-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QQp2COjgWiEyUkKkDW1kGj2BUJcWV3Jy9NKctfLMJzSTCi0rjURRFyTD113vU5Uu xiRq+DuPBPRhV5Gmp0wx3A== 0001188112-06-001918.txt : 20060623 0001188112-06-001918.hdr.sgml : 20060623 20060623163646 ACCESSION NUMBER: 0001188112-06-001918 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060326 FILED AS OF DATE: 20060623 DATE AS OF CHANGE: 20060623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENIHANA INC CENTRAL INDEX KEY: 0000935226 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 650538630 STATE OF INCORPORATION: DE FISCAL YEAR END: 0328 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26396 FILM NUMBER: 06922586 BUSINESS ADDRESS: STREET 1: 8685 NW 53RD TERRACE CITY: MIAMI STATE: FL ZIP: 33166 BUSINESS PHONE: 3055930770 MAIL ADDRESS: STREET 1: 8685 NW 53RD TERRACE CITY: MIAMI STATE: FL ZIP: 33166 10-K 1 t10794_10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 26, 2006 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:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED - ------------------- ------------------------------------ Common Stock, par value $.10 per share NASDAQ Class A Common Stock, par value $.10 per share NASDAQ Preferred Share Purchase Right Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] 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 (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of May 31, 2006, 2,483,053 shares of Common Stock and 7,329,561 shares of Class A Common Stock were outstanding. As of October 9, 2005, the last day of our second fiscal quarter, the aggregate market value of common equity held by non-affiliates was $135,778,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the year ended March 26, 2006 are incorporated by reference in Parts I and II. Portions of the Registrant's Proxy Statement for the 2006 Annual Meeting are incorporated by reference in Part III. ITEM 1. BUSINESS GENERAL We have operated "Benihana" teppanyaki-style Japanese restaurants in the United States for over 40 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 are prepared by a chef on a grill which forms a part of the table at 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, including New York strip steak with wasabi croquette, spicy shallots and ginger sauce, garlic shrimp and crispy duck. 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. During April and May 2006, we opened two RA Sushi restaurants, which are located in Palm Beach Gardens, Florida and Glenview, Illinois. During April 2006, we sold our sole Doraku restaurant located in Miami Beach, Florida. Additionally, we terminated the franchise agreements for 3 locations in Venezuela during May 2006. At May 31, 2006, we: o own and operate 56 Benihana teppanyaki-style Japanese dinnerhouse restaurants, including one restaurant under the name Samurai; o franchise 18 additional Benihana restaurants; o own and operate seven Haru restaurants in New York City and Philadelphia, Pennsylvania; and o own and operate eleven RA Sushi restaurants. We own the related United States trademarks and service marks to the names "Benihana", "Benihana of Tokyo" and the "red flower" symbol and we have the exclusive rights to own, develop and license Benihana and Benihana Grill restaurants in the United States, Central and South America and the islands of the Caribbean. We also own the United States trademarks and worldwide development rights to the names "Haru" and "RA Sushi". Sales by our owned restaurants were approximately $244.0 million for the fiscal year ended March 26, 2006, as compared to approximately $216.8 million for the prior fiscal year. Our net income for the fiscal year ended March 26, 2006 was approximately $14.6 million, as compared to approximately $7.8 million for the prior fiscal year. Our principal executive offices are located at 8685 Northwest 53rd Terrace, Miami, Florida 33166 (telephone number 305-593-0770) and our corporate website address is HTTP://WWW.BENIHANA.COM. We make our electronic filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports available on the corporate website free of charge as soon as practicable after filing with or furnishing to the SEC. STRATEGY The critical elements of our growth strategy are as follows: SELECTIVELY PURSUE RESTAURANT GROWTH. We believe that each of our three concepts has broad appeal and that, as a result, we have significant opportunities to expand our business selectively. We plan to continue to capitalize on our broad customer appeal and strong brand recognition within the casual dining segment by opening new restaurants, selectively acquiring existing Asian-theme restaurants in major U.S. markets and franchising new restaurant locations. In fiscal 2006, we opened one Benihana restaurant in Tucson, Arizona, one RA Sushi restaurant in Houston, Texas and one Haru restaurant in Philadelphia, Pennsylvania. DESIGN INITIATIVE. We have implemented a design initiative to develop a prototype to be used at most of our new Benihana restaurants to improve unit-level economics while shortening construction time and improving appeal to our customers. Elements of the new design will be incorporated into 20 to 25 existing Benihana restaurants that we will be renovating over the next two and one-half years. MAINTAIN STRONG RESTAURANT UNIT ECONOMICS. Our experienced management team intends to maintain and improve where necessary attractive restaurant unit profit margins through sustained sales growth and effective cost controls. CONTINUE TO BUILD BRAND AWARENESS AND CUSTOMER LOYALTY. We will continue to provide marketing and promotional support to sustain and grow our reputation for distinctive value, quality food and customer satisfaction. PROVIDE STRONG MANAGEMENT SUPPORT. Our senior management team has an average of over 17 years with our company and is experienced in developing and operating distinctive, high-volume casual dining establishments. 1 THE BENIHANA CONCEPT The Benihana concept offers casual dining in a distinctive Japanese atmosphere enhanced by the unique entertainment provided by our highly-skilled Benihana chefs who prepare fresh steak, chicken and seafood in traditional Japanese style at a grill which forms a part of the customer's table. Most of our Benihana restaurants are open for both lunch and dinner and have a limited menu offering a full course meal generally consisting of an appetizer, soup, salad, tea, rice, vegetable, an entree of steak, seafood, chicken or any combination of them and a dessert. We also offer sushi entrees at each of our Benihana teppanyaki restaurants and we believe that Benihana is the largest coast-to-coast restaurant chain highlighting sushi as a part of an Asian theme. Specific menu items may be different in the various restaurants depending upon the local geographic market. The servings prepared at the teppanyaki grill are portion controlled to provide consistency in quantities served to each customer. Alcoholic beverages, including specialty mixed drinks, wines and beers and soft drinks are available. During fiscal 2006, beverage sales in both the lounges and dining rooms accounted for approximately 17% of total restaurant sales. The average check size per person was $24.96 in fiscal 2006. Sushi is offered at all of our traditional restaurants at either separate sushi bars or at the teppanyaki grills. Each of our teppan tables generally seats eight customers. The chef is assisted in the service of the meal by a waitress or waiter who takes beverage and food orders. An entire dinnertime meal takes approximately one hour and thirty minutes. Of the 56 Benihana restaurants we operate: o 40 are located in freestanding, special use restaurant buildings usually on leased lands; o 6 are located in shopping centers; and o 10 are located in office or hotel building complexes. The freestanding restaurants were built to our specifications as to size, style and interior and exterior decor using an overall Japanese design theme. The other locations were adapted to the Benihana interior decor. The freestanding, traditional Benihana restaurant units, which are generally one story buildings, average approximately 8,000 square feet and are constructed on a land parcel of approximately 1.25 to 1.50 acres. Benihana restaurants located in shopping centers, office buildings and hotels are of similar size, but differ somewhat in appearance from location to location in order to conform to the appearance of the buildings in which they are located. A typical Benihana restaurant has 18 teppan tables and seats from 86 to 178 customers in the dining rooms and 8 to 120 customers in the bar, lounge and sushi bar areas. Most of the future Benihana restaurants that we will build will conform to our new prototype design. During fiscal 2007, we anticipate opening a new Benihana restaurant in Miramar, Florida and a restaurant in Coral Gables, Florida as a replacement for a restaurant previously located in another suburb of Miami, Florida. The Company is also developing another two Benihana restaurants to be located in Maple Grove, Minnesota and Chandler, Arizona with targeted openings in early fiscal 2008. THE HARU CONCEPT The Haru concept offers an extensive menu of distinctive 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, including New York strip steak with wasabi croquette, spicy shallots and ginger sauce, garlic shrimp and crispy duck. Haru also offers delivery and take-out services which represent 37% of its total sales. The average check size per person was $29.36 in fiscal 2006. During fiscal 2000, we acquired 80% of the subsidiary that operates the Haru restaurants. During fiscal 2006, we acquired the remaining 20% interest upon the exercise of a put option by the former Minority Stockholders. Currently, there is a dispute between the Company and the former Minority Stockholders concerning the price at which the former Minority Stockholders exercised their put option to sell the remaining interest in Haru to the Company. The Company believes that the proper application of the put option price formula would result in a payment to the former Minority Stockholders of approximately $3.7 million. Under the former Minority Stockholders' interpretation of the put option price formula, they claim to be entitled to a greater payment. Since that time the parties have been engaged in negotiations over the calculation of the put option price. There can be no assurance that this matter will not result in a legal proceeding or that the Company's interpretation of the put option price formula will prevail in any such proceeding. The Company has recorded $3.7 million liability for the payment of the put option. We currently operate six Haru restaurants in New York City and we opened a new Haru restaurant in Philadelphia, Pennsylvania, during the first quarter of fiscal 2006. The Company is currently developing another Haru restaurant to be located in the Wall Street district of New York City to open during fiscal 2008. The six Haru restaurants that we operate in New York City are located in office or residential buildings. The restaurants vary in size and decor but emphasize a Japanese decor. We typically seek restaurant locations that are in densely populated metropolitan areas in order to take advantage of Haru's delivery business. 2 THE RA SUSHI CONCEPT The RA Sushi concept offers sushi and Pacific-Rim dishes in a fun-filled, high energy environment. The average check size per person was $20.51 for fiscal 2006 and beverage sales in both the lounges and dining rooms accounted for approximately 33% of total sales. Of the eleven RA Sushi restaurants we operate: o four are located in special-use restaurant buildings on leased land; and o seven are located in shopping or "life style" centers. All of the restaurants were built to our specifications as to size, style and emphasize a contemporary interior and exterior decor. These restaurants average approximately 4,500 square feet which exclude outdoor seating. A typical RA Sushi restaurant seats from 150 to 225 customers in the bar and sushi areas. We currently operate eleven RA Sushi restaurants. During February 2006, we opened a new RA Sushi restaurant in Houston, Texas. During April and May 2006, we opened two additional RA Sushi restaurants in Palm Beach Gardens, Florida and Glenview, Illinois, respectively. We anticipate opening another two new RA Sushi restaurants in Torrance, California and Corona, California during fiscal 2007. We have signed leases for another three RA Sushi restaurants to be located in Huntington Beach, California, Tustin, California, and Lombard, Illinois. RESTAURANT OPERATIONS Our Benihana restaurants are under the direction of our Executive Vice President-Restaurant Operations and are divided among eight geographic regions, each managed by a regional manager. Food preparation in the teppanyaki restaurants is supervised by nine regional chefs. Our Haru restaurants are managed out of New York City under the direction of Haru's Vice President of Operations and our RA Sushi restaurants are managed out of Phoenix, Arizona under the direction of RA Sushi's Vice President of Operations. Each restaurant has a manager and one or more assistant managers responsible for the operation of the restaurant, including personnel matters, local inventory purchasing, and maintenance of quality control standards, cleanliness and service. Strict guidelines as documented in our restaurant operations manuals are followed to assure consistently high quality in customer service and food quality for each location. Specifications are used for quality and quantity of ingredients, food preparation, maintenance of premises and employee conduct and are incorporated in manuals used by the managers, assistant managers and head chefs. Food and portion sizes are regularly and systematically tested for quality and compliance with our standards. The Company has entered into supply agreements for the purchase of beef, chicken and seafood, in the normal course of business, at fixed prices for twelve- and six-month terms, respectively, beginning on January 1, 2006. These supply agreements will eliminate volatility in the cost of the commodities over the terms of the agreements. Substantially all commodities are distributed to our teppanyaki restaurants by a national food service logistics company. Most of the other food products are purchased locally by the individual restaurant managers and senior chefs. Substantially all of our restaurant operating supplies are purchased centrally and distributed to the restaurants from our warehouse or a bonded warehouse. Our chefs are trained in the teppanyaki style of cooking and sushi preparation and in customer service with training programs lasting from eight to twelve weeks. A portion of the training is spent working in a restaurant under the direct supervision of an experienced head chef. The program includes training in our method of restaurant operations and in both tableside and kitchen food preparation as applied in our restaurants. Manager training is similar except that the manager trainee is given in-depth exposure to each position in the restaurant. Other categories of employees are trained by the manager and assistant manager at each restaurant unit. Ongoing continuing education programs and seminars are provided to restaurant managers and chefs to improve restaurant quality and implement changes in operating policy or menu listings. We use various incentive compensation plans pursuant to which key restaurant personnel share in the results of operations at both a local and company-wide level. MARKETING We utilize television, radio, billboard and print media to promote our restaurants; strengthen our brand identity; and maintain high name recognition. The advertising programs are tailored to each local market. The advertising program is designed to emphasize the inherently fresh aspects of a Benihana meal and the entertainment value of the chef cooking at the customer's table. In fiscal year 2006, we expended approximately $7.4 million on advertising and other marketing. The entertainment component of the Benihana method of food preparation and service is emphasized to distinguish Benihana from other restaurant concepts. RA Sushi's advertising campaigns are geared to young affluent demographics via radio and print media, while Haru does not currently require much advertising and focuses on local publications. 3 FRANCHISING We have, from time to time, franchised Benihana teppanyaki restaurant to operators in markets in which we consider expansion to be of benefit to the Benihana system. We continue to selectively pursue franchising opportunities, particularly in Central and South America and the islands of the Caribbean where we own the rights to the Benihana trademarks and system. Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. We provide franchisee support for: o site selection, o prototypical architectural plans, o interior and exterior design and layout, o training, marketing and sales techniques, and o opening assistance. All franchisees are required to operate their restaurants in accordance with Benihana operating standards and specifications including menu offerings, food quality and preparation. The current standard franchise agreement provides for payment to us of a non-refundable franchise fee of from $30,000 to $50,000 per restaurant and royalties of from 3% to 6% of gross sales. In fiscal year 2006, revenues from franchising were approximately $1,521,000. To comply with the terms of the franchise agreements, we are prohibited from opening additional restaurants within certain areas in which our existing franchisees have the exclusive right to open additional restaurants and operate their existing Benihana restaurants. In general, such franchise agreements currently provide for an initial payment to us with respect to each new restaurant opened by a franchisee and continuing royalty payments to us based upon a percentage of a franchisee's gross sales throughout the term of the franchise. TRADE NAMES AND SERVICE MARKS Benihana is a Japanese word meaning "red flower". In the United States and certain foreign countries, we own the "Benihana" and "Benihana of Tokyo" brand names and related trademarks and "red flower" symbol, which we believe to be of material importance to our business and are registered in the United States Patent and Trademark Office. We also own the United States trademarks and worldwide development rights to the names "Haru" and "RA Sushi". Benihana of Tokyo, Inc., a privately held company and our largest stockholder and originator of the Benihana concept, continues to own the rights to the Benihana name and trademarks outside of the United States, Central and South America and the islands of the Caribbean. Benihana of Tokyo, Inc. is also the operator of a Benihana restaurant in Honolulu, Hawaii under an exclusive, royalty-free franchise from the Company. We have no financial interest in any restaurant operated or franchised by Benihana of Tokyo, Inc. NEW RESTAURANT SITE SELECTION AND DEVELOPMENT We believe the locations of our restaurants are critical to our long-term success and, accordingly, we devote significant time and resources to analyzing each prospective site. Each of our three concepts requires a different real estate formula for successful execution. The Benihana concept is successful in free-standing or in-line locations and require approximately 7,000 to 8,000 square feet. The prototype was designed to accommodate 7,500 square feet. The Haru concept is successful in densely populated urban markets and space requirements are somewhat flexible. The RA Sushi concept is successful in urban or suburban shopping malls, retail strip centers and entertainment life-style centers and typically requires 4,000 to 5,500 square feet. In general, we currently prefer to open our restaurants in high profile sites within larger metropolitan areas with dense populations and above-average household incomes. The layout of each restaurant is customized to accommodate different types of buildings and different square feet within the available space. In addition to analyzing demographic information for each prospective site, we consider other factors such as visibility, traffic patterns and general accessibility; the availability of suitable parking and the proximity of residences and shopping areas. Our new restaurant development model for each of our active concepts typically calls for us to occupy leased space in shopping malls, office complexes, strip centers, entertainment centers and other real estate developments (the "retail lease" development model). We have also acquired the land where it is economically justified. While we expect the retail lease development model to continue as our principal approach for opening new restaurant units, we also expect to open more freestanding restaurants. We generally lease our restaurant locations for primary periods of 15 to 20 years and include renewal options for varying lengths of time. Our rent structures vary from lease to lease, but generally provide for the payment of both minimum base rent and contingent rent, such as percentage rent based on restaurant sales and rent increases based on changes in the consumer price index. We are also responsible for our proportionate share of common area maintenance (CAM), insurance, property tax and other occupancy-related expenses under our leases. Many of our leases provide for maximum allowable annual percentage or fixed dollar increases for CAM and insurance expenses to enable us to better predict and control 4 future variable lease costs. We expend cash for leasehold improvements and furnishings, fixtures and equipment to build out leased premises. We own all of the equipment in our restaurants and currently plan to do so in the future. Due to the uniquely flexible and customized nature of our teppanyaki restaurant operations and the complex design, construction and preopening processes for each new location, our lease negotiation and restaurant development timeframes vary for each restaurant. The development and opening process generally ranges from ten to twelve months after lease signing and depends largely upon the availability of the leased space we intend to occupy, and are often subject to matters that result in delays outside of our control, usually the permitting process and mandates of local governmental building authorities. The number and timing of new restaurants actually opened during any given period, and their associated contribution, will depend on a number of factors including, but not limited to, the identification and availability of suitable locations and leases; the timing of the delivery of the leased premises to us from our landlords so that we can commence our build-out construction activities; the ability of our landlords and us to timely obtain all necessary governmental licenses and permits to construct and operate our restaurants; disputes experienced by our landlords or our outside contractors; any unforeseen engineering or environmental problems with the leased premises; weather conditions that interfere with the construction process; our ability to successfully manage the design, construction and preopening processes for each restaurant; the availability of suitable restaurant management and hourly employees; and general economic conditions. While we attempt to manage those factors within our control, we have experienced unforeseen delays in restaurant openings from time to time in the past and will likely experience such delays in the future. We have undertaken a design initiative to develop a prototype Benihana teppanyaki restaurant to improve the unit-level economics while shortening construction time and improving decor. The new design reflects the cutting edge of contemporary dining and entertainment, and places the customer at the center of the Benihana experience through the visual impact of the exterior, a vibrant waiting area, and a more dramatic stage for our legendary Benihana Chefs. The restaurant in Miramar, Florida, which opened during June 2006, is the first company-owned restaurant to feature the new prototype design. RENOVATION OF EXISTING RESTAURANTS Under a renovation program commenced during 2005, we are also using the design elements of the new prototype to refurbish our older teppanyaki restaurant units. We plan to refurbish approximately 20-25 of our older teppanyaki restaurants over a two and one-half year period. By beginning the transformation of our 20-25 older Benihana teppanyaki units now, we are opportunistically building a stronger foundation for our core brand amid a growing American appetite for Asian cuisine. As we roll out the new design, we will be contending with lost restaurant operating weeks, charges related to shortening the useful lives of restaurant assets, as well as ongoing expenditures for those locations under construction, in addition to the capital expenditures of the program, which we currently estimate to average approximately $2.0 million per unit. Together, these factors will impact our overall earnings. However, we believe the long-term benefits of the revitalization initiative far outweigh the costs, allow for new concept expansion, and further strengthen our leadership position as the premier choice for Japanese-style dining During fiscal 2006, management made a strategic decision to accelerate the renovation and revitalization program. We are committed to revitalizing our 40-plus year old Benihana teppanyaki concept for a new generation, while simultaneously generating a solid return on invested capital for our shareholders. During fiscal 2006, our restaurant in Short Hills, New Jersey was the first teppanyaki to be retrofitted with the new design elements. Management is pleased with the initial impact that this enhanced atmosphere has had on sales at the Short Hills location. While it is still early in the renovation program, management anticipates similar results at our Memphis and Cleveland restaurants, which have recently re-opened after similar renovations were completed in May 2006. We believe that we will complete the renovation of eight restaurants in fiscal 2007 and have an additional three in progress by the end of the fiscal year. RESTAURANT OPENING COSTS FOR NEW RESTAURANTS Restaurant opening costs include incremental out-of-pocket costs that are directly related to the openings of new restaurants and are not capitalizable and an amortization of rentals under lease agreements for accounting purposes. Restaurant opening costs include costs to recruit and train an average of 50-100 hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees, costs for practice service activities; and straight-line minimum base rent during the restaurant preopening period. Restaurant opening costs will vary from location to location depending on a number of factors, including the proximity of our existing restaurants; the size and physical layout of each location; the cost of travel and lodging for different metropolitan areas; the extent of unexpected delays, if any, in obtaining final licenses and permits to open the restaurants, which may also be dependent upon our landlords obtaining their licenses and permits, as well as completing their construction activities for the restaurant units. Restaurant opening costs will fluctuate from period to period, based on the number and timing of restaurant openings and the specific restaurant opening costs incurred for each restaurant unit, and the fluctuations could be significant. We expense restaurant opening costs as incurred. 