private placement. BFC is a diversified holding company with operations in banking, real estate and other industries. A director of the Company is also Vice Chairman, a director and a significant shareholder of BFC. The Convertible Preferred Stock will be convertible into common shares of the Company at a conversion price of $19.00 per share, will carry a cash dividend of 5.0% and will vote on an "as if converted" basis together with the Company's Common stock on all matters put to a vote of the holders of Common Shares. In addition, under certain circumstances, the approval of the holders of a majority of the Convertible Preferred Stock will be required for certain events outside the ordinary course of business. The closing of the transaction, which is subject to the execution of definitive documentation and customary closing conditions, is expected to occur in the first quarter of fiscal 2005. The Company expects to receive $10,000,000 of this financing at the closing, with the balance to be provided from time to time during the two-year period commencing on the first anniversary of the closing. The holders of the Convertible Preferred Stock will be entitled to nominate one director at all times and one additional director in the event that dividends are not paid for two consecutive quarters. The Convertible Preferred Stock will be subject to redemption at its original issue price ten years from the date of closing and, at the Company's option, may be redeemed for cash or common shares valued at then-current market prices. In addition, the Convertible Preferred Stock may be redeemed at any time beginning three years from the date of issue if the price of the common shares is at least $38.00 for sixty consecutive trading days. The Company has been advised that on or about June 10, 2004, three of the four trustees of the trust which owns Benihana of Tokyo, Inc. ("BOT"), a privately held company which owns 50.9% of the Company's outstanding Common Stock, intend to cause BOT to adopt resolutions declaring that this equity financing transaction is not in the best interest of BOT and authorizing BOT to commence a lawsuit against the Company and certain members of its Board of Directors with respect to the financing. The Company believes that the financing complies with all applicable legal and regulatory requirements and believes there is no basis for a threatened suit. However there can be no assurance that such claim might not frustrate or delay the consummation of such financing or result in a claim for damages. ITEM 9.A. CONTROLS AND PROCEDURES The Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of March 28, 2004 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the period covered by this report, and following a February 2005 review of the accounting adjustments cited in several recent Form 8-K filings by other restaurant companies and a letter by the Chief Accountant of the Securities and Exchange Commission to the Chairman of the center for Public Company Audit Firms of the 29 AICPA, we determined that certain of the adjustments in those filings relating to the treatment of lease accounting and leasehold depreciation applied to us, and that it was appropriate to adjust our prior financial statements. As a result, on February 16, 2005, we concluded that our previously-filed financial statements through 2004 should be restated. The Restatement is further discussed in the section entitled "Restatement of Previously Issued Financial Statements" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K/A and in Note 2, "Restatement of Previously Issued Financial Statements" under Notes to Consolidated Financial Statements included in Item 8, "Financial Statements" of this Form 10-K/A. In connection with the Restatement under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the Company implemented additional procedures in its lease accounting to make certain that the provisions of FAS 13, "Accounting for Leases", FAS 98, "Accounting for Leases", and FASB Interpretation No. 24, "Leases Involving Only Part of a Building" can be appropriately applied for each new restaurant property. Accordingly, we re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures and determined that such controls and procedures are effective. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Benihana Inc.: We have audited the accompanying consolidated balance sheets of Benihana Inc. and subsidiaries ("Benihana") as of March 28, 2004 and March 30, 2003, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended March 28, 2004. These consolidated financial statements are the responsibility of Benihana's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Benihana as of March 28, 2004 and March 30, 2003, and the results of its operations and its cash flows for each of the three years in the period ended March 28, 2004 in conformity with accounting principles generally accepted in the United States of America. As discussed in Notes 2 and 11, the accompanying consolidated financial statements have been restated. Deloitte & Touche LLP Certified Public Accountants Miami, Florida June 11, 2004, March 15, 2005 as to the restatement described in Note 2, November 24, 2004 as to the restatement described in Note 11. 31 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No.'s 333-33880, 333-63783 and 333-13973 of Benihana Inc. on Forms S-8 of our report dated June 11, 2004, March 15, 2005 as to the restatement described in Note 2, November 24, 2004 as to the restatement described in Note 11, appearing in this Annual Report on Form 10-K/A of Benihana Inc. for the year ended March 28, 2004. Deloitte & Touche LLP Miami, Florida March 15, 2005 32 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No.'s 333-83585 and 333-13977 of Benihana Inc. on Forms S-3 of our report dated June 11, 2004, March 15, 2005 as to the restatement described in Note 2, November 24, 2004 as to the restatement described in Note 11, appearing in this Annual Report on Form 10-K/A of Benihana Inc. for the year ended March 28, 2004 and to the reference to us under the heading "Experts" in such Registration Statements. Deloitte & Touche LLP Miami, Florida March 15, 2005 33 EXHIBIT 31.1 CERTIFICATION I, JOEL A. SCHWARTZ, certify that: 1. I have reviewed this Annual Report on Form 10-K of BENIHANA INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Joel A. Schwartz ----------------------------------------- Joel A. Schwartz President and Chief Executive Officer March 15, 2005 34 EXHIBIT 31.2 CERTIFICATION I, MICHAEL R. BURRIS, certify that: 1. I have reviewed this Annual Report on Form 10-K of BENIHANA INC.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael R. Burris ----------------------------------------- Michael R. Burris Chief Financial Officer March 15, 2005 35 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Benihana Inc. (the "Company") on Form 10-K for the period ended March 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel A. Schwartz, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joel A. Schwartz ----------------------------------------- Joel A. Schwartz President and Chief Executive Officer March 15, 2005 36 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Benihana Inc. (the "Company") on Form 10-K for the period ended March 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael R. Burris, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael R. Burris ----------------------------------------- Michael R. Burris Chief Financial Officer March 15, 2005 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2005 BENIHANA INC. By: /s/ Joel A. Schwartz ------------------------------------ Joel A. Schwartz, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the date indicated above by the following persons on behalf of the registrant and in the capacities indicated. SIGNATURE TITLE DATE /s/ Joel A. Schwartz President and March 15, 2005 ---------------------------- Director (Principal Joel A. Schwartz Executive Officer) /S/ Taka Yoshimoto Executive Vice President - March 15, 2005 ---------------------------- Restaurant Operations Taka Yoshimoto and Director /s/ Michael R. Burris Senior Vice President of March 15, 2005 ---------------------------- Finance and Treasurer - Michael R. Burris Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Kevin Y. Aoki Vice President - March 15, 2005 ---------------------------- Marketing and Director Kevin Y. Aoki /s/ Juan C. Garcia Vice President - Controller March 15, 2005 ---------------------------- Juan C. Garcia /s/ Darwin C. Dornbush Secretary and Director March 15, 2005 ---------------------------- Darwin C. Dornbush /s/ John E. Abdo Director March 15, 2005 ---------------------------- John E. Abdo /s/ Norman Becker Director March 15, 2005 ---------------------------- Norman Becker /s/ Max Pine Director March 15, 2005 ---------------------------- Max Pine /s/ Robert B. Sturges Director March 15, 2005 ---------------------------- Robert B. Sturges /s/ Lewis Jaffe Director March 15, 2005 ---------------------------- Lewis Jaffe 38