Note 6 - Capital Expenditures

6 Months Ended

Aug. 14, 2011

Commitments and Contingencies Disclosure [Text Block]

NOTE 6 – CAPITAL EXPENDITURES

The Company is required by its franchise agreements to periodically bring its restaurants up to the required image of the franchisor.  This typically involves a new dining room décor and seating package and exterior changes and related items but can, in some cases, require the relocation of the restaurant.  If the Company deems a particular image enhancement expenditure to be inadvisable, it has the option to cease operations at that restaurant.  Over time, the estimated cost and time deadline for each restaurant may change due to a variety of circumstances and the Company revises its requirements accordingly.  Also, significant numbers of restaurants may have image enhancement deadlines that coincide, in which case, the Company will adjust the actual timing of the image enhancements in order to facilitate an orderly construction schedule.  During the image enhancement process, each restaurant is normally closed for up to two weeks, which has a negative impact on the Company’s revenues and operating efficiencies.  At the time a restaurant is closed for a required image enhancement, the Company may deem it advisable to make other capital expenditures in addition to those required for the image enhancement.

The franchise agreements with KFC and Taco Bell Corporation require the Company to upgrade and remodel its restaurants to comply with the franchisors’ current standards within agreed upon timeframes.  As discussed below, the Company has not met its obligations with respect to certain of its restaurants.  As a result, the franchisor may terminate the franchise agreement for those restaurants.  In the case of a restaurant containing two concepts, even though only one is required to be remodeled, additional costs will be incurred because the dual concept restaurant is generally larger and contains more equipment and signage than the single concept restaurant.  If a property is of usable size and configuration, the Company can perform an image enhancement to bring the building to the current image of the franchisor.  If the property is not large enough to fit a drive-thru or has some other deficiency, the Company would need to relocate the restaurant to another location within the trade area to meet the franchisor’s requirements.

During April 2011 the Company was required by KFC Corporation to close twelve KFC locations because they did not meet the franchisor’s current image.  Image enhancement requirements for these closed locations were formerly included in the capital requirements schedules published by the Company and have now been removed.  As discussed in its report on Form 8-K filed May 20, 2011, the Company has entered into a Pre-negotiation Agreement with KFC Corporation with the intention of arriving at a definitive schedule for the completion of the image enhancement of thirteen KFC restaurants which were the subject of default notices received on May 2, 2011, as well as other restaurant locations.  Under the May 19, 2011 Pre-negotiation Agreement, KFC has agreed to forbear until August 31, 2011 from terminating the franchise agreements on the 13 operating restaurants on which KFC on May 2, 2011 delivered to the Company a notice of default (for failure to timely comply with required image enhancement obligations) provided that the Company is in compliance with certain forbearance conditions, which include, among others, that (i) the Company is paid up on amounts owing under the franchise agreements, (ii) the Company is not in default of its obligations under the franchise agreements (other than the image enhancement obligations), (iii) the Company submits to KFC a written proposal by June 20, 2011 (which the Company has submitted) detailing how the Company will obtain the necessary funds to enable it to comply with the Company’s image enhancement obligations, (iv) the Company will establish a remodel escrow account, and (v) the Company will enter into a definitive remodel agreement with KFC by August 31, 2011.  As disclosed in a form 8-K filed on September 1, 2011, the Company and KFC entered into an amendment of the Pre-negotiation Agreement changing the August 31, 2011 deadlines in the agreement to September 30, 2011 as negotiations are continuing but could not be concluded in the original time frame.

Even though the Pre-negotiation Agreement outlines generally the mutually acceptable terms of a final agreement related to the Company’s image enhancement obligations, there can be no assurance that the Company (i) will be able to reach an agreement with KFC regarding image enhancements that would extend the time periods for completion of the required image enhancements, or (ii) will complete the financial restructuring or that the restructuring will create the ability for the Company to complete a satisfactory number of image enhancements.  If KFC exercises its termination rights, it is unclear, what, if any, action the Company’s landlords and creditors may take under cross default provisions of the Company’s agreements that would impede the Company’s ability to satisfy its obligations.  The termination of those franchise agreements would have a material adverse effect on the Company’s financial condition and results of operations.