5 EMPLOYEES At March 26, 2006, we employed approximately 4,600 people, of which 89 were corporate personnel and the balance were restaurant employees. Most employees, except restaurant and corporate management personnel, are paid on an hourly basis. We also employ some restaurant personnel on a part-time basis to provide the services necessary during the peak periods of restaurant operations. We believe our relationship with our employees is good. EXECUTIVE OFFICERS Joel A. Schwartz, age 65, serves as our Chairman of the Board and Chief Executive Officer. Taka Yoshimoto, age 60, serves as Executive Vice President-Operations and Director. Michael R. Burris, age 56, serves as Senior Vice President-Finance and Chief Financial Officer. Juan C. Garcia, age 42, serves as Senior Vice President-Chief Operating Administrative Officer. COMPETITION The casual dining segment of the restaurant industry is intensely competitive with respect to price, service, location, and the type and quality of food. Each of our restaurants competes directly or indirectly with locally owned restaurants as well as regional and national chains, and several of our significant competitors are much larger or more diversified and have substantially greater resources than the Company. It is also anticipated that growth in the industry will result in continuing competition for available restaurant sites as well as continued competition in attracting and retaining qualified management-level operating personnel. We believe that our competitive position is enhanced by offering quality food selections at an appropriate price with the unique entertainment provided by our chefs in an attractive, relaxed atmosphere. GOVERNMENT REGULATION Each of our restaurants is subject to licensing and regulation by the health, sanitation, safety standards, fire department and the alcoholic beverage control and other authorities in the state or municipality where it is located. Difficulties or failure in obtaining the required licensing or requisite approvals could result in delays or cancellations in the opening of new restaurants; termination of the liquor license would adversely affect the revenues for the restaurant. While we have not yet experienced any material difficulties in obtaining and maintaining necessary governmental approvals, the failure to obtain or retain, or a delay in obtaining food and liquor licenses or any other governmental approvals could have a material adverse effect on our operating results. Changes in Federal and state environmental regulations have not had a material effect on our operations, but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new restaurants and materially affect our existing restaurant operations. We are also subject to federal and state regulations regarding franchise offering and sales. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises, or impose substantive standards on the relationship between franchisee and franchisor. The Americans with Disabilities Act (the "ADA") which prohibits discrimination on the basis of disability in public accommodations and employment mandates accessibility standards for individuals with physical disabilities and increases the cost of construction of new restaurants and of remodeling older restaurants. We are subject to "dram-shop" statutes in most of the states where we operate restaurants, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages. We carry liquor liability coverage as part of our existing comprehensive general liability insurance that we believe is consistent with coverage carried by other entities in the restaurant industry of similar size and scope of operations. Even though we are covered by general liability insurance, a settlement or judgment against us under a `dram-shop" statute in excess of our liability coverage could have a material adverse effect on our operations. Various federal and state labor laws govern our operations and our relationships with our employees, including such matters as minimum wages, breaks, overtime, fringe benefits, safety, working conditions and work authorization requirements. Significant increases in minimum wages, changes in statutes regarding paid or unpaid leaves of absence and mandated health benefits, or increased tax reporting, assessment or payment requirements related to our employees who receive gratuities all could be detrimental to the profitability of our operation. Various proposals that would require employers to provide health insurance for all of their employees are considered from time-to-time in Congress and various individual states. The imposition of any requirement that we provide health insurance to all employees could have an adverse effect on our results of operations and financial position, as well as the restaurant industry in general. Our suppliers may also be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to the Company. While we carry employment practices insurance, a settlement or judgment against us in excess of our coverage limitations could have a material adverse effect on our results of operations, liquidity, financial position or business. 6 We have a significant number of hourly restaurant employees that receive tip income. We have elected to voluntarily participate in a Tip Rate Alternative Commitment ("TRAC") agreement with the Internal Revenue Service. By complying with the educational and other requirements of the TRAC agreement, we reduce the likelihood of potential employer-only FICA assessments for unreported or underreported tips. MANAGEMENT INFORMATION SYSTEMS We provide restaurant managers with centralized financial and management control systems through use of data processing information systems and prescribed reporting procedures. We have contracted with a point of sales vendor to upgrade our point-of-sale and time and attendance systems. Each restaurant transmits sales, purchasing, payroll and other operational data to the home office on a weekly and four-week period basis. This data is used to record sales, product, labor and other costs and to prepare periodic financial and management reports. We believe that our centralized accounting, payroll and human resources, cash management and information systems improve management's ability to control and manage its operations efficiently. FORWARD LOOKING STATEMENTS This 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, the possibility of an adverse outcome in the lawsuit against the Company brought by Benihana of Tokyo, Inc. or in the Company's dispute with the former Minority Stockholders of Haru Holding Corp., unstable economic conditions in foreign countries where we franchise restaurants and other factors that we cannot presently foresee. ITEM 1A. RISK FACTORS FAILURE OF OUR RESTAURANTS TO ACHIEVE EXPECTED RESULTS COULD HAVE A NEGATIVE IMPACT ON OUR REVENUES AND PERFORMANCE RESULTS. Performance results currently achieved by our restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in new locations. We cannot be assured that new restaurants that we open will have similar operating results as existing restaurants. New restaurants take several months to reach expected operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations. THE INABILITY TO CONSTRUCT NEW RESTAURANTS AND REMODEL EXISTING RESTAURANTS WITHIN PROJECTED BUDGETS AND TIME PERIODS WILL ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. Many factors may affect the costs associated with construction of new restaurants and remodeling of existing restaurants, including: o landlord delays; o labor disputes; o shortages of materials and skilled labor; o weather interference; o unforeseen engineering problems; o environmental problems; o construction or zoning problems; o local government regulations; o modifications in design to the size and scope of the projects; and o other unanticipated increases in costs, any of which could give rise to delays or cost overruns. If we are not able to develop additional restaurants within anticipated budgets or time periods, our business, financial condition, results of operations or cash flows will be adversely affected. 7 DEVELOPMENT IS CRITICAL TO OUR SUCCESS. Critical to our future success is our ability to successfully expand our operations. Our ability to expand successfully will depend on a number of factors, including: o identification and availability of suitable locations; o competition for restaurant sites; o negotiation of favorable lease arrangements; o timely development of commercial, residential, street or highway construction near our restaurants; o management of the costs of construction and development of new restaurants; o securing required governmental approvals and permits; o recruitment of qualified operating personnel, particularly managers and chefs; o weather conditions; o competition in new markets; and o general economic conditions. The opening of additional restaurants in the future will depend in part upon our ability to generate sufficient funds from operations or to obtain sufficient equity or debt financing on favorable terms to support our expansion. We may not be able to open our planned new operations on a timely basis, if at all, and, if opened, these restaurants may not be operated profitably. We have experienced, and expect to continue to experience, delays in restaurant openings from time to time. Delays or failures in opening planned new restaurants could have an adverse effect on our business, financial condition, results of operations or cash flows. INCREASES IN THE MINIMUM WAGE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL RESULTS. Many of our employees are subject to various minimum wage requirements. Many restaurants are located in states where the minimum wage is greater than the federal minimum. There likely will be increases implemented in jurisdictions in which we operate or seek to operate. We note that the federal minimum wage has not changed in nearly a decade. The possibility exists that the federal minimum wage or the minimum subject to other jurisdictions will be increased in the near future. These minimum wage increases may have a material adverse effect on our business, financial condition, results of operations or cash flows. INTENSE COMPETITION IN THE RESTAURANT INDUSTRY COULD PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUES AND PROFITABILITY. The restaurant industry is intensely competitive with respect to food quality, price-value relationships, ambiance, service and location, and many restaurants compete with us at each of our locations. There are a number of well-established competitors with substantially greater financial, marketing, personnel and other resources than ours, and many of our competitors are well established in the markets where we have restaurants, or in which we intend to locate restaurants. Additionally, other companies may develop restaurants that operate with similar concepts. Any inability to successfully compete with the other restaurants in our markets will prevent us from increasing or sustaining our revenues and profitability and result in a material adverse effect on our business, financial condition, results of operations or cash flows. We may also need to modify or refine elements of our restaurant system to evolve our concepts in order to compete with popular new restaurant formats or concepts that may develop in the future. We cannot assure you that we will be successful in implementing these modifications or that these modifications will not reduce our profitability. CHANGES IN GENERAL ECONOMIC AND POLITICAL CONDITIONS AFFECT CONSUMER SPENDING AND MAY HARM OUR REVENUES AND OPERATING RESULTS. Our country's economic condition affects our customers' levels of discretionary spending. A decrease in discretionary spending due to decreases in consumer confidence in the economy could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues and operating results. FLUCTUATIONS IN OPERATING RESULTS MAY CAUSE PROFITABILITY TO DECLINE. Our operating results may fluctuate significantly as a result of a variety of factors, including: o general economic conditions; o consumer confidence in the economy; o changes in consumer preferences; o competitive factors; o weather conditions; o timing of new restaurant openings and related expenses; o timing and duration of temporary restaurant closures; o changes in governmental regulations; 8 o revenues contributed by new restaurants; and o increases or decreases in comparable restaurant revenues. We typically incur the most significant portion of restaurant opening expenses associated with a given restaurant within the three months immediately preceding and the month of the opening of the restaurant. Our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on restaurant opening expenses as well as labor and operating costs. OUR INABILITY TO FIND A SUFFICIENT NUMBER OF QUALIFIED TEPPANYAKI AND SUSHI CHEFS COULD NEGATIVELY IMPACT OUR EXPANSION PLANS. The success of our growth strategy is dependant on hiring and training a sufficient number of qualified teppanyaki and sushi chefs. The teppanyaki chefs are the centerpiece of the experience at the Benihana restaurants where customers go to be entertained by the performance of the chefs while preparing their food. Sushi chefs must possess the skills necessary for artfully preparing fresh sushi at each of our three concepts. Our inability to identify and hire a sufficient number of qualified individuals for these positions will have a direct negative impact on our ability to open new restaurant units. OUR INABILITY TO RETAIN KEY PERSONNEL COULD NEGATIVELY IMPACT OUR BUSINESS. Our success will continue to be highly dependent on our key operating officers and employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers, general managers and executive and sushi chefs, to keep pace with our expansion schedule. Individuals of this caliber may be in short supply and such a shortage may limit our ability to effectively penetrate new market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of our restaurants is a critical factor in our success. Any failure to do so may harm our reputation and result in a loss of business. FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD HARM OUR BUSINESS AND OUR REPUTATION. We are subject to regulation by federal agencies and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to: o the environment; o building construction; o zoning requirements; o the preparation and sale of food and alcoholic beverages; and o employment. Our facilities are licensed and subject to regulation under state and local fire, health and safety codes. The construction and remodeling of restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We may not be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and work authorization requirements. In particular, we are subject to federal immigration regulations. Given the location of many of our restaurants, even if we operate those restaurants in strict compliance with federal immigration requirements, our employees may not all meet federal work authorization or residency requirements, which could lead to disruptions in our work force. Our business can be adversely affected by negative publicity resulting from complaints or litigation alleging poor food quality, food-borne illness or other health concerns or operating issues stemming from one or a limited number of restaurants. Unfavorable publicity could negatively impact public perception of our brand. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants. 9 The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities. Failure to comply with these and other regulations could negatively impact our business and our reputation. FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY CAUSE ADVERSE UNEXPECTED OPERATING RESULTS AND AFFECT OUR REPORTED RESULTS OF OPERATIONS. Changes in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective. As an example, the recent change requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method will have a negative effect on our reported results. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing rules or differing interpretations with respect to our current practices may adversely affect our reported financial results. IMPLEMENTING OUR GROWTH AND RENOVATION STRATEGIES MAY STRAIN OUR MANAGEMENT RESOURCES AND NEGATIVELY IMPACT OUR COMPETITIVE POSITION. Our growth and renovation strategies may strain our management, financial and other resources. We must maintain a high level of quality and service at our existing and future restaurants, continue to enhance our operational, financial and management capabilities and locate, hire, train and retain experienced and dedicated operating personnel, particularly restaurant managers and chefs. We may not be able to effectively manage these and other factors necessary to permit us to achieve our expansion objectives, and any failure to do so could negatively impact our competitive position. POTENTIAL LABOR SHORTAGES MAY DELAY PLANNED OPENINGS OR DAMAGE CUSTOMER RELATIONS. Our success will continue to be dependent on our ability to attract and retain a sufficient number of qualified employees, including restaurant managers, chefs, kitchen staff and wait staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions may be in short supply in certain areas. Our inability to recruit and retain qualified individuals may delay the planned openings of new restaurants while high employee turnover in existing restaurants may negatively impact customer service and customer relations, resulting in an adverse effect on our revenues or results of operations. CHANGES IN FOOD COSTS COULD NEGATIVELY IMPACT OUR REVENUES AND RESULTS OF OPERATIONS. Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Any increase in distribution and commodity costs could cause our food costs to fluctuate. Additional factors beyond our control through our supply chain, including energy costs, adverse weather conditions and governmental regulation, may affect our food costs. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations. RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY. The cost of insurance (workers compensation insurance, general liability insurance, property insurance, health insurance and directors and officers liability insurance) has risen significantly over the past few years and is expected to continue to increase in 2006. These increases, as well as potential state legislation requirements for employers to provide health insurance to employees, could have a negative impact on our profitability if we are not able to negate the effect of such increases with plan modifications and cost control measures or by continuing to improve our operating efficiencies. We self-insure a substantial portion of our workers compensation and health care costs and unfavorable changes in trends could also have a negative impact on our profitability. LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We may be the subject of complaints or litigation from guests alleging illness, injury or other concerns related to visits to our restaurants. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are liable. We may be subject to complaints or allegations from former or prospective employees. A lawsuit or claim could result in an adverse decision against us that could have a materially adverse effect on our business. Additionally, the costs and expense of defending ourselves against lawsuits or claims, regardless of merit, could have an adverse impact on our profitability. 10 While we carry general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, or at all. We are a party to a litigation instituted by Benihana of Tokyo, Inc. ("BOT") seeking, among other things, substantial monetary damages, and temporary and permanent injunctive relief, in connection with the Company's issuance and sale of $20 million of our Series B Preferred Stock. The trial court in that action rejected all claims against the Company. The trial court's decision is being appealed. An adverse decision on appeal could have a material adverse effect on the Company. The Company is in a dispute with the former Minority Stockholders of its subsidiary, Haru Holding Corp., concerning the amount owed by the Company to the former Minority Stockholders in payment for shares in the subsidiary which the former Minority Stockholders elected to sell to the Company. The resolution of the dispute could adversely affect the Company's financial position and results of operations. COMPLIANCE WITH EXISTING AND NEW REGULATIONS OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES. Compliance with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules, has required an increased amount of management attention and external resources. We are committed to maintaining high standards of corporate governance and public disclosure. This investment required to comply with these changing regulations may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES Of the 74 restaurants in operation at May 31, 2006, 12 are located on owned real estate and 62 are leased pursuant to land or land and building leases, which require either a specific monthly rental, or a minimum rent and additional rent based upon a percentage of gross sales. In addition, there are four Benihana restaurants, five RA Sushi restaurants and one Haru restaurant under development. We are actively pursuing new locations suitable for development as restaurant units for each of our concepts. Generally, these leases are "triple net" leases which pass increases in property operating expenses, such as real estate taxes and utilities, through to the Company as tenant. Expiration of these leases, including renewal options, occur at various dates through calendar year 2035. 11 The following table sets forth the location of our directly owned restaurants:
Benihana, Haru, Approx. or RA Sushi Square Interior Date Location Address Footage Seating Opened - -------- ------- ------- ------- ------ ALASKA: BENIHANA 1100 West 8th Avenue, Anchorage (3) 7,970 142 March, 2005 ARIZONA: BENIHANA 16403 N. Scottsdale Road, Scottsdale (1) 8,600 234 November, 2003 BENIHANA 6091 N. Oracle Road, Tucson (2) 8,300 146 November, 2005 BENIHANA Chandler (1) (Specific address not yet -0- Under development assigned) RA SUSHI 2905 E. Skyline Drive, Suite 289, Tucson (1) 3,900 176 November, 2003 RA SUSHI 4921 E. Ray Road, Suite B-1, Phoenix (2) 6,200 255 December, 2002 RA SUSHI 3815 N. Scottsdale Road, Scottsdale (2) 5,000 156 December, 2002 RA SUSHI 411 S. Mill Avenue, Tempe (1) 3,500 204 December, 2002 RA SUSHI 7012 E. Greenway Parkway, Scottsdale (2) 4,200 155 December, 2002 CALIFORNIA: BENIHANA 2100 E. Ball Road, Anaheim (1) 8,710 263 March, 1980 BENIHANA 1496 Old Bayshore Hwy., Burlingame (1) 8,740 286 February, 1978 BENIHANA 755 Raintree Drive, Carlsbad (1) 10,850 236 June, 2004 BENIHANA 17877 Gale Avenue, City of Industry (1) 8,000 224 November, 1988 BENIHANA 1989 Diamond Blvd., Concord (1) 8,250 246 February, 1980 BENIHANA 2074 Vallco Fashion Park, Cupertino (1) 7,937 197 July, 1980 BENIHANA 16226 Ventura Blvd., Encino (2) 7,790 216 October, 1970 BENIHANA 4250 Birch Street, Newport Beach (2) 8,275 242 March, 1978 BENIHANA 3760 E. Inland Empire Blvd., Ontario (1) 7,433 172 December, 1998 BENIHANA 5489F Sunrise Blvd., Citrus Heights (1) 3,798 101 October, 1995 BENIHANA 477 Camino Del Rio So., San Diego (1) 7,981 235 May, 1977 BENIHANA 1737 Post Street, San Francisco (1) 7,990 185 December, 1980 BENIHANA 1447 4th Street, Santa Monica (1) 7,500 197 September, 2001 BENIHANA 21327 Hawthorne Blvd., Torrance (1) 7,430 219 May, 1980 RA SUSHI 474 Broadway, San Diego (1) 4,676 156 December, 2003 RA SUSHI Huntington Beach (1) 4,535 -0- Under development (1) Lease provides for minimum rent, plus additional rent based upon a percentage of gross sales. (2) Lease provides for fixed rent. (3) Owned.
12
Benihana, Haru, Approx. or RA Sushi Square Interior Date Location Address Footage Seating Opened - -------- ------- ------- ------- ------ RA SUSHI Corona (1) (Specific address not yet assigned) 4,500 -0- Under development RA SUSHI Torrance (1) (Specific address not yet 4,500 -0- Under development assigned) RA SUSHI Tustin (1) (Specific address not yet assigned) 4,500 -0- Under development COLORADO: BENIHANA 3295 S. Tamarac Drive, Denver (1) 7,572 220 February, 1977 DISTRICT OF COLUMBIA: BENIHANA 3222 M Street, NW, Washington (2) 7,761 164 May, 1982 FLORIDA: SAMURAI 8717 S.W. 136th Street, Miami (1) 8,162 218 October, 1981 BENIHANA 276 E. Commercial Blvd., Ft. Lauderdale (3) 8,965 230 June, 1970 BENIHANA 1665 N.E. 79th Street, Miami (3) 8,938 306 September, 1973 BENIHANA 1751 Hotel Plaza Blvd., Lake Buena Vista (1) 8,145 220 October, 1988 BENIHANA 3602 S.E. Ocean Blvd., Stuart (3) 8,485 286 February, 1977 BENIHANA 242 Miracle Mile, Coral Gables (1) 7,000 -0- Under development BENIHANA 3261 S.W. 160th Avenue, Miramar (2) 6,598 213 June, 2006 RA SUSHI 11701 Lake Victoria Gardens Avenue Suite 4105, Palm Beach Gardens (1) 4,200 130 April, 2006 GEORGIA: BENIHANA 2365 Mansell Road, Alpharetta (3) 8,600 234 October, 2003 BENIHANA 2143 Peachtree Road, NE, Atlanta I (2) 8,244 217 May, 1974 BENIHANA 229 Peachtree Street NE, Atlanta II (2) 6,372 160 April, 1981 ILLINOIS: BENIHANA 166 East Superior Street, Chicago (1) 7,288 198 April, 1968 BENIHANA 747 E. Butterfield Road, Lombard (3) 9,200 219 April, 1985 BENIHANA 1200 E. Higgins Road, Schaumburg (3) 8,388 208 July, 1992 BENIHANA 150 N. Milwaukee Avenue, Wheeling (3) 8,500 199 June, 2001 RA SUSHI 1139 N. State Street, Chicago (1) 4,500 74 January, 2004 RA SUSHI 2601 Aviator Lane, Glenview (1) 5,469 165 May, 2006 RA SUSHI Lombard (1) (Specific address not yet assigned) 4,500 -0- Under development INDIANA: BENIHANA 8830 Keystone Crossing Road, Indianapolis (1) 8,460 237 February, 1979 (1) Lease provides for minimum rent, plus additional rent based upon a percentage of gross sales. (2) Lease provides for fixed rent. (3) Owned.
13
Benihana, Haru, Approx. or RA Sushi Square Interior Date Location Address Footage Seating Opened - -------- ------- ------- ------- ------ MARYLAND: BENIHANA 7935 Wisconsin Avenue, Bethesda (1) 9,300 254 October, 2003 MICHIGAN: BENIHANA 18601 Hubbard Drive, Dearborn (1) 7,500 222 March, 1977 BENIHANA 21150 Haggerty Road, Northville (3) 8,000 184 May, 1989 BENIHANA 1985 W. Big Beaver Road, Troy (1) 8,600 231 February, 1996 MINNESOTA: BENIHANA 850 Louisiana Avenue So., Golden Valley (3) 10,400 237 September, 1980 BENIHANA Maple Grove (3) (Specific address not yet assigned) -0- Under development NEVADA: RA SUSHI 3200 Las Vegas Blvd. South, Las Vegas (2) 4,500 222 October, 2004 NEW JERSEY: BENIHANA 840 Morris Turnpike, Short Hills (2) 11,500 256 October, 1976 BENIHANA 5255 Marlton Pike, Pennsauken (1) 7,000 239 February, 1978 NEW YORK: BENIHANA 47 West 56th Street, New York (2) 7,340 171 June, 1973 BENIHANA 2105 Northern Blvd., Munsey Park (1) 8,252 307 December, 1978 BENIHANA 920 Merchant's Concourse, Westbury (1) 7,400 173 April, 2003 HARU 205 West 43rd Street, New York (2) 4,400 119 May, 2001 HARU 1327 Third Avenue, New York (2) 2,200 46 September, 2001 HARU 1329 Third Avenue, New York (2) 4,000 78 December, 1999 HARU 433 Amsterdam Avenue, New York (2) 4,000 74 December, 1999 HARU 280 Park Avenue, New York (2) 6,350 132 August, 2001 HARU 220 Park Avenue South, New York (2) 4,650 160 February, 2005 HARU One Wall Street Court, New York (1) 6,110 -0- Under development OHIO: BENIHANA 50 Tri-County Parkway, Cincinnati I (1) 7,669 235 June, 1978 BENIHANA 126 East 6th Street, Cincinnati II (1) 5,800 142 August, 1979 BENIHANA 23611 Chagrin Blvd., Beachwood (1) 10,393 273 May, 1973 OREGON: BENIHANA 9205 S.W. Cascade Avenue, Beaverton (1) 6,077 200 August, 1986 (1) Lease provides for minimum rent, plus additional rent based upon a percentage of gross sales. (2) Lease provides for fixed rent. (3) Owned.
14
Benihana, Haru, Approx. or RA Sushi Square Interior Date Location Address Footage Seating Opened - -------- ------- ------- ------- ------ PENNSYLVANIA: BENIHANA 2100 Greentree Road, Pittsburgh (1) 8,000 234 May, 1971 HARU 241-243 Chestnut Street, Philadelphia (1) 6,000 168 July, 2005 TENNESSEE: BENIHANA 912 Ridgelake Blvd., Memphis (1) 8,680 233 October, 1979 TEXAS: BENIHANA 7775 Banner Drive, Dallas (3) 8,007 307 January, 1976 BENIHANA 3848 Oak Lawn Avenue, Dallas (1) 3,998 106 June, 1997 BENIHANA 1318 Louisiana Street, Houston I (2) 6,938 200 May, 1975 BENIHANA 1720 Lake Woodlands Drive, The Woodlands (3) 8,728 203 April, 2002 BENIHANA 5400 Whitehall Street, Irving (2) 8,565 172 May, 2002 BENIHANA 9707 Westheimer Road, Houston II (1) 7,669 274 November, 1977 BENIHANA 2579 Town Center Blvd., Sugar Land (1) 5,000 152 July, 1997 RA SUSHI 3908 Westheimer Road, Houston(1) 5,600 220 February, 2006 UTAH: BENIHANA 165 S.W. Temple, Bldg. 1, Salt Lake City (1) 7,530 202 April, 1977 (1) Lease provides for minimum rent, plus additional rent based upon a percentage of gross sales. (2) Lease provides for fixed rent. (3) Owned.
The Company leases approximately 15,200 square feet of space for its general administrative offices in Miami, Florida at an annual rental of approximately $294,000 and 8,000 square feet for a warehouse in Miami, Florida at an annual rental of approximately $37,000. The leases expire November 30, 2013 and October 31, 2006, respectively. 15 ITEM 3. LEGAL PROCEEDINGS On July 2, 2004, Benihana of Tokyo, Inc. ("BOT"), a significant holder of the Company's Common Stock, commenced a lawsuit in the Court of Chancery of the State of Delaware (the "Chancery Court") against the Company, individuals who were then members of the Company's Board of Directors and BFC Financial Corporation ("BFC"). The action, which purported to be brought both individually and derivatively on behalf of the Company, sought temporary and permanent injunctive relief, monetary damages of $14.2 million for loss of value of the Company's Common Stock and from $9.5 million to $10.8 million for loss of an alleged control premium, and recovery of costs and expenses, in connection with the closing of the $20,000,000 sale of a new class of Series B Preferred Stock of the Company to BFC, a diversified holding company with operations in banking, real estate and other industries. John E. Abdo, a director of the Company, serves as a Vice Chairman, director, and is a significant shareholder of BFC. Among other relief sought, the action sought rescission of the sale of the Series B Preferred Stock to BFC. The action alleged that the director defendants breached their fiduciary duties in approving the financing transaction with BFC by diluting the voting power represented by BOT's Common Stock holding in the Company. The trial of the action was completed on November 15, 2004. On December 8, 2005, the Chancery Court rejected all claims asserted against the Company and its directors in the suit brought by BOT. In rejecting BOT's claims, the Chancery Court found that "the directors who approved the transaction did so on an informed basis, acting in good faith and believing that they were acting in the best interests of Benihana." Thereafter, BOT filed an appeal with respect to the decision of the Chancery Court. The Company and its Board of Directors believe that the BFC financing was and is in the best interests of the Company and all of its shareholders, that there is no merit to the action brought by BOT, and intend to continue to vigorously defend and oppose the action. The appeal has been briefed and argued to the Delaware Supreme Court, and the parties are awaiting a decision from that court. The Company has not recorded a liability for this lawsuit, but legal expenses are being incurred and recognized to defend the Company and members of the Board of Directors. There can be no assurance that an adverse result from an appeal that overturns the Chancery Court's ruling will not have a material adverse effect on the Company and its financial position. The Company is not subject to any other pending legal proceedings, other than ordinary routine claims incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated herein by reference from the information under the caption "Common Stock Information" contained in the Company's 2006 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference from the information under the caption "Selected Financial Data" contained in the Company's 2006 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference from the information under the caption "Management's Discussion and Analysis" contained in the Company's 2006 Annual Report to Shareholders. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The information required by this Item is incorporated herein by reference from the information under the caption "Quantitative and Qualitative Disclosures about Market Risks" contained in the Company's 2006 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference from the information under the caption "Consolidated Financial Statements" contained in the Company's 2006 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9.A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation. INTERNAL CONTROL OVER FINANCIAL REPORTING Management's report on our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related report of our independent public accounting firm, are included in our Annual Report under the headings MANAGEMENTS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING and REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING, respectively, and are incorporated by reference. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There has been no significant change in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 of the Exchange Act that occurred during the fourth quarter of our fiscal year ended March 26, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 17 ITEM 9.B. OTHER INFORMATION ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT On April 1, 2006, the Company and Taka Yoshimoto entered into a new employment agreement (the "Agreement"). Mr. Yoshimoto has been employed by the Company as Executive Vice President - Operations for many years and will continue to be employed by the Company in such position pursuant to the terms of the Agreement. Effective April 1, 2006, Mr. Yoshimoto's annual base salary is $187,209 and his employment period has been extended through March 31, 2009. The above description of the Agreement is qualified in its entirety by reference to the copy of the Agreement filed as Exhibit 10.27 hereof, which is incorporated by reference herein. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this Item is incorporated herein by reference from the information under the caption "Election of Directors" contained in the Company's Proxy Statement for its 2006 Annual Meeting of Stockholders (the "Company's Proxy Statement"). We have adopted a written code of business conduct and ethics that applies to our Chief Executive Officer, Chief Financial Officer and all of our officers and directors and can be found on our website, which is located at WWW.BENIHANA.COM. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of business conduct and ethics on our website. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the information under the caption "Executive Compensation" contained in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Sections A through C of this Item is incorporated herein by reference from the information under the caption "Security Ownership of Certain Beneficial Owners of Management" contained in the Company's Proxy Statement. The following is the information required by Section D of this Item: EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining available Number of securities to Weighted average for future issuance be issued upon exercise exercise price of under equity compensation of outstanding options outstanding options plans (excluding securities PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)) - ------------- ------------------- ------------------- ------------------------ (a) (b) (c) Equity compensation plans approved by 1,162,434 $12.51 981,994 security holders Equity compensation plans not approved by 10,750 10.33 -0- security holders Total 1,173,184 12.49 981,994
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from the information under the caption "Certain Relationships and Related Transactions" contained in the Company's Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference from the information under the caption "Principal Accountant Fees and Services" contained in the Company's Proxy Statement. 19 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following consolidated financial statements of the Company and its subsidiaries, which are set forth on Pages 14 through 33 of the Company's 2006 Annual Report to Shareholders included herein as Exhibit 13, are incorporated herein by reference as part of this report. Consolidated Balance Sheets as of March 26, 2006 and March 27, 2005. Consolidated Statements of Earnings for the years ended March 26, 2006, March 28, 2004 and March 30, 2003. Consolidated Statements of Stockholders' Equity for the years ended March 26, 2006, March 27, 2005 and March 28, 2004. Consolidated Statements of Cash Flows for the years ended March 26, 2006, March 27, 2005 and March 28, 2004. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm on consolidated Financial Statements. Management's Report on Internal Audit Over Financial Reporting. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting. 2. Financial Statement Schedules: None 3. Exhibits: 2.01 Amended and Restated Agreement and Plan of Reorganization dated as of December 29, 1994 and amended as of March 17, 1995 among BNC, BOT, the Company and BNC Merger Corp. Incorporated by reference to Exhibit 2.01 to the Company's Registration Statement on Form S-4, Registration No. 33-88295, made effective March 23, 1995 (the "S-4"). 3.01 Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.01 to the S-4 and to Exhibit 1 on Form 8-A dated February 12, 1997. 3.02 By-Laws of the Company. Incorporated by reference to Exhibit 3.02 to the S-4. 4.01 Certificate of Designation of Rights, Preferences and Terms for the Series A Convertible Preferred Stock of the Company. Incorporated by reference to Exhibit 4.01 to the Company's Current Report on Form 8-K dated May 15, 1995. 4.02 Form of Certificate representing shares of the Company's Common Stock. Incorporated by reference to Exhibit 4.02 to the S-4. 4.03 Form of Certificate representing shares of the Company's Class A Common Stock. Incorporated by reference to Exhibit 4.03 to the S-4. 10.01 License Agreement, dated as of May 15, 1995 between BNC and BOT. Incorporated by reference to Exhibit 10.01 to the S-4. 10.02 Directors' Stock Option Plan. Incorporated by reference to Exhibit 10.08 to the S-4. 10.03 1996 Class A Stock Option Plan. Incorporated by reference to Exhibit A to Benihana Inc. Proxy Statement for its Annual Meeting of Stockholders held on July 19, 1996. 10.04 1997 Class A Stock Option Plan. Incorporated by reference to Exhibit A to Benihana Inc. Proxy Statement for its Annual Meeting of Stockholders held on August 27, 1998 (the "1998 Proxy Statement"). 20 10.05 Amendments to the Directors' Stock Option Plan. Incorporated by reference to Exhibit B to the 1998 Proxy Statement. 10.06 2000 Employees' Class A Common Stock Option Plan. Incorporated by reference to Exhibit A to Benihana Inc. Proxy Statement for its Annual Meeting of Stockholders held on August 3, 2000. 10.07 2003 Directors' Stock Option plan. Incorporated by reference to Exhibit A to Benihana Inc. Proxy Statement for its Annual Meeting of Stockholders held on August 21, 2003. 10.08 Restated Credit Agreement dated December 3, 2002 (the "Credit Agreement") by and among Benihana Inc., the Guarantors (as listed and defined therein), and Wachovia Bank, National Association, as Agent and Lender. Incorporated by reference to Exhibit 10.09 of the 2003 10-K. 10.09 Second Amendment to Credit Agreement dated November 19, 2004. Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended January 2, 2005. 10.10 Third Amendment to Credit Agreement dated November 23, 2004. Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended January 2, 2005. 10.11 Fourth Amendment to Credit Agreement dated January 20, 2005. Incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended January 2, 2005. 10.12 Fifth Amendment to Credit Agreement dated May 12, 2005. 10.13 Stockholders Agreement dated as of December 6, 1999 by and among Haru Holding Corp., BNC, Mei Ping Matsumura and the Estate of Arthur Cutler. Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-2, Registration Number 333-68946. 10.14 Benihana Incentive Compensation Plan. Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. 10.15 Employment Agreement dated April 1, 2001 between Joel A. Schwartz and the Company. Incorporated by reference to Exhibit 10.07 of the 2001 10-K. 10.16 Employment Agreement dated April 1, 2001 between Taka Yoshimoto and the Company. Incorporated by reference to Exhibit 10.12 of the 2001 10-K. 10.17 Employment Agreement dated September 1, 2003 between Kevin Aoki and the Company. Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarterly year ended October 12, 2003. 10.18 Employment Agreement dated September 1, 2003 between Juan C. Garcia and the Company. Incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarterly year ended October 12, 2003. 10.19 Consulting Agreement dated April 1, 2001 between Rocky H. Aoki and the Company. Incorporated by reference to Exhibit 10.23 of the 2001 10-K. 10.20 Employment Agreement dated September 1, 2005 between Michael R. Burris and the Company. Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended October 12, 2003. 10.21 Amendment No. 1 dated May 27, 2004 to Employment Agreement dated April 1, 2001 between Joel A. Schwartz and the Company. Incorporated by reference to Exhibit 10.18 to the 2004 10-K. 10.22 Preferred Stock Purchase Agreement between Benihana Inc. and BFC Financial Corporation dated June 8, 2004. Incorporated by reference to Exhibit 10.19 of the 2004 10-K 10.23 Amendment No. 1 dated October 17, 2005 to Employment Agreement dated September 1, 2003 between Juan C. Garcia and the Company. Incorporated by reference to Exhibit 10.01 to Form 8-K filed October 20, 2005. 21 10.24 Summary Description of Benihana Incentive Compensation Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K filed March 24, 2006. 10.25 Agreement of Sale dated April 17, 2006 by and among Benihana Lincoln Road Corp., Benihana National Corp., Doraku Lincoln Road LLC and Aoki Group LLC. Incorporated by reference to Exhibit 10.1 to Form 8-K filed April 21, 2006. 10.26 Restrictive Covenant and Agreement not to Disclose Confidential Information dated April 17, 2006 by and between Kevin Aoki and Benihana Inc. Incorporated by reference to Exhibit 10.2 to Form 8-K filed April 21, 2006. 10.27 Employment Agreement dated April 1, 2006 between Taka Yoshimoto and the Company. 13.01 Portions of Annual Report to Stockholders for the year ended March 26, 2006. 21.01 Subsidiaries 23.01 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. 31.01 Chief Executive Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Chief Financial Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Chief Executive Officer's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Chief Financial Officer's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22 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: June 23, 2006 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 June 23, 2006 - ----------------------------------- Director (Principal Joel A. Schwartz Executive Officer) /s/ Taka Yoshimoto Executive Vice President - June 23, 2006 - ----------------------------------- Restaurant Operations Taka Yoshimoto and Director /s/ Michael R. Burris Senior Vice President of June 23, 2006 - ----------------------------------- Finance and Treasurer - Michael R. Burris Chief Financial Officer (Principal Financial and Accounting Officer) /s/ John E. Abdo Director June 23, 2006 - ----------------------------------- John E. Abdo Director June __, 2006 - ----------------------------------- Kevin Y. Aoki /s/ Norman Becker Director June 23, 2006 - ----------------------------------- Norman Becker Director June __, 2006 - ----------------------------------- J. Ronald Castell /s/ Lewis Jaffe Director June 23, 2006 - ----------------------------------- Lewis Jaffe /s/ Robert B. Sturges Director June 23, 2006 - ----------------------------------- Robert B. Sturges /s/ Joseph J. West Director June 23, 2006 - ----------------------------------- Joseph J. West