The negotiations which are being conducted under the Pre-negotiation Agreement involve mainly restaurants with delinquent image enhancement requirement dates or dates that are two years or less in the future.  The capital requirements for these restaurants are included in the schedule in the time frame where management believes they are most likely to be when the definitive agreement is completed.  The Company has completed the image enhancement of three of its KFC restaurants during the current fiscal year, on June 1, 2011, June 28, 2011 and August 4, 2011.  The following schedule contains the capital requirements for image enhancements of restaurants for which the due dates are either estimated or definitive:

Number of Units	Period	Type	Capital Cost (1)
1	Fiscal 2012	Remodels	$             350,000
6	Fiscal 2013	Remodels	2,100,000
2	Fiscal 2014	Remodels	700,000
3	Fiscal 2014	Relo (2)	1,200,000
	Total 2014		1,900,000
3	Fiscal 2015	Remodels	570,000
3	Fiscal 2016	Relo (2)	570,000
10	Fiscal 2016	Dining Room (3)	750,000
	Total 2016		1,320,000
1	Fiscal 2017	Remodels	190,000
5	Fiscal 2017	Refresh (4)	375,000
2	Fiscal 2017	Taco Bell	800,000
	Total 2017		1,365,000
5	Fiscal 2018	Remodels	375,000
2	Fiscal 2018	Taco Bell	800,000
	Total 2018		1,175,000
1	Fiscal 2019	Remodels	190,000
2	Fiscal 2019	Remodels	320,000
2	Fiscal 2019	Taco Bell	800,000
4	Fiscal 2019	Refresh (4)	300,000
	Total 2019		1,610,000
6	Fiscal 2020	Refresh (4)	450,000
2	Fiscal 2020	Taco Bell	800,000
	Total 2020		1,250,000
4	Fiscal 2021	Remodels	760,000
5	Fiscal 2021	Refresh (4)	375,000
	Total 2021		1,135,000
2	Fiscal 2022	Remodels	380,000
4	Fiscal 2022	Refresh (4)	300,000
	Total 2022		680,000
6	Fiscal 2023	Remodels	1,140,000
2	Fiscal 2023	Refresh (4)	150,000
	Total 2023		1,290,000
1	Fiscal 2024	Refresh (4)	75,000
64	Total		$        14,820,000
(1) These amounts are based on estimates of current construction costs and actual costs may vary.
(2) Relocations of fee owned properties are shown net of expected recovery of capital from the sale of the former location.  Relocation of leased properties assumes the capital cost of only equipment because it is not known until each lease is finalized whether the lease will be a capital or operating lease.
(3) This reflects the cost of replacing the dining room and seating package for restaurants that are not yet due for a full remodel and may redue the cost of the remodel when it is performed at a future date.  Any potential cost savings has not been reduced from the projected remodel cost.
(4) Reflects the esimated cost of dining room update and exterior paint and refurbishment on restaurants previously remodeled to the current image.  This is a cost that may be incurred at the time of renewal of the franchise agreement for that location.

In addition to the various facilities actions listed on the table above, the Company expects to spend approximately $800,000 in each of the fiscal years 2012 through 2014 to install the KFC operations platform consisting of a new point of sale system and related reporting and management systems, new food holding cabinets that improve the quality of product held for sale and a new drive-thru speed of service system in all of its KFC and KFC/Taco Bell "2n1" restaurants.

As discussed in Note 4, in connection with the image enhancement program and negotiations, the Company has retained a financial advisor, Brookwood Associates, LLC, to evaluate alternatives for providing the capital necessary for its capital improvements.  The Company has paid a retainer to Brookwood which can be applied to success fees generated by strategic objectives attained by them on behalf of the Company.  Brookwood’s engagement began on November 23, 2010.

Capital expenditures to meet the image requirements of the franchisors and additional capital expenditures on those same restaurants being image enhanced are a large portion of the Company’s annual capital expenditures.  However, the Company also has made and may make capital expenditures on restaurant properties not included on the foregoing schedule for upgrades or replacement of capital items appropriate for the continued successful operation of its restaurants.  The Company may not be able to finance capital expenditures in the volume and time horizon required by the image enhancement deadlines solely from existing cash balances and existing cash flow and the Company expects that it will have to utilize financing for a portion of the capital expenditures.  The Company may use both debt and sale/leaseback financing but has no commitments for either.

There can be no assurance that the Company will be able to accomplish the image enhancements and relocations required in the franchise agreements on terms acceptable to the Company.  If the Company is unable to meet the requirements of a franchise agreement, the franchisor may choose to extend the time allowed for compliance or may terminate the franchise agreement for the affected location.