23 EX-10.27 2 ex10-27.txt EXHIBIT 10.27 EXHIBIT 10.27 EMPLOYMENT AGREEMENT AGREEMENT dated as of this 1st day of April, 2006, (the "Effective Date") by and between BENIHANA INC., a Delaware corporation (the "Company"), and TAKA YOSHIMOTO (the "Executive"). R E C I T A L The Executive has for many years been employed by the Company and by its predecessor, Benihana National Corp. as its Executive Vice President - Operations. The Company and the Executive desire to enter into a new employment agreement which will set forth the terms and conditions upon which the Executive shall serve in the employ of the Company and upon which the Company shall compensate the Executive and to replace and supercede the Employment Agreement between the parties hereto dated as of April 1, 2006. NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is hereby agreed by and between the Company and Executive as follows: 1. ENGAGEMENT AND TERM. The Company hereby employs Executive and Executive hereby accepts such employment by the Company on the terms and conditions set forth herein, for a period commencing on the Effective Date of this Agreement and ending, unless sooner terminated in accordance with the provisions of Section 5 hereof, on March 31, 2009 (the "Employment Period"). 2. SCOPE OF DUTIES. Executive shall be employed by the Company as its Executive Vice President - Operations. In such capacities, the Executive shall have such authority, powers and duties customarily attendant upon such offices. If elected or appointed, Executive shall also serve, without additional compensation, in one or more offices and, if and when elected, as a director of the Company or any subsidiary or affiliate of the Company, provided that his duties and responsibilities are not inconsistent with those pertaining to his position as stated above. Executive shall faithfully devote his full business time and efforts so as to advance the best interests of the Company. During the Employment Period, Executive shall not be engaged in any other business activity, whether or not such business activity is pursued for profit or other pecuniary advantage, unless same is only incidental and is in no way, directly or indirectly, competitive with, or opposed to the best interests of the Company. 3. COMPENSATION. 3.1 Basic Compensation. In respect of services to be performed by the Executive during the Employment Period, the Company agrees to pay the Executive an annual salary of one hundred eighty-seven thousand, two hundred nine Dollars ($187,209) ("Basic Compensation"), payable in accordance with the Company's customary payroll practices for executive employees. 3.2 Cost of Living Adjustments. The Basic Compensation shall be increased by an amount established by reference to the "Consumer Price Index for Urban Wage Earners and Clerical Workers, New York, New York- Northern New Jersey area published by the Bureau of Labor Statistics of the United States Department of Labor (the "Consumer Price Index"). The base period shall be the month ended December 31, 2005 (the "Base Period"). If the Consumer Price Index for the month of December in any year, commencing in 2006, is greater than the Consumer Price Index for the Base Period, Basic Compensation shall be increased, commencing on April 1 of the next following year, to the amount obtained by multiplying Basic Compensation by a fraction, the numerator of which is the Consumer Price Index for the month of December of the year in which such determination is being made and the denominator of which is the Consumer Price Index for the Base Period. 3.3 Discretionary Increases. The Executive shall also be entitled to such additional increments and bonuses as shall be determined from time to time by the Board of Directors of the Company. 3.3 Other Benefits. (a) Executive shall be entitled to participate, at Company's expense, in the major medical health insurance plan, and all other health, insurance or other benefit plans applicable generally to executive officers of the Company. (b) During the Employment Period, Executive will be entitled to paid vacations and holidays consistent with the Company's policy applicable to executives generally. All vacations shall be scheduled at the mutual convenience of the Company and the Executive. 4. TERMINATION OF EMPLOYMENT. The provisions of Section 1 of this Agreement notwithstanding, the Company may terminate this Agreement and Executive's employment hereunder in the manner and for the causes hereinafter set forth, in which event the Company shall be under no further obligation to Executive other than as specifically provided herein: 4.1 If Executive is absent from work or otherwise substantially unable to assume his normal duties for a period of sixty (60) successive days or an aggregate of ninety (90) business days during any consecutive twelve-month period during the Employment Period because of physical or mental disability, accident, illness, or any other cause other than vacation or approved leave of absence, the Company may thereupon, or any time thereafter while such absence or disability still exists, terminate the employment of Executive hereunder upon ten (10) days' written notice to Executive. 4.2 In the event of the death of Executive, this Agreement shall immediately terminate on the date thereof. 4.3 If Executive materially breaches or violates any material term of his employment hereunder, or commits any criminal act or an act of dishonesty or moral turpitude, in the reasonable judgment of the Company's Board of Directors, then the Company may, in addition to other rights and remedies available at law or equity, immediately terminate this Agreement upon written notice to Executive with the date of such notice being the termination date and such termination being deemed for "cause." 4.4 In the event Executive's employment shall be terminated by reason of the provisions of Section 4.2 or 4.3, then in such event, the Company shall pay to Executive, if living, or other person or persons as Executive may from time to time designate in writing as the beneficiary of such payment a sum, equal to the basic compensation in effect at the time which such death or disability occurred, such payment to continue for three months after such death or disability. 5. DISCLOSURE OF CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE. Executive acknowledges that the Company possesses confidential information, know-how, customer lists, purchasing, merchandising and selling techniques and strategies, and other information used in its operations of which Executive will obtain knowledge, and that the Company will suffer serious and irreparable damage and harm if this confidential information were disclosed to any other party or if Executive used this information to compete against the Company. Accordingly, Executive hereby agrees that except as required by Executive's duties to the Company, Executive without the consent of the Company's Board of Directors, shall not at any time during or after the term of this contract disclose or use any secret or confidential information of the Company, including, without limitation, such business opportunities, customer lists, trade secrets, formulas, techniques and methods of which Executive shall become informed during his employment, whether learned by him as an Executive of the Company, as a member of its Board of Directors or otherwise, and whether or not developed by the Executive, unless such information shall be or become public knowledge other than as a result of the Executive's direct or indirect disclosure of the same. Executive further agrees that for a period of one year following the termination of Executive's employment, the Company, except as a result of the breach by the Company of any material term or condition hereof, Executive will not, directly or indirectly, alone or with others, individually or through or by a corporate or other business entity in which he may be interested as a partner, shareholder, joint venturer, officer or director or otherwise, engage in the United States in "any business which is competitive with that of the Company or any of its subsidiaries" as hereinafter defined, provided, however, that the foregoing shall not be deemed to prevent the ownership by Executive of up to five percent of any class of securities of any corporation which is regularly traded on any stock exchange or over-the-counter market. For the purpose of this Agreement, a business activity competitive with the business of the Company or any of its subsidiaries, shall include only (i) the operation or franchise of restaurants selling Japanese, or other oriental food, or restaurants of a type then being operated by the Company, or any of its subsidiaries; and (ii) the sale at wholesale or retail of oriental food products. 6. REIMBURSEMENT OF EXPENSES; USE OF AUTOMOBILE. 6.1. The Company shall further pay directly, or reimburse the Executive, for all other reasonable and necessary expenses and disbursements incurred by him for and on behalf of the Company in the performance of his duties during the Employment Period upon submission of vouchers or other evidence thereof in accordance with the Company's usual policies of expense reimbursement. 6.2. In addition to the reimbursement described in Section 6.1, Executive shall receive an allowance of $300.00 per month for automobile expenses, including lease costs or purchase price, gasoline, oil and garaging. 7. CHANGE IN CONTROL. 7.1. In the event at any time after the Effective Date, a majority of the Board of Directors is composed of persons who are not "Continuing Directors", as hereinafter defined, which event is defined to mean a "Change in Control", Executive shall have the option, to be exercised by written notice to the Company, to resign as an employee and terminate this Agreement, effective as of such date specified in the notice of exercise and immediately upon such termination to receive payment of a sum equal to the product of (A) the Basic Compensation in effect on the date of such termination multiplied (B) by the number of years (both full and partial) remaining in the term hereof had such termination not occurred. The payment to be made upon the exercise of the option by the Executive in accordance with the provisions of the preceding sentence is defined as the "Severance Payment". The Severance Payment shall be made to Executive not later than twenty (20) days after the date designated by the Executive as the date upon which Executive's resignation as an employee and termination of his Employment is to be effective. The Severance Payment shall constitute liquidated damages and not a penalty, and Executive shall not be obligated to seek employment to mitigate his damages; nor shall any compensation the Executive receives from any party subsequent to such termination be an offset to the amount of the Severance Payment. 7.2 "Continuing Directors" shall mean (i) the directors of the Company at the close of business on the date hereof, 2 and (ii) any person who was or is recommended to (A) succeed a Continuing Director or (B) become a director as a result of an increase in the size of the Board, in each case, by a majority of the Continuing Directors then on the Board. 7.3 If during the term hereof Executive owns any options to purchase securities of the Company which securities are publicly traded and which options were granted to him in connection with his service as an employee, officer or director of the Company, the Executive shall have the right at any time after a "Change in Control" to cause the Company to repurchase such options from him at a purchase price equal to the difference between (i) the closing price of the appropriate security of the Company (if traded on the New York or American Stock Exchange or quoted in the NASDAQ National Market) or the average between the closing bid and asked prices (if traded on the over-the-counter market) on the date immediately prior to the date on which Executive exercises such right and (ii) the exercise price of such option; provided however, that in no fiscal year of the Company shall the aggregate purchase price of such options exceed five percent (5%) of the total stockholders equity (net worth) of the Company as shown on its audited financial statements for the fiscal year immediately preceding the year in which such right is exercised. Such right shall be exercised by Executive giving the Company written notice thereof and the purchase and sale shall be consummated not more than ten (10) business days after receipt by the Company of the notice of exercise. 8. TERMINATION OF EMPLOYMENT WITHOUT CAUSE. Upon any termination of the Executive's employment without cause, the Executive shall be entitled to receive an amount computed in the same manner as the Severance Payment not later than 20 days after any such termination. This payment shall constitute liquidated damages and not a penalty, and Executive shall not be obligated to seek employment to mitigate his damages; nor shall any compensation the Executive receives from any party subsequent to such termination be an offset to the amount of such payment. 9. MISCELLANEOUS PROVISIONS. 9.1 Section headings are for convenience only and shall not be deemed to govern, limit, modify or supersede the provisions of this Agreement. 9.2 This Agreement is entered into in the State of Florida and shall be governed pursuant to the laws of the State of Florida. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, the remaining provisions hereof shall continue to be fully effective. 9.3 This Agreement contains the entire agreement of the parties regarding this subject matter. There are no contemporaneous oral agreements, and all prior understandings, agreements, negotiations and representations are merged herein. This Agreement replaces and supercedes the Prior Agreement. 9.4 This Agreement may be modified only by means of a writing signed by the party to be charged with such modification. 9.5 Notices or other communications required or permitted to be given hereunder shall be in writing and shall be deemed duly given upon receipt by the party to whom sent at the respective addresses set forth below or to such other address as any party shall hereafter designate to the other in writing delivered in accordance herewith: IF TO THE COMPANY: Benihana Inc. 8685 NW 53rd Terrace Miami, Florida 33166-0120 IF TO EXECUTIVE: Taka Yoshimoto 7010 N.W. 186th Street - #516 Miami, Florida 33015 9.6 This Agreement shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, including, without limitation, any entity that may acquire all or substantially all of the Company's assets and business or into which the Company may be consolidated or merged. This Agreement may not be assigned by Executive. 9.7 This Agreement may be executed in separate counterparts, each of which shall constitute the original hereof. [SIGNATURE PAGE FOLLOWS] 3 IN WITNESS WHEREOF, the parties have set their hands as of the date first above written. BENIHANA INC. By: /S/ JOEL A. SCHWARTZ -------------------- Name: Joel A. Schwarts Title: President /S/ TAKA YOSHIMOTO -------------------------- Taka Yoshimoto 4 EX-13.1 3 ex13-1.txt EXHIBIT 13.1 EXHIBIT 13.01 SELECTED FINANCIAL DATA The following table sets forth, for the periods indicated, selected consolidated financial data that has been derived from our audited Consolidated Financial Statements. The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
FISCAL YEARS ENDED March 26, March 27, March 28, March 30, March 31, 2006 2005 2004 2003 2002 ---- ---- ---- ---- ---- (53 wk yr) (In thousands, except per share information) CONSOLIDATED STATEMENTS OF EARNINGS DATA: Total revenues $245,553 $218,331 $202,963 $189,244 $171,507 Cost of food and beverage sales 59,014 53,372 51,437 46,182 42,754 Restaurant operating expenses 139,433 126,825 118,183 112,050 99,964 Restaurant opening costs 1,270 1,304 2,088 501 1,281 Marketing, general and administrative expenses 22,693 20,939 16,362 15,512 13,373 Impairment charge - 2,668 - - 438 Interest (income) expense, net (88) 298 457 528 990 Income before income taxes and minority interest 23,231 12,925 14,436 14,471 12,707 Income tax provision 8,491 4,520 4,821 4,725 3,964 Income before minority interest 14,740 8,405 9,615 9,746 8,743 Minority interest 178 585 643 477 100 Net income 14,562 7,820 8,972 9,269 8,643 Basic earnings per share (1) 1.40 .81 1.01 1.06 1.14 Diluted earnings per share (1) 1.36 .77 .98 .99 1.09 CONSOLIDATED BALANCE SHEET DATA: Total assets $191,516 $154,254 $142,643 $129,759 $99,444 Long-term debt including current maturities 6,666 10,000 21,500 22,000 6,000 Stockholders' equity 125,262 103,207 95,045 83,713 71,999 OTHER FINANCIAL DATA: Capital expenditures $25,834 $22,446 $22,950 $27,418 $13,944
(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. MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OUR BUSINESS We are one of the largest chains of Asian restaurants in the United States. We have operated "Benihana" teppanyaki-style Japanese restaurants in the United States for over 40 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 chef on a steel grill which forms a part of the table at which the food is served. We also operate other restaurant concepts offering Asian, predominately sushi, entrees. Our Haru concept offers an extensive menu of Japanese fusion dishes in an urban atmosphere, as well as catering to customers seeking take-out or delivery of their meals. In addition to traditional, high quality sushi and sashimi creations, Haru offers raw bar items and Japanese cuisine. We believe that Haru is well situated for densely populated cities with nearby shopping, office and tourist areas. Our RA Sushi concept offers sushi and a full menu of Pacific-Rim dishes in a high-energy environment featuring upbeat design elements and contemporary music. RA Sushi caters to a younger demographic and we believe that it is highly suitable for a variety of real estate options including life-style centers, shopping centers and malls. At March 26, 2006 we: o owned and operated 56 Benihana teppanyaki-style Japanese dinnerhouse restaurants, o franchised 21 additional Benihana restaurants, o owned and operated seven Haru restaurants, o owned and operated nine RA Sushi restaurants, and o owned and operated one Doraku restaurant in Miami Beach, Florida, which was sold subsequent to year end. SUMMARY OF RESULTS Summary highlights of our fiscal 2006 year compared to the previous year: o the fourteenth consecutive year of total sales increases, o opened a new Benihana teppanyaki-style restaurant in Tucson, Arizona, o opened a new RA Sushi restaurant in Houston, Texas, and o opened a new Haru restaurant in Philadelphia, Pennsylvania. OUTLOOK In fiscal 2006, we opened one teppanyaki restaurant, one Haru restaurant and one RA Sushi restaurant. 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. We believe that total revenues will also increase during fiscal 2007 from the planned openings of two new teppanyaki restaurants in Coral Gables and Miramar, Florida; and four new RA Sushi restaurants in Palm Beach Gardens, Florida, Glenview, Illinois, Torrance, California and Corona, California. We will, however, have to contend with lost sales due to our renovation and revitalization program, as well as lost sales from sold units. We have undertaken a design initiative to develop a prototype Benihana teppanyaki restaurant to improve the unit-level economics while shortening construction time and improving decor. The restaurant in Miramar, Florida, which opened during June 2006, is the first restaurant to feature the new prototype design. Under a renovation program commenced during 2005, we are also using many of the design elements of the new prototype to refurbish our older teppanyaki restaurant units. During fiscal 2006, management made a strategic decision to accelerate the renovation and revitalization program. We are committed to revitalizing our 40-plus year old Benihana teppanyaki concept for a new generation, while simultaneously generating a solid return on invested capital for our shareholders. The new design reflects the cutting edge of contemporary dining and entertainment, and places the customer at the center of the Benihana experience through the visual impact of the exterior, a vibrant waiting area, and a more dramatic stage setting for our legendary Benihana Chefs. During fiscal 2006, our restaurant in Short Hills, New Jersey was the first teppanyaki to be retrofitted with the new design elements. We plan to refurbish approximately 20-25 of our older teppanyaki restaurants over a thirty month timeframe. Management is pleased with the initial impact that this enhanced atmosphere has had on sales at the Short Hills location. While it is still early in the renovation program, management anticipates similar results at our Memphis and Cleveland restaurants, which have recently re-opened after similar renovations were completed in May 2006. We believe that we will complete the renovation of eight restaurants in fiscal 2007 and have an additional three in progress by the end of the fiscal year. By beginning the older Benihana teppanyaki units now, we are opportunistically building a stronger foundation for our core brand amid 2 a growing American appetite for Asian cuisine. As we roll out the new design over fiscal 2007, we will be contending with 175-200 lost restaurant operating weeks, $1.5-$1.8 million in charges related to shortening the useful lives of restaurant assets, as well as ongoing expenditures for those locations under construction, in addition to the capital expenditures of the program, which we currently estimate to average approximately $2.0 million per unit. Together, these factors will have an impact on our overall earnings by $0.33-$0.39 per diluted share for fiscal 2007. We believe that once the renovated restaurants re-open they will mitigate the gross cost of the program with higher sales and operating profits. However, we believe the long-term benefits of the revitalization initiative far outweigh the costs. The program will enhance our leadership position as the premier choice for Japanese-style dining The restaurant industry is a highly competitive business, which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. Operating margins for the restaurant industry are susceptible to fluctuations in prices of commodities, which include beef, chicken and seafood as well as other items necessary to operate, such as electricity or other energy supplies. Additionally, the restaurant industry is characterized by a significant initial capital investment, coupled with high labor costs. Our management is focused on monitoring these costs and increasing same store sales to continue to raise restaurant operating profit in existing restaurants as well as new restaurants. Our expansion plans take into account these operational factors and investment costs to generate sustainable operating results and achieve acceptable returns of investment from each of our restaurant concepts. 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 restaurants in operation, the number of patrons that visit our restaurants and franchisees' restaurants and the average per person guest check amounts. The following table shows revenues and percentage changes for the past three years: (Dollar amounts are expressed in thousands)
Fiscal year ended ----------------------------------------------------------------------- 2006 2005 2004 ----------------------------------------------------------------------- Percentage Percentage Percentage change change change from 2005 from 2004 from 2003 -------------------------------------------------------------------------------------------------- Restaurant sales $244,032 12.6% $216,756 7.7% $201,335 7.1% Franchise fees and royalties 1,521 (3.4%) 1,575 (3.3%) 1,628 22.3% -------------------------------------------------------------------------------------------------- Total revenues $245,553 12.5% $218,331 7.6% $202,963 7.2% ==================================================================================================
The table below shows the amount of the changes in restaurant sales and the nature of the changes. (Amounts are expressed in thousands)
Fiscal year ended ---------------------------------------- 2006 2005 2004 --------------------------------------------------------------------------------------------------- Increase in sales from restaurants opened or owned longer than one year $18,438 $10,139 $ 211 Increase from restaurants opened less than one year 6,912 11,652 7,062 Increase from acquired restaurants owned less than one year 3,441 83 7,748 Increase (decrease) from sales at existing units while not comparable due to remodeling closures 1,392 (3,370) 497 Decrease in sales due to units permanently closed or sold (2,907) (3,083) (2,096) ---------------------------------------- Amount of increase from prior year $27,276 $15,421 $13,422 ========================================
In addition to our Benihana teppanyaki restaurants, we have other concepts that feature sushi along with other predominately Asian menu choices. Our 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 average unit sales volumes from take-out and delivery and as a result of customer satisfaction and the high population density that comprises 3 the concept's primary market, New York City. Approximately 37% 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 contemporary music. RA Sushi's beverage sales represent approximately 33% 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 we believe can succeed in larger markets. The Company's sole Doraku restaurant offered sushi and other Japanese dishes. Subsequent to the end of fiscal 2006, the Company sold its Doraku restaurant. Restaurant sales for each of our restaurant concepts are shown in the table below (amounts are expressed in thousands): Fiscal year ended ---------------------------------------------- 2006 2005 2004 ------------------------------------------------------------------------------ Benihana $189,796 $175,045 $166,452 Haru 27,662 22,785 21,871 RA Sushi 24,620 17,334 11,574 Doraku 1,954 1,592 1,438 ---------------------------------------------- Total $244,032 $216,756 $201,335 ============================================== 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 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. 2006 COMPARED TO 2005 Revenues increased 12.5% in fiscal 2006 when compared to fiscal 2005. Restaurant sales increased $27.3 million in fiscal 2006 when compared to fiscal 2005. The increase was mainly attributable to increases in sales from restaurants opened longer than one year of $18.4 million, sales from new or acquired restaurants of $10.4 million, and a net increase of $1.4 million in sales from restaurants closed for remodeling offset by $2.9 million decrease for restaurants permanently closed. BENIHANA - Sales for the Benihana teppanyaki restaurants increased $14.8 million in fiscal 2006 compared to fiscal 2005. The increase is attributable to increases in sales from restaurants opened longer than one year of $12.2 million and from sales of new or acquired restaurants prior to becoming comparable restaurant units of $4.1 million. Sales were positively impacted by $1.4 million due to the timing of temporary closures during fiscal 2006 when compared to fiscal 2005. These increases were offset by sales reductions attributable to permanent restaurant closures. Two restaurants were closed during fiscal 2005 as a result of lease expirations and one unit was sold to a franchisee during fiscal 2006. The increase in sales from restaurants opened longer than one year benefited from a 2-3% menu price increase initiated during the second quarter of fiscal 2005. Additionally, guest counts increased 4.6% to 7.6 million guests in fiscal 2006 from fiscal 2005. Comparable restaurant sales growth for teppanyaki restaurants opened longer than one year increased 7.2%. The average per person guest check amount was $24.96 in fiscal 2006 compared to $24.15 in fiscal 2005, representing a 3.4% increase. Guest counts for teppanyaki restaurants opened longer than one year increased by 4.2%. Sales from new or acquired restaurants were mainly attributable to the Carlsbad, California restaurant which opened in June 2005 and the Anchorage, Alaska restaurant and the Tucson, Arizona restaurant, which were acquired in March 2005 and November 2005, respectively. We closed two teppanyaki restaurants in fiscal 2005, after their leases expired. One restaurant was located in Kendall, a suburb of Miami, Florida and the other was located in New York City. The Kendall restaurant will be replaced by the Coral Gables, Florida restaurant expected to open in fiscal 2007. We have no plans to replace the New York City restaurant. During fiscal 2006, we sold the Monterey, California restaurant to a franchisee. HARU - Sales for the Haru restaurants increased $4.9 million in fiscal 2006 compared to fiscal 2005. The increase is attributable to increases in sales from restaurants opened longer than one year of $645,000 and from sales of $4,232,000 from two new Haru restaurants, one restaurant located in Philadelphia, Pennsylvania, which opened during fiscal 2006, and the other in Manhattan located in Gramercy Park, which opened during fiscal 2005. Comparable restaurant sales growth for the Haru restaurants increased 2.8% from fiscal 2005. The average per person guest check amount was $29.36 in fiscal 2006 compared to $27.73 in fiscal 2005, representing a 5.9% increase. The increase in average per person guest checks, however, was offset by a decrease in traffic at restaurants opened longer than one year totaling 3.2%. 4 RA SUSHI - Sales for the RA Sushi restaurants increased $7.3 million in fiscal 2006 compared to fiscal 2005. The increase is attributable to increases in sales from restaurants opened longer than one year of $5.2 million and from sales of new restaurants of $2.1 million. As a result, during fiscal 2006, total traffic increased by 39.8%. Comparable restaurant sales growth for the RA Sushi restaurants was 29.9% for fiscal 2006 compared to fiscal 2005. The average per person guest check amount was $20.51 in fiscal 2006 compared to $20.19 in fiscal 2005, representing an increase of 1.6%. Additionally, traffic at restaurants opened longer than one year increased by 24.2% between fiscal years. Sales from new restaurants were attributable to the opening of a RA Sushi restaurant in Houston, Texas in February 2006 and the restaurant in Las Vegas, Nevada, which opened in October 2004. Franchise fees and royalties decreased slightly in fiscal 2006 when compared to fiscal 2005. There was a net decrease of one restaurant in the franchise portfolio. The net decrease reflected one new opening offset by the closure of two franchise locations. 2005 COMPARED TO 2004 Revenues increased 7.6% in fiscal 2005 when compared to fiscal 2004. Restaurant sales increased $15.4 million in fiscal 2005 when compared to fiscal 2004. The increase was mainly attributable to sales from new restaurants of $11.7 million and from increases in sales from restaurants opened longer than one year of $10.1 million offset by $3.4 million for restaurants temporarily closed for remodeling and $3.1 million for restaurants permanently closed. BENIHANA - Sales for the Benihana teppanyaki restaurants increased $8.6 million in fiscal 2005 compared to fiscal 2004. The increase is attributable to increases in sales from restaurants opened longer than one year of $8.0 million and from sales from new restaurants prior to becoming comparable restaurant units of $7.1 million offset by sales reductions attributable to two permanent restaurant closures in fiscal 2005 as a result of lease expirations and sales reductions attributable to two temporary restaurant closures due to major refurbishings. The increase in sales from restaurants opened longer than one year is a result of a 2-3% menu price increase instituted during the second quarter of fiscal 2005. Additionally, guest counts increased 2.9% to 7 million guests in fiscal 2005 from fiscal 2004. Comparable restaurant sales growth for teppanyaki restaurants opened longer than one year increased 5.0%. The average per person guest check amount was $24.15 in fiscal 2005 compared to $23.61 in fiscal 2004. Sales from new restaurants were mainly attributable to the Carlsbad, California restaurant which opened in June 2005. During fiscal 2005, we temporarily closed two restaurants; the San Francisco, California and Manhasset, New York restaurants for major refurbishing with a negative impact on sales of $3.4 million. We closed two teppanyaki restaurants in fiscal 2005; one in Kendall a suburb of Miami, Florida and one in New York City after their leases expired. The Kendall restaurant will be replaced by the Coral Gables, Florida restaurant expected to open in fiscal 2007. We have no plans to replace the New York City restaurant. HARU - Sales for the Haru restaurants increased $914,000 in fiscal 2005 compared to fiscal 2004. The increase is attributable to increases in sales from restaurants opened longer than one year of $545,000 and from sales of $369,000 from a new restaurant located in the Gramercy Park section of Manhattan. The increase from restaurants opened longer than one year was a result of increased traffic of 1.7%. In addition, take-out and delivery sales increased by 4.7% compared to the prior year. Comparable restaurant sales growth for the Haru restaurants increased 2.5% from fiscal 2004. The average per person guest check amount was $27.73 in fiscal 2005 compared to $27.15 in fiscal 2004. RA SUSHI - Sales for the RA Sushi restaurants increased $5.8 million in fiscal 2005 compared to fiscal 2004. The increase is attributable to increases in sales from restaurants opened longer than one year of $1.5 million and from sales of new restaurants of $4.3 million. The increase from restaurants opened longer than one year is a result of increased traffic of 8.8% and from the maturation of recently opened restaurants in new markets. Comparable restaurant sales growth for the RA Sushi restaurants was 12.8% for fiscal 2005 compared to fiscal 2004. The average per person guest check amount was $20.19 in fiscal 2005 compared to $19.06 in fiscal 2004. Sales from new restaurants was attributable to the opening of a RA Sushi restaurant in Las Vegas, Nevada in October 2004 and from three other RA Sushi restaurants opened in the latter part of fiscal 2004. Franchise fees and royalties decreased slightly in fiscal 2005 when compared to fiscal 2004. There were no new franchised locations opened during fiscal 2005. OPERATING COSTS AND EXPENSES Cost of restaurant food and beverages sold represents the direct cost of the ingredients for the prepared food and beverages sold. Restaurant operating expenses consist of direct and indirect labor, occupancy costs, advertising and other costs that are directly attributed to each restaurant location. Restaurant opening costs include rent paid during the development period, as well as labor, training expenses and certain other pre-opening charges which are expensed as incurred. 5 Operating costs and expenses are largely dependent on the number of customers that visit our restaurants and the cost of commodities, 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 operating costs. Expenses are additionally dependent upon average wage rates, marketing costs and the costs of administering restaurant operations. 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 ----------------------------------------- 2006 2005 2004 ------------- ------------- ------------- COST AS A PERCENTAGE OF RESTAURANT SALES: Cost of food and beverage sales 24.2% 24.6% 25.5% Restaurant operating expenses 57.1% 58.5% 58.7% Restaurant opening costs .5% .6% 1.0% Marketing, general and administrative expenses 9.3% 9.7% 8.1% AMOUNT OF INCREASE (DECREASE) FROM PRIOR YEAR: Cost of food and beverage sales $ 5,642 $ 1,935 $ 5,255 Restaurant operating expenses 12,608 8,642 6,133 Restaurant opening costs (34) (784) 1,587 Marketing, general and administrative expenses 1,754 4,577 850 Interest (income) expense, net (386) (159) (71) PERCENTAGE INCREASE (DECREASE) FROM PRIOR YEAR: Cost of food and beverage sales 10.6% 3.8% 11.4% Restaurant operating expenses 9.9% 7.3% 5.5% Restaurant opening costs (2.6%) (37.6%) 316.8% Marketing, general and administrative expenses 8.4% 28.0% 5.5% Interest (income) expense, net (129.5%) (34.8%) (13.4%)
2006 COMPARED TO 2005 Cost of food and beverage sales increased in absolute amount but decreased when expressed as a percentage of restaurant sales in fiscal 2006 when compared to fiscal 2005. The increase in absolute amount is directly attributable to the increase in restaurant sales. The decrease when expressed as a percentage of sales during the current fiscal year can be attributed to menu price increases taken during the prior year's second fiscal quarter coupled with relatively stable commodity prices. Restaurant operating expenses increased in absolute amount but decreased when expressed as a percentage of restaurant sales in fiscal 2006 when compared to fiscal 2005. The increase in absolute amount was primarily attributable to increases in variable costs directly related to restaurant sales and new restaurant units. Also, the Company recognized additional depreciation expense totaling approximately $1.1 million during fiscal 2006, which resulted from the Company reevaluating the remaining useful lives of assets at restaurants to be renovated as part of its renovation program. The decrease when expressed as a percentage of sales was primarily attributable to gains in labor productivity in fiscal 2006 when compared to fiscal 2005. Restaurant opening expenses decreased slightly in absolute amount and when expressed as a percentage of restaurant sales in fiscal 2006. A comparable number of restaurants were under active development in fiscal 2006 compared to fiscal 2005. Marketing, general and administrative expenses increased in absolute amount but decreased slightly when expressed as a percentage of restaurant sales in fiscal 2006 when compared to fiscal 2005. The increase in absolute amount is primarily attributable to increased administration headcount. Additional corporate personnel have been hired to accommodate the Company's growth plans and renovation program. The Company's expansion and renovation programs have also resulted in increased travel expenses between the corporate office and restaurant locations. Advertising and promotional costs have also increased during fiscal 2006 as a result of increased advertising related to new store openings and entrance into new markets. The Company did realize a decrease in professional fees during fiscal 2006 attributable to Benihana of Tokyo, Inc. litigation fees primarily incurred during fiscal 2005, as the trial was held during fiscal 2005. This decrease was partially offset by increased costs associated with professional fees incurred by the Company in order to remediate its material weakness identified during fiscal 2005. 6 Interest (income) expense, net, decreased in fiscal 2006 when compared to fiscal 2005. The decrease in expense was a result of a decrease in the average outstanding bank debt in fiscal 2006 compared to fiscal 2005 offset by increasing interest rates between fiscal years. Additionally, the Company's invested cash balances were higher during fiscal 2006 due to the completion of the second tranche of the Series B Preferred Stock sale during the current fiscal year, as well as greater cash provided by operating activities than cash used in investing activities during 2006, which resulted in increased interest income. Our effective tax rate was 36.6% for fiscal 2006 compared to 35.0% for fiscal 2005. The increase was a direct result of increasing marginal tax rates caused by increased sales, as well as sales and profitability increasing at a greater rate than tax credits earned during the current year. Net income for fiscal 2006 was $14.6 million, an increase of 86.2% over net income of $7.8 million in fiscal 2005. Basic earnings per common share increased to $1.40 for fiscal 2006 from basic earnings per share of $.81 for fiscal 2005. Basic average weighted shares outstanding increased by approximately 210,000 shares to 9,364,000 shares at March 26, 2006 from 9,154,000 shares at March 27, 2005. Diluted earnings per common share increased to $1.36 for fiscal 2006 from diluted earnings per common share of $.77 in fiscal 2005. Average diluted weighted shares outstanding increased by approximately 524,000 shares to 10,671,000 shares at March 26, 2006 from 10,147,000 shares at March 27, 2005. The increase in both basic and diluted average weighted shares outstanding during fiscal 2006 compared to fiscal 2005 was due to the issuance of shares for stock option exercises and the issuance of convertible preferred stock in fiscal 2006 and 2005. 2005 COMPARED TO 2004 During fiscal 2005, an impairment charge of $2,668,000 was recorded ($0.16 per diluted share net of income taxes) and is related to the write-down of equipment and leasehold improvements to estimated fair market value at four existing restaurants: the Georgetown and Monterey Benihana teppanyaki restaurants, the Doraku restaurant and the RA Sushi restaurant located in Chicago. We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value amount of an asset or group of assets may not be recoverable. We consider a history of relatively small operating gains or consistent and significant operating losses to be a primary indicator of potential asset impairment. Assets are grouped and evaluated for impairment at the lowest levels for which there are identifiable cash flows, primarily the individual restaurants. A restaurant is deemed to be impaired if a forecast of future operating cash flows directly related to the restaurant is less than its carrying amount. While each of the four restaurants was cash flow positive, the amount of projected cash flows was insufficient to cover our investments in them. If a restaurant is determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. Fair value is an estimate based on the best information available, including multiples of cash flow derived from recent purchases and sales in the restaurant industry. Cost of food and beverage sales increased in absolute amount and decreased when expressed as a percentage of restaurant sales in fiscal 2005 when compared to fiscal 2004. The increase in absolute amount is attributable to the increase in sales. Beef and lobster costs, which comprise approximately 40% and 15%, respectively, of our total commodity costs slightly increased in fiscal 2005 compared to fiscal 2004. The decrease when expressed as a percentage of sales is attributable to menu price increases coupled with stable commodity costs in fiscal 2005 compared to fiscal 2004. Restaurant operating expenses increased in absolute amount but decreased slightly when expressed as a percentage of restaurant sales in fiscal 2005 when compared to fiscal 2004. The increase in absolute amount was mainly attributable to the aforementioned increase in sales. The decrease when expressed as a percentage of sales was attributable to continued gains in labor productivity in fiscal 2005 when compared to fiscal 2004. Restaurant opening expenses decreased in absolute amount and when expressed as a percentage of restaurant sales in fiscal 2005. The decrease is attributable to fewer restaurants under active development in fiscal 2005 compared to fiscal 2004. Marketing, general and administrative expenses increased in absolute amount and when expressed as a percentage of restaurant sales in fiscal 2005 when compared to fiscal 2004. The increase in absolute amount is attributable to increased administration headcount and professional fees. Additional corporate personnel were hired to accommodate the Company's growth plans. The increase in professional fees is attributable to the Benihana of Tokyo, Inc. litigation of $2,100,000 and to professional fees relating to Sarbanes-Oxley Section 404 compliance. Interest expense, net, decreased in fiscal 2005 when compared to fiscal 2004. The decrease was a result of a decrease in the average outstanding bank debt in fiscal 2005 compared to fiscal 2004. Our effective tax rate was 35.0% for fiscal 2005 compared to 33.4% for fiscal 2004. The increase was primarily a result of increased state income taxes and changes in estimates made in the computation of the current year tax provision. 7 Net income for fiscal 2005 was $7.8 million, a decrease of 12.8% over net income of approximately $9.0 million in fiscal 2004. Basic earnings per common share decreased to $.81 for fiscal 2005 from basic earnings per share of $1.01 for fiscal 2004. Basic average weighted shares outstanding increased by approximately 267,000 shares to 9,154,000 shares at March 27, 2005 from 8,887,000 shares at March 28, 2004. Diluted earnings per common share decreased to $.77 for fiscal 2005 from diluted earnings per common share of $.98 in fiscal 2004. Average diluted weighted shares outstanding increased by approximately 992,000 shares to 10,147,000 shares at March 27, 2005 from 9,155,000 shares at March 28, 2004. The increase in both basic and diluted average weighted shares outstanding during fiscal 2005 compared to fiscal 2004 was due to the issuance of shares for stock option exercises and the issuance of convertible preferred stock in fiscal 2005. OUR FINANCIAL RESOURCES Cash flow from operations has historically been the primary source to fund our capital expenditures. Since the Company has accelerated its building program, the Company will be relying more upon financing obtained from financial institutions. The Company has financed acquisitions principally through the use of borrowed funds. The Company presently has borrowings from Wachovia Bank, National Association ("Wachovia") under a term loan. At March 26, 2006, the Company had $6,666,000 outstanding under the term loan which is payable in quarterly installments of $833,333 until the term loan matures in December 2007. Additionally, the Company maintains 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 26, 2006, the Company had a $2,306,000 letter of credit outstanding against the credit facility in connection with its workers compensation insurance program. Accordingly, at March 26, 2006, the Company had $12,694,000 available for borrowing under the line of credit facility, as no amounts were outstanding. The interest rate at March 26, 2006 of both the line of credit and the term loan was 5.53%. The Company has 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 of the sum of earnings before interest, taxes, depreciation and amortization, as defined in the agreement, to our indebtedness. The loan agreements limit capital expenditures to certain amounts, require that the Company maintain certain financial ratios and profitability amounts and limit the payment of cash dividends. On July 1, 2004, the Company received net proceeds of $9,253,000, after transaction costs, representing the funding of the first $10,000,000 tranche of its sale of $20,000,000 aggregate principal amount of Series B Convertible Preferred Stock ("Series B Preferred Stock") to BFC Financial Corporation ("BFC"). In connection with the first tranche, the Company issued and sold 400,000 shares of its Series B Preferred Stock. John E. Abdo, a director of the Company, is a director and Vice Chairman of the Board of BFC and is a significant shareholder of BFC. On August 4, 2005, the Company completed the second and final tranche consisting of $10,000,000 aggregate principal amount of its Series B Preferred Stock sold to BFC. In connection with the second tranche, the Company issued and sold 400,000 shares of its Series B Preferred Stock. The Company received net proceeds of $9,884,000, after transaction costs, from the sale. The Series B Preferred Stock has a liquidation preference of $20,000,000, or $25.00 per share, (subject to anti-dilution provisions). The Series B Preferred Stock is convertible into Common Stock of the Company at a conversion price of $19.00 per share, that is 1.32 shares of Common Stock for each share of Series B Preferred Stock (subject to anti-dilution provisions), carries a dividend at the annual rate of $1.25 per share (or 5% of the purchase price) payable in cash or additional Series B Preferred Stock, and votes 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 Stock. In addition, under certain circumstances, the approval of a majority of the Series B Preferred Stock is required for certain events outside the ordinary course of business, principally acquisitions or disposition of assets having a value in excess of 25% of the total consolidated assets of the Company. The Company pays quarterly dividends on the Series B Preferred Stock, and at March 26, 2006, accrued but unpaid dividends on the Series B Preferred Stock totaled $233,000. The Company is obligated to redeem the Series B Preferred Stock at its original issue price on July 2, 2014, which date may be extended by the holders of a majority of the then-outstanding shares of Series B Preferred Stock to a date no later than July 2, 2024. The Company may pay the redemption in cash or, at its option, in shares of Common Stock valued at then-current market prices unless the aggregate market value of the Company's Common Stock and any other common equity is below $75.0 million. In addition, the Series B Preferred Stock may, at the Company's option, be redeemed in cash at any time beginning three years from the date of issue if the volume-weighted average price of the Common Stock exceeds $38.00 per share for sixty consecutive trading days. The holders of a majority of the outstanding Series B Preferred Stock are entitled to nominate one individual to the Company's board of directors. In the event that dividends are not paid for two consecutive quarters, the holders of the majority of the Series B Preferred Stock are entitled to elect one additional director. As further discussed in Item 3. Legal Proceedings, the sale of the Series B Preferred Stock is the subject of pending litigation. While the Delaware Court of Chancery (the "Chancery Court") has rejected all claims asserted against the Company and certain directors, the decision has been appealed. The Company and its Board of Directors believe 8 that the financing was and is in the best interests of the Company and all of its shareholders, that there is no merit to the pending legal action, and intend to continue to vigorously defend and oppose the action. The appeal has been briefed and argued to the Delaware Supreme Court, and the parties are awaiting a decision from that court. The Company has not recorded a liability for this lawsuit, but legal expenses are being incurred and recognized to defend the Company and members of the Board of Directors. There can be no assurance that an adverse result from an appeal that overturns the Chancery Court's ruling will not have a material adverse effect on the Company and its financial position. The Company has entered into supply agreements for the purchase of beef, chicken and seafood, in the normal course of business, at fixed prices for twelve- and six-month terms, respectively, beginning on January 1, 2006. These supply agreements will eliminate volatility in the cost of the commodities over the terms of the agreements. These supply agreements are not considered derivative contracts. Since restaurant businesses do not have large amounts of inventory and accounts receivable, there is generally no need to finance such items. As a result, many restaurant businesses, including our own, operate with negative working capital. The following table summarizes the sources and uses of cash and cash equivalents (in thousands): Fiscal year ended ------------------------ 2006 2005 ------------------------ Cash provided by operating activities $ 29,440 $ 25,414 Cash used in investing activities (25,119) (22,172) Cash provided by (used in) financing activities 11,539 (2,160) ------------------------ Increase in cash $ 15,860 $ 1,082 ======================== We have undertaken a design initiative to develop a prototype Benihana teppanyaki restaurant to improve the unit-level economics while shortening construction time and improving decor. The restaurant in Miramar, Florida, which opened during June 2006, is the first restaurant to feature the new prototype design. Under a renovation program commenced during 2005, we are also using many of the design elements of the new prototype to refurbish our older teppanyaki restaurant units. During fiscal 2006, management made a strategic decision to accelerate the renovation and revitalization program. We are committed to revitalizing our 40-plus year old Benihana teppanyaki concept for a new generation, while simultaneously generating a solid return on invested capital for our shareholders. The new design reflects the cutting edge of contemporary dining and entertainment, and places the customer at the center of the Benihana experience through the visual impact of the exterior, a vibrant waiting area, and a more dramatic stage setting for our legendary Benihana Chefs. We plan to refurbish approximately 20-25 of our older teppanyaki restaurants over a thirty month timeframe. By beginning the transformation of our 20-25 older Benihana teppanyaki units now, we are opportunistically building a stronger foundation for our core brand amid a growing American appetite for Asian cuisine. During fiscal 2006, our restaurant in Short Hills, New Jersey was the first teppanyaki to be retrofitted with the new design elements. Management is pleased with the initial impact that this enhanced atmosphere has had on sales at the Short Hills location. While it is still early in the renovation program, management anticipates similar results at our Memphis and Cleveland restaurants, which have recently re-opened after renovations were completed in May 2006. We believe that we will complete the renovation of eight restaurants in fiscal 2007 and have an additional three in progress by the end of the fiscal year. As we roll out the new design over fiscal 2007, we currently estimate the capital expenditures of the program to average approximately $2.0 million per unit. We believe the long-term benefits of the revitalization initiative far outweigh the costs. The program will enhance our leadership position as the premier choice for Japanese-style dining. Other future capital requirements depend on numerous factors, including market acceptance of products, the timing and rate of expansion of the business, acquisitions, and other factors. The Company has experienced increases in its expenditures commensurate with growth in its operations and management anticipates that expenditures will continue to increase in the foreseeable future. The Company currently has ten restaurants under development, consisting of four Benihana teppanyaki restaurants, five RA Sushi restaurants, and one Haru restaurant. In addition to the renovation program, the Company will use its capital resources to settle the outstanding liability incurred when the Minority Stockholders exercised their put option in Haru Holding Corp. On July 1, 2005, the Minority Stockholders exercised the put option to sell their respective shares to the Company. Currently, there is a dispute between the Company and the former Minority Stockholders concerning the price at which the former Minority Stockholders exercised their put option to sell the remaining interest in Haru to the Company. The Company believes that the proper application of the put option price formula would result in a payment to the former Minority Stockholders of approximately $3.7 million. Under the former Minority Stockholders' interpretation of the put option price formula, they claim to be entitled to a greater payment. There can be no assurance that this matter will not result in a legal proceeding or that the Company's interpretation of the put option price formula will prevail in any such proceeding. The Company has recorded a $3.7 million liability for the payment of the put option. 9 Management believes that the Company's cash from operations and the funds available under the term loan and line of credit and the proceeds from the issuances of the Series B Preferred Stock will provide sufficient capital to fund operations, the restaurant renovation program and restaurant expansion for at least the next twelve months. Contractual obligations and commitments (in thousands):
- -------------------------------------------------------------------------------------------------------------------- Total 2007 2008 2009 2010 2011 Thereafter - -------------------------------------------------------------------------------------------------------------------- Long-term debt obligations(1) $ 6,666 $ 4,166 $ 2,500 - - - - Operating lease obligations 148,487 11,013 10,968 11,016 10,910 10,860 93,720 RA Sushi contingent payment 228 228 - - - - - Haru put option 3,718 3,718 - - - - - - -------------------------------------------------------------------------------------------------------------------- Total $159,099 $19,125 $13,468 $11,016 $10,910 $10,860 $93,720 ====================================================================================================================
(1) Long-term debt obligations do not include interest. 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 ebitda has to our total indebtedness as defined in the loan agreement. Estimated interest payments are $281,000 and $75,000 for fiscal year ending 2007 and 2008, respectively. OPERATING ACTIVITIES Cash provided by operations increased during the year when compared to fiscal 2005. The increase resulted mainly from the increase in net income, adjusted for depreciation and amortization, offset by the changes in working capital during the current fiscal year when compared to the prior fiscal year. INVESTING ACTIVITIES Expenditures for property and equipment increased during fiscal 2006 when compared to the prior year. The Company continues to pursue its new construction and renovation programs. Capital expenditures are expected to increase, as the Company accelerates the pace of its programs. The Company currently has ten restaurants under development, consisting of four Benihana teppanyaki restaurants, five RA Sushi restaurants and one Haru restaurant. Additionally, during fiscal 2006, the Company acquired a teppanyaki restaurant facility in Tucson, Arizona. The purchase price, which was paid in cash, totaled $1.9 million. The restaurant facility has been converted to a Benihana restaurant. During fiscal 2006, the Company also sold a Benihana restaurant facility located in Monterey, California, to a new franchisee. The restaurant facility was sold for $522,000, of which $147,000 was paid in cash and $375,000 is payable with interest over three years. FINANCING ACTIVITIES During fiscal 2006, there were stock option exercises with cash proceeds to the Company of $5,720,000 as compared to $612,000 in the prior year. Our total indebtedness decreased by $3,360,000 during fiscal 2006. We paid down $3,334,000 of the term loan and paid $26,000 under leases that are considered to be capital in nature. Additionally, as discussed above, on August 4, 2005, the Company completed the take down of the second and final tranche consisting of $10,000,000 aggregate principal amount of its Series B Preferred Stock sold to BFC. In connection with the second tranche, the Company issued and sold 400,000 shares of its Series B Preferred Stock. The Company received net proceeds of $9,884,000, after transaction costs, from the sale. 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 recent 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. 10 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 libor. 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 have no derivative agreements as of March 26, 2006. 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. We have, however, entered into supply agreements for the purchase of beef, chicken and seafood, in the normal course of business, at fixed prices for twelve- and six-month terms, respectively, beginning on January 1, 2006. These supply agreements will eliminate volatility in the cost of the commodities over the terms of the agreements. These supply agreements are not considered derivative contracts. SEASONALITY OF OUR BUSINESS We have a 52/53-week fiscal year. Our fiscal year ends on the Sunday within the dates of March 26 through April 1. We divide the fiscal year into 13 four-week periods. Because of the odd number of periods, our first fiscal quarter consists of 4 periods totaling 16 weeks and each of the remaining three quarters consists of 3 periods totaling 12 weeks each. In the event of a 53-week year, the additional week is included in the fourth quarter of the fiscal year. This operating calendar provides us a consistent number of operating days within each period, as well as ensures that certain holidays significant to our operations occur consistently within the same fiscal quarters. Because of the differences in length of fiscal quarters, however, results of operations between the first quarter and the later quarters of a fiscal year are not comparable. 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 Eve. Mother's Day falls in our first fiscal quarter, New Year's Eve in the third fiscal quarter and Valentine's Day in the fourth fiscal quarter of each year. Each of fiscal years 2006, 2005 and 2004 consisted of 52 weeks. 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. Actual amounts could differ from those estimates. (See Note 1 of Notes to Consolidated Financial Statements included in this Annual Report). 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. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation and amortization of long-lived assets are 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 and amortization 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 estimated 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. In fiscal 2005 we recorded such an impairment charge resulting in a write down of long-lived assets of approximately $2.7 million. (See Note 3 of Notes to Consolidated Financial Statements). No impairment charges were recognized during fiscal 2006 or 2004. 11 We review the recoverability of goodwill annually based primarily upon an estimation of the fair market value based upon an analysis of cash flows of the related investment assets in comparison to cash flows of similar restaurant businesses that were bought and sold within a reasonable time frame to our own evaluation. Our annual evaluation is made during the third fiscal quarter of each year. We also would make a similar evaluation whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The analysis involves judgments by management which could produce materially different results if different assumptions are used in the analysis. The Company is obligated under various lease agreements for certain restaurant facilities. For operating leases, the Company recognizes rent expense on a straight-line basis over the expected lease term. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. Under the provisions of certain of the Company's leases, there are rent holidays and/or escalations in payments over the base lease term, as well as options for renewal for additional periods. The effects of the rent holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes option periods when management determines that the Company will exercise such option periods due to the fact that the Company would incur an economic penalty for not doing so. The lease term commences on the date when the Company becomes legally obligated for the rent payments. The leasehold improvements and property held under capital leases for each restaurant facility are amortized on the straight-line method over the shorter of the estimated life of the asset or the same expected lease term used for lease accounting purposes. For each restaurant facility, the consolidated financial statements reflect the same lease term for amortizing leasehold improvements as the Company uses to determine capital versus operating lease classifications and in calculating straight-line rent expense. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sales levels will be achieved. Leasehold improvements paid for by the lessor are recorded as leasehold improvements and deferred rent. Judgments made by the Company related to the probable term for each restaurant's lease affect the classification and accounting for a lease as capital or operating, the rent holidays and/or escalations in payments that are taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant facility are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different lease term assumptions were used. 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 claims 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 12 of Notes to 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 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires compensation costs related to share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. With limited exceptions, the amount of compensation cost will be measured based on the fair market value on the grant date of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service for that award, resulting in a decrease in net earnings. As of March 27, 2006, the beginning of fiscal 2007, the Company has adopted this new standard, as amended. As permitted by SFAS 123, prior to March 27, 2006, the Company accounted for share-based payments to employees using the intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R's fair value method will impact the Company's results of operations, although it will have no impact on the Company's overall financial position. The estimated impact of adopting SFAS 123R for fiscal 2007, relating to prior year grants only, will be approximately $161,000, net of tax. However, had the Company adopted SFAS 123R in prior years, the impact of that standard would have approximated the impact of SFAS 123 as presented in the disclosure of pro forma net income and earnings per share in Note 1 of the consolidated financial statements. SFAS 123R also requires the benefits of tax deductions 12 in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. While the Company cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in fiscal years 2006, 2005 and 2004 for such excess tax deductions were $2,677,000, $145,000 and $162,000, respectively. 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, the possibility of an adverse outcome in the lawsuit against the Company brought by Benihana of Tokyo, Inc. or in the Company's dispute with the former Minority Stockholders of Haru Holding Corp., unstable economic and conditions in foreign countries where we franchise restaurants and other factors that we cannot presently foresee. 13 CONSOLIDATED FINANCIAL STATEMENTS BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share information)
Fiscal year ended ---------------------------------------------- March 26, March 27, March 28, 2006 2005 2004 - -------------------------------------------------------------------------------------------------------------- REVENUES Restaurant sales $ 244,032 $ 216,756 $ 201,335 Franchise fees and royalties 1,521 1,575 1,628 - -------------------------------------------------------------------------------------------------------------- Total revenues 245,553 218,331 202,963 - -------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of food and beverage sales 59,014 53,372 51,437 Restaurant operating expenses 139,433 126,825 118,183 Restaurant opening costs 1,270 1,304 2,088 Marketing, general and administrative expenses 22,693 20,939 16,362 Impairment charge - 2,668 - - -------------------------------------------------------------------------------------------------------------- Total operating expenses 222,410 205,108 188,070 - -------------------------------------------------------------------------------------------------------------- Income from operations 23,143 13,223 14,893 Interest (income) expense, net (88) 298 457 - -------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 23,231 12,925 14,436 Income tax provision 8,491 4,520 4,821 - -------------------------------------------------------------------------------------------------------------- Income before minority interest 14,740 8,405 9,615 Minority interest 178 585 643 - -------------------------------------------------------------------------------------------------------------- NET INCOME 14,562 7,820 8,972 Less: accretion of issuance costs and preferred stock dividends 1,430 422 - - -------------------------------------------------------------------------------------------------------------- Net Income attributable to common stockholders $ 13,132 $ 7,398 $ 8,972 ============================================================================================================== EARNINGS PER SHARE Basic earnings per share $ 1.40 $ .81 $ 1.01 Diluted earnings per share $ 1.36 $ .77 $ .98 ==============================================================================================================
See notes to consolidated financial statements. 14
BENIHANA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share information) March 26, March 27, 2006 2005 - ---------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19,138 $ 3,278 Receivables, net 2,437 910 Inventories 6,528 6,571 Income tax receivable 1,634 - Prepaid expenses and other current assets 1,517 1,727 Deferred income tax asset, net 805 417 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 32,059 12,903 PROPERTY AND EQUIPMENT, NET 123,578 108,132 GOODWILL 29,900 28,131 OTHER ASSETS 5,979 5,088 - ---------------------------------------------------------------------------------------------------------------- $ 191,516 $ 154,254 ================================================================================================================ LIABILITIES, MINORITY INTEREST, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,044 $ 6,414 Accrued expenses 20,821 15,667 Accrued put option liability 3,718 - Income tax payable - 1,001 Current maturity of bank debt 4,166 3,333 Current maturities of obligations under capital leases - 26 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 36,749 26,441 LONG-TERM DEBT - BANK 2,500 6,667 DEFERRED OBLIGATIONS UNDER OPERATING LEASES 7,059 6,479 DEFERRED INCOME TAX LIABILITY, NET 673 156 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 46,981 39,743 - ---------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 10, 11 AND 13) MINORITY INTEREST - 1,999 CONVERTIBLE PREFERRED STOCK - $1.00 par value; authorized - 5,000,000 shares; Series B Mandatory Redeemable Convertible Preferred Stock - authorized - 800,000 shares; issued and outstanding - 800,000 and 400,000 shares in 2006 and 2005, respectively, with a liquidation preference of $20 million plus accrued and unpaid dividends as of March 26, 2006 (Note 14) 19,273 9,305 STOCKHOLDERS' EQUITY: Common stock - $.10 par value; convertible into Class A Common stock; authorized - 12,000,000 shares; issued and outstanding - 2,649,953 and 2,975,978 shares in 2006 and 2005, respectively 265 298 Class A Common stock - $.10 par value; authorized - 20,000,000 shares; issued and outstanding - 7,111,671 and 6,198,475 shares in 2006 and 2005, respectively 711 620 Additional paid-in capital 60,393 51,528 Retained earnings 64,036 50,904 Treasury stock - 10,828 shares of Common and Class A Common stock at cost (143) (143) - ---------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 125,262 103,207 - ---------------------------------------------------------------------------------------------------------------- $ 191,516 $ 154,254 ================================================================================================================ See notes to consolidated financial statements
15 BENIHANA INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share information)
Class A Additional Total Common Common Paid-in Retained Treasury Stockholders' Stock Stock Capital Earnings Stock Equity - -------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 30, 2003 $318 $560 $48,444 $34,534 $(143) $83,713 Net income 8,972 8,972 Issuance of 207,000 shares of Class A Common stock from exercise of warrants 21 1,420 1,441 Issuance of 85,943 shares of Class A Common stock from exercise of options 8 532 540 Issuance of 30,000 shares of Common stock from exercise of options 3 214 217 Conversion of 79,500 shares of Common stock into 79,500 shares of Class A Common stock (8) 8 - Tax benefit from stock option exercises 162 162 - ----------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 28, 2004 313 597 50,772 43,506 (143) 95,045 Net income 7,820 7,820 Issuance of 71,598 shares of Class A Common stock from exercise of options 8 604 612 Conversion of 159,000 shares of Common stock into 159,000 shares of Class A Common stock (15) 15 - Issuance of 350 shares of Class A Common stock for incentive compensation 7 7 Dividends declared on Series B Preferred Stock (370) (370) Accretion of issuance costs on Series B Preferred Stock (52) (52) Tax benefit from stock option exercises 145 145 - ----------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 27, 2005 298 620 51,528 50,904 (143) 103,207 Net income 14,562 14,562 Issuance of 571,670 shares of Class A Common stock from exercise of options 57 5,532 5,589 Issuance of 15,500 shares of Common stock from exercise of options 1 130 131 Conversion of 341,526 shares of Common stock into 341,526 shares of Class A Common stock (34) 34 - Dividends declared on Series B Preferred Stock (820) (820) Accretion of issuance costs on Series B Preferred Stock (84) (84) Deemed dividend on Series B Preferred Stock beneficial conversion feature 526 (526) - Tax benefit from stock option exercises 2,677 2,677 - ----------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 26, 2006 $265 $711 $60,393 $64,036 $(143) $125,262 =======================================================================================================================
See notes to consolidated financial statements. 16
BENIHANA INC. AND SUBSIDIARIES Fiscal year ended ------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share information) March 26, March 27, March 28, 2006 2005 2004 - ------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 14,562 $ 7,820 $ 8,972 Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisitions Depreciation and amortization 11,896 9,837 8,657 Minority interest 178 585 643 Tax benefit from stock option exercises 2,677 145 162 Loss on disposal of assets 149 327 154 Deferred income taxes 129 (76) 2,265 Impairment charge - 2,668 - Issuance of Class A Common stock for incentive compensation - 7 - Change in operating assets and liabilities that provided (used) cash: Receivables (1,402) (28) (256) Inventories 22 (424) (819) Income taxes (2,635) 1,897 73 Prepaid expenses and other current assets 210 (197) (263) Other assets (1,163) (716) (59) Accounts payable 988 771 81 Accrued expenses 3,829 2,798 1,913 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 29,440 25,414 21,523 ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Expenditures for property and equipment (25,486) (18,978) (22,950) Business acquisition, net of cash acquired - (2,816) - Payment of contingent consideration on RA Sushi acquisition (348) (652) - Cash proceeds from sales of property and equipment 715 274 - Other - - (4) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (25,119) (22,172) (22,954) - ----------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Repayment of long-term debt and obligations under capital leases (3,360) (19,773) (18,270) Proceeds from issuance of Series B Preferred stock, net 9,884 9,253 - Proceeds from issuance of long-term debt - 8,000 17,400 Proceeds from issuance of Common stock and Class A Common stock from exercise of options and warrants 5,720 612 2,198 Dividends paid on preferred stock (705) (252) - - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 11,539 (2,160) 1,328 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 15,860 1,082 (103) Cash and cash equivalents, beginning of year 3,278 2,196 2,299 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 19,138 $ 3,278 $ 2,196 ================================================================================================================= SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID DURING THE FISCAL YEAR FOR: Interest $ 387 $ 386 $ 484 Income taxes $ 8,331 $ 3,380 $ 2,305 BUSINESS ACQUISITIONS, NET OF CASH ACQUIRED: Fair value of assets acquired, other than cash - $ 2,816 - =================================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES: During fiscal 2006, 2005 and 2004, the Company acquired property and equipment totaling $3,635,000, $1,083,000 and $244,000, respectively, for which cash payments had not yet been made. During fiscal 2006, 2005 and 2004, $228,000, $348,000 and $652,000 of goodwill was recorded related to contingent payments accrued for the RA Sushi acquisition, respectively. During fiscal 2006, the Company accrued $3,718,000 related to the Haru put option liability. During fiscal 2006, the Company received a note receivable for $375,000 as partial consideration for the sale of a Benihana restaurant located in Monterey, California. As of the end of fiscal years 2006, 2005 and 2004, accrued but unpaid dividends on the Series B Preferred Stock totaled $233,000, $118,000 and $-0-, respectively. See notes to consolidated financial statements. 17 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 26, 2006, MARCH 27, 2005 AND MARCH 28, 2004 - ------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS - Benihana Inc., including its majority owned subsidiaries (the "Company"), owned and operated 56 teppanyaki theme and 17 Japanese theme restaurants featuring sushi, as of March 26, 2006. The Company also has 21 franchised teppanyaki theme restaurants as of March 26, 2006. The Company has the rights to open, license and develop restaurants using the Benihana name and trademarks 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 has a 52/53-week fiscal year. The Company's fiscal year ends on the Sunday within the dates of March 26 through April 1. The Company divides the fiscal year into 13 four-week periods. Because of the odd number of periods, the Company's first fiscal quarter consists of 4 periods totaling 16 weeks and each of the remaining three quarters consists of 3 periods totaling 12 weeks each. In the event of a 53-week year, the additional week is included in the fourth quarter of the fiscal year. This operating calendar provides the Company a consistent number of operating days within each period, as well as ensures that certain holidays significant to the Company occur consistently within the same fiscal quarters. Because of the differences in length of fiscal quarters, however, results of operations between the first quarter and the later quarters of a fiscal year are not comparable. Each of fiscal years 2006, 2005 and 2004 consisted of 52 weeks. 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 amounts shown in the consolidated balance sheet as of March 27, 2005 have been reclassified to conform to the current year consolidated balance sheet presentation. Specifically, accounts payable and income tax payable have been presented as separate items in the current year presentation. Corresponding changes have been made to the consolidated statements of cash flows for fiscal 2005 and 2004. Additionally, in the accompanying consolidated statements of cash flows for fiscal 2005 and 2004, respectively, the Company has changed the classification of the following items: o The tax benefit from stock option exercises to present such as an operating activity. The Company previously presented such amount as a financing activity. o Contingent payment of $652,000 made during fiscal 2005 related to its RA Sushi acquisition as a use of cash related to investing activities in the accompanying consolidated statement of cash flows for fiscal 2005. The payment had been previously presented within the change in operating liabilities and was reducing the net cash provided by operating activities during 2005. o Additions to property and equipment for which payments had not been made as of the respective period end. These amounts were previously presented within the change in operating liabilities and as expenditures for property and equipment instead of as noncash investing activities. These changes resulted in: o a net decrease of $42,000 in fiscal 2005 and a net increase of $1,074,000 in fiscal 2004 in net cash provided by operating activities; o a net decrease of $187,000 in fiscal 2005 and a net increase of $912,000 in fiscal 2004 in net cash used in investing activities; and o an increase of $145,000 in fiscal 2005 in net cash used in financing activities and a decrease of $162,000 in fiscal 2004 in net cash provided by financing activities from amounts previously presented. 18 REVENUE RECOGNITION - RESTAURANT SALES - Revenues from food and beverage sales are recognized as products are sold. FRANCHISE FEES AND ROYALTIES - 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. Amounts receivable from third-party credit card processors are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. 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. ACCOUNTING FOR LONG-LIVED ASSETS - Property and equipment are stated at cost. 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. Rent expense incurred during the construction period is not capitalized but is charged to restaurant opening costs. The amount of interest capitalized in connection with restaurant construction was approximately $213,000 in fiscal 2006, $127,000 in fiscal 2005 and $92,000 in fiscal 2004. The Company evaluates its net investment in restaurant properties for impairment when events or changes in circumstances that indicate the carrying amounts of an asset may not be recoverable. During fiscal 2005, the Company recorded an impairment charge of $2,668,000 for the write-down to fair value of property and equipment at two teppanyaki restaurants, one RA Sushi restaurant and its sole Doraku restaurant. (See Note 3). No impairment charges were recognized during fiscal years 2006 or 2004. 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 leasehold improvements - lesser of the underlying lease terms, including renewal options, or their useful lives). Depreciation expense associated with property and equipment, including property under capital leases, totaled $11,386,000, $9,452,000, and $8,145,000, for fiscal years 2006, 2005, and 2004, respectively. During fiscal 2006, the Company incurred an incremental $1.1 million in depreciation expense related to the Company's review of estimated useful lives of assets at restaurants to be remodeled. ACCOUNTING FOR GOODWILL AND INTANGIBLES - Goodwill represents the residual purchase price after allocation of the purchase price of assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. Intangible assets deemed to have definite lives are amortized over their estimated useful lives. The Company annually reviews goodwill for recoverability based primarily on a multiple of earnings analysis comparing the fair value to the carrying value. The Company performs its annual assessment for impairment during the third quarter of its fiscal year and more frequently if impairment indicators are identified during the year. The Company reviewed goodwill for possible impairment during fiscal 2006, 2005 and 2004 and determined that there was no impairment of goodwill. The following table reflects the changes in the carrying amount of goodwill for the fiscal years 2006 and 2005 (in thousands): Balance as of March 28, 2004 $27,783 RA Sushi contingent payment 348 --------- Balance as of March 27, 2005 28,131 RA Sushi contingent payment 228 Haru put option exercise 1,541 --------- Balance as of March 26, 2006 $29,900 ========= Intangible assets consist of premiums on liquor licenses, lease acquisition costs, and capitalized computer software costs and are classified as other assets. Premiums on liquor licenses are indefinite lived intangible assets. Lease acquisition costs are amortized over the remaining life of the acquired lease. Capitalized computer software costs are amortized over three years. Amortization of intangibles totaled $438,000, $324,000 and $367,000 during fiscal years 2006, 2005 and 2004, respectively. 19 Estimated amortization expense for the five succeeding fiscal years is as follows (in thousands): Fiscal year ending: 2007 $ 382 2008 355 2009 181 2010 181 2011 180 Thereafter 583 ------- Total $ 1,862 ======= ACCOUNTING FOR LEASES - OPERATING LEASES - Rent expense for the Company's operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term, as defined in SFAS No. 13, "Accounting for Leases." The lease term begins when the Company has the right to control the use of the leased property, which is typically before rent payments are due under the terms of most of the Company's leases. The difference between rent expense and rent paid is recorded as deferred rent obligation and is included in the consolidated balance sheets. CAPITAL LEASES are recorded as an asset and an obligation is recorded at an amount equal to the present value of the minimum lease payments during the lease term. 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. SELF-INSURANCE - The Company is self-insured for certain losses related to health, general liability and workers' compensation. The Company maintains stop loss coverage with third party insurers to limit its total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed by the Company on a quarterly basis to ensure that the liability is appropriate. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted. 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. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. DERIVATIVE INSTRUMENTS - The Company does not currently utilize instruments to hedge exposure to fluctuations in variable interest rates, currency fluctuations or fluctuations in the prices of commodities used in its products. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation for employees and directors 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 does not issue stock-based compensation to non-employees. The Company has disclosed pro forma net income and earnings per share amounts using the fair value method. 20 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 26, March 27, March 28, 2006 2005 2004 -------- -------- -------- Net Income As reported $ 14,562 $ 7,820 $ 8,972 Less: Accretion of issuance costs and preferred stock dividends (1,430) (422) - -------- -------- -------- Net income attributable to common stockholders 13,132 7,398 8,972 Add: Stock-based compensation cost included in net income - 7 - Less: Total stock-based employee compensation expense determined under fair value based method for all awards 263 248 564 -------- -------- -------- Pro forma income for computation of basic 12,869 7,157 8,408 earnings per share Add: Accretion of issuance costs and preferred stock dividends 1,430 422 - -------- -------- -------- Pro forma income for computation of diluted $ 14,299 $ 7,579 $ 8,408 earnings per share ======== ======== ======== Basic earnings per share: As reported $ 1.40 $ .81 $ 1.01 ======== ======== ======== Pro forma $ 1.37 $ .78 $ .95 ======== ======== ======== Diluted earnings per share: As reported $ 1.36 $ .77 $ .98 ======== ======== ======== Pro forma $ 1.34 $ .75 $ .92 ======== ======== ========
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 4.3% for fiscal year 2006, 3.6% for fiscal year 2005 and 1.9% for fiscal year 2004, respectively, an expected life of three years, no expected dividend yield and a volatility factor of 37% for fiscal 2006, 36% for fiscal 2005 and 50% for fiscal 2004, respectively. 21 SEGMENT REPORTING - The Company accounts for its segments in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a public company report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. As of March 26, 2006, the Company operated 73 Benihana, Haru, RA Sushi and Doraku restaurants in North America as a single reporting segment. The restaurants operate in the United States within the casual dinner industry, providing similar products to similar customers. Revenues from external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of revenue. The Company believes it meets the criteria for aggregating its operating segments into a single reporting segment. RESTAURANT OPENING COSTS - Restaurant opening costs include incremental out-of-pocket costs that are directly related to the opening of new restaurants and are not capitalizable and an amortization of rentals under lease agreements for accounting purposes. Restaurant opening costs include costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for the Company's opening training team and other support employees, costs for practice service activities; and straight-line minimum base rent during the restaurant preopening period. The Company expenses restaurant opening costs as incurred. ADVERTISING - Advertising costs are expensed as incurred. Advertising costs were $7.4 million, $6.7 million, and $6.7 million in fiscal 2006, 2005 and 2004, respectively and are included in Marketing, General and Administrative expenses in the Consolidated Statements of Earnings. EARNINGS PER SHARE - Basic earnings per 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 share computation includes dilutive share equivalents issued under the Company's various stock option plans and the dilutive convertible preferred stock outstanding during fiscal 2006 and 2005. The computation of basic earnings per share and diluted earnings per share for each fiscal year is shown below (in thousands):
March 26, March 27, March 28, 2006 2005 2004 -------- -------- -------- Net income $ 14,562 $ 7,820 $ 8,972 Less: Accretion of issuance costs and preferred stock dividends (1,430) (422) - -------- -------- -------- Income for computation of basic earnings per share 13,132 7,398 8,972 Add: Accretion of issuance costs and preferred dividends (See Note 14) 1,430 422 - -------- -------- -------- Income for computation of diluted earnings per share $ 14,562 $ 7,820 $ 8,972 ======== ======== ======== Weighted average number of common shares in basic earnings per share 9,364 9,154 8,887 Effect of dilutive securities: Stock options and warrants 429 483 268 Convertible preferred shares 878 510 -------- -------- -------- Weighted average number of common shares and dilutive potential common shares used in diluted earnings per share 10,671 10,147 9,155 ======== ======== ========
22 During fiscal years 2006, 2005 and 2004, stock options to purchase 60,000, 222,750 and 439,000 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 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires compensation costs related to share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. With limited exceptions, the amount of compensation cost will be measured based on the fair market value on the grant date of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service for that award, resulting in a decrease in net earnings. As of March 27, 2006, the beginning of fiscal 2007, the Company has adopted this new standard, as amended. As permitted by SFAS 123, prior to March 27, 2006, the Company accounted for share-based payments to employees using the intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123R's fair value method will impact the Company's results of operations, although it will have no impact on the Company's overall financial position. The estimated impact of adopting SFAS 123R for fiscal 2007, relating to prior year grants only that will vest during fiscal 2007 and later, will be approximately $161,000, net of tax. However, had the Company adopted SFAS 123R in prior years, the impact of that standard would have approximated the impact of SFAS 123 as presented in the disclosure of pro forma net income and earnings per share presented above. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. While the Company cannot estimate what those amounts will be in the future, the amount of operating cash flows recognized in fiscal years 2006, 2005 and 2004 for such excess tax deductions were $2,677,000, $145,000 and $162,000, respectively. 2. PURCHASE AND SALE OF RESTAURANT FACILITIES During November 2005, the Company completed the acquisition of a teppanyaki restaurant facility in Tucson, Arizona. The purchase price totaled $1.9 million payable in cash. The restaurant facility has been converted to a Benihana restaurant. The cash expenditure for this asset purchase is included in expenditures for property and equipment in the consolidated statement of cash flows for the year ended March 26, 2006. During December 2005, the Company sold its Benihana restaurant facility located in Monterey, California to a new franchisee. The restaurant facility was sold for $522,000, of which $147,000 was paid in cash and $375,000 is payable with interest over three years. The franchisee has entered into a 15-year franchise agreement for the operation of the Monterey location. The cash receipt is included in cash proceeds from sale of property and equipment in the consolidated statement of cash flows for the year ended March 26, 2006. During March 2005, the Company acquired a Benihana restaurant from a franchisee in Anchorage, Alaska. The restaurant was acquired for $2.8 million. 3. IMPAIRMENT CHARGE The Company reviews it's long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value amount of an asset or group of assets may not be recoverable. The Company considers a history of relatively small operating gains or consistent and significant operating losses to be a primary indicator of potential asset impairment, after the individual restaurant locations have been operating for 2 years. Assets are grouped and evaluated for impairment at the lowest level for which there is identifiable cash flows, primarily the individual restaurant units. A restaurant unit is deemed to be impaired if a forecast of future operating cash flows directly related to the restaurant is less than the carrying amount of the restaurant's long-lived assets. If a restaurant unit is determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant's long-lived assets exceeds its fair value. Fair value is an estimate based on the best information available, including multiples of cash flow derived from recent purchases and sales of restaurant businesses in the restaurant industry. In fiscal 2005, the Company recorded a $2,668,000 expense for the impairment of long-lived assets. The loss on impairment of long-lived assets primarily related to the write-down of equipment and leasehold improvements at four restaurant units. No impairment charges were recognized during fiscal 2006 or 2004. 23 The Company will continue to review its restaurants for potential asset impairment. As of March 26, 2006, the Company believes that all of its restaurant units have sufficient estimated future cash flows to support the carrying value of their long-lived assets. However, if an individual restaurant unit's estimated future cash flows decline below its carrying value of long-lived assets, it could result in additional impairment charges. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, 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 26, March 27, 2006 2005 ------ ------ Food and beverage $3,152 $2,834 Supplies 3,376 3,737 ------ ------ $6,528 $6,571 ====== ======
6. PROPERTY AND EQUIPMENT Property and equipment consist of (in thousands):
March 26, March 27, 2006 2005 -------- -------- Land $ 12,975 $ 12,975 Buildings 30,511 29,146 Leasehold improvements 98,204 88,411 Restaurant furniture, fixtures, and equipment 29,804 28,348 Restaurant facilities and equipment under capital leases 7,040 7,040 -------- -------- 178,534 165,920 Less: Accumulated depreciation and amortization (including accumulated amortization of restaurant facilities and equipment under capital leases of $7,040 and $7,030 in 2006 and 2005, respectively) 69,949 64,553 -------- -------- 108,585 101,367 Construction in progress 14,993 6,765 -------- -------- $123,578 $108,132 ======== ========
24 7. OTHER ASSETS Other assets consist of (in thousands):
March 26, March 27, 2006 2005 ------ ------ Lease acquisition costs, net of accumulated amortization of $904 and $725, respectively $1,478 $1,657 Premium on liquor licenses 1,308 1,220 Security deposits 2,018 957 Computer software costs, net of accumulated amortization of $1,010 and $750, respectively 384 636 Cash surrender value of life insurance policy 391 395 Deferred financing charges, net of accumulated amortization of $643 and $571, respectively 127 188 Long-term receivables 273 35 ------ ------ $5,979 $5,088 ====== ======
8. ACCRUED EXPENSES Accrued expenses consist of (in thousands):
March 26, March 27, 2006 2005 ------- ------- Accrued payroll, incentive compensation and related taxes $ 4,824 $ 4,157 Unredeemed gift certificates 2,521 2,036 Accrued workers compensation claims 1,325 1,193 Sales taxes payable 1,287 1,264 Accrued percentage rent 1,248 935 Deferred compensation 861 719 Accrued property taxes 682 698 Accrued health insurance costs 608 955 Straight-line rent accrual 130 121 Other accrued operating expenses 7,335 3,589 ------- ------- $20,821 $15,667 ======= =======
9. RESTAURANT OPERATING EXPENSES Restaurant operating expenses are those costs that are directly attributed to the operation of individual restaurant locations and consist of (in thousands): March 26, March 27, March 28, Fiscal year ended 2006 2005 2004 --------------------------------------------------------------------- Labor and related costs $ 81,398 $ 76,026 $ 71,812 Occupancy costs 14,204 12,830 11,910 Depreciation and amortization 11,467 9,607 8,313 Utilities 6,084 5,239 4,854 Restaurant supplies 5,065 4,313 3,945 Credit card discounts 4,450 3,871 3,465 Other restaurant operating expenses 16,765 14,939 13,884 -------------------------------------------------------------------- Total restaurant operating expenses $139,433 $126,825 $118,183 ==================================================================== 25 10. LEASES The Company is obligated under various lease agreements for most of its restaurant units, as well as its corporate office. For operating leases, the Company recognizes rent expense on a straight-line basis over the expected lease term. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. Under the provisions of certain of the Company's leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the rent holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes option periods when it is deemed to be reasonably assured that the Company will exercise such option periods due to the fact that the Company would incur an economic penalty for not doing so. The lease term commences on the date when the Company gains access to the leased property. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sales levels will be achieved. Leasehold improvements paid for by the lessor are recorded as leasehold improvements and deferred rent. Judgments made by the Company related to the probable term for each restaurant unit lease affect the classification and accounting for a lease as capital or operating, the rent holidays and/or escalations in payments that are taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant unit are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different lease term assumptions were used. The Company generally operates its restaurant units 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 operating leases. The amounts of operating lease obligations are as follows (in thousands): Operating Leases --------- Fiscal year ending: 2007 $ 11,013 2008 10,968 2009 11,016 2010 10,910 2011 10,860 Thereafter 93,720 -------- Total minimum lease payments $148,487 ======== Rental expense consists of the following (in thousands): March 26, March 27, March 28, 2006 2005 2004 ------------------------------------- Minimum rentals $10,304 $ 9,948 $ 9,144 Contingent rentals 3,293 2,454 2,330 ------------------------------------- $13,597 $12,402 $11,474 ===================================== 26 11. LONG-TERM DEBT Long-term debt consists of (in thousands): March 26, March 27, 2006 2005 ------- ------- Term loan - bank $ 6,666 $10,000 Less current portion 4,166 3,333 ------- ------- $ 2,500 $ 6,667 ======= ======= The Company presently has borrowings from Wachovia Bank, National Association ("Wachovia") under a term loan. At March 26, 2006, the Company had $6,666,000 outstanding under the term loan which is payable in quarterly installments of $833,333 until the term loan matures in December 2007. Additionally, the Company maintains 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 26, 2006, the Company had a $2,306,000 letter of credit outstanding against such facility in connection with its workers' compensation insurance program. Accordingly, at March 26, 2006, the Company had $12,694,000 available for borrowing under the line of credit facility, as no amounts were outstanding. The interest rate at March 26, 2006 of both the line of credit and the term loan was 5.53%. The Company has the option to pay interest at Wachovia's prime rate plus 1% or at the London interbank offering rate plus 1%. The interest rate may vary depending upon the ratio of the sum of earnings before interest, taxes, depreciation and amortization, as defined in the agreement, to its indebtedness. The loan agreements limit capital expenditures to certain amounts, require that the Company maintain certain financial ratios and profitability amounts and limit the payment of cash dividends. As of March 26, 2006, the Company was in compliance with all covenants of the Company's credit agreement with Wachovia. Principal maturities of long-term debt obligations at March 26, 2006 are as follows: Fiscal year ending 2007 $4,166 2008 2,500 ------ Total $6,666 ====== 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. The income tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands): March 26, March 27, 2006 2005 ------ ------ Deferred tax assets: Straight-line rent expense $1,715 $1,569 Tax credit carryforward - 1,017 Gift certificate liability 1,031 870 Amortization of gain 784 807 Employee benefit accruals 302 308 Other 396 148 ------ ------ 4,228 4,719 ------ ------ Deferred tax liabilities: Property and equipment 1,741 2,501 Inventories 853 839 Goodwill 1,502 1,118 ------ ------ 4,096 4,458 ------ ------ Net deferred tax asset $ 132 $ 261 ====== ====== 27 The net deferred tax asset is classified on the balance sheet as follows (in thousands): March 26, March 27, 2006 2005 -------- -------- Current asset $805 $417 Long-term liability 673 156 -------- -------- $132 $261 ======== ======== The income tax provision consists of (in thousands): March 26, March 27, March 28, Fiscal year ended 2006 2005 2004 ------------------------------------ Current: Federal $ 5,823 $ 3,037 $ 1,876 State 2,539 1,559 680 Deferred: Federal and State 129 (76) 2,265 ---------------------------------- Income tax provision $ 8,491 $ 4,520 $ 4,821 ================================== The income tax provision differed from the amount computed at the statutory rate as follows (in thousands):
March 26, March 27, March 28, Fiscal year ended 2006 2005 2004 ------------------------------------------------------------------------------------------------ Federal income tax provision at statutory rate of 35% $ 8,131 $ 4,524 $ 5,053 Benefit of graduated rates - (86) (140) State income taxes, net of federal benefit 1,519 963 899 Tax credits, net (1,226) (1,222) (1,026) Other 67 341 35 --------------------------------------- Income tax provision $ 8,491 $ 4,520 $ 4,821 ======================================= Effective income tax rate 36.6% 35.0% 33.4% =======================================
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 from July 1, 2005 through September 30, 2005, the holders of the balance of Haru's equity (the "Minority Stockholders") had a one-time option to sell their remaining shares to the Company (the "put option"). The exercise price under the put option was to be calculated as four and one-half (4 1/2) times Haru's consolidated cash flow for the fiscal year ended March 27, 2005 less the amount of Haru's debt (as that term is defined in the purchase agreement) at the date of the computation. On July 1, 2005, the Minority Stockholders exercised the put option. Since that time the parties have been engaged in negotiations over the calculation of the put option price. The Company believes that the proper application of the put option price formula would result in a payment to the former Minority Stockholders of approximately $3.7 million. The former Minority Stockholders claim to be entitled to a greater payment. There can be no assurance that this matter will not result in a legal proceeding or that the Company's interpretation of the put option price formula will prevail in any such proceeding. The Company has recorded a $3.7 million liability for the payment of the put option, based upon its calculation under the put option price formula, resulting in an increase to goodwill totaling $1.5 million and a decrease to minority interest totaling $2.2 million. In December 2002, the Company completed the acquisition of RA Sushi, a privately owned Arizona chain which operated four restaurants. Pursuant to the purchase agreement of RA Sushi, the Company is required to pay the seller contingent purchase price payments 28 based on certain operating results of the acquired business for fiscal years ending 2004, 2005 and 2006. The contingent purchase price 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 such payments are not contingent on the continued employment of the sellers of the restaurants. The minimum contingent payment levels were met in fiscal 2006, 2005 and 2004. The Company recorded $228,000, $348,000 and $652,000 in fiscal 2006, 2005 and 2004, respectively, as additional goodwill for the contingent purchase price payments due for fiscal 2006, 2005 and 2004. LITIGATION - On July 2, 2004, Benihana of Tokyo, Inc. ("BOT"), a significant holder of the Company's Common Stock, commenced a lawsuit in the Court of Chancery of the State of Delaware (the "Chancery Court") against the Company, individuals who were then members of the Company's Board of Directors and BFC Financial Corporation ("BFC"). The action, which purported to be brought both individually and derivatively on behalf of the Company, sought temporary and permanent injunctive relief, monetary damages of $14.2 million for loss of value of the Company's Common Stock and from $9.5 million to $10.8 million for loss of an alleged control premium, and recovery of costs and expenses, in connection with the closing of the $20.0 million sale of a new class of Series B Preferred Stock of the Company to BFC, a diversified holding company with operations in banking, real estate and other industries (see Note 14). John E. Abdo, a director of the Company, serves as a Vice Chairman, director, and is a significant shareholder of BFC. Among other relief sought, the action sought rescission of the sale of the Series B Preferred Stock to BFC. The action alleged that the director defendants breached their fiduciary duties in approving the financing transaction with BFC by diluting the voting power represented by BOT's Common Stock holding in the Company. The trial of the action was completed on November 15, 2004. On December 8, 2005, the Chancery Court rejected all claims asserted against the Company and its directors in the suit brought by BOT. In rejecting BOT's claims, the Chancery Court found that "the directors who approved the transaction did so, on an informed basis, acting in good faith and believing that they were acting in the best interests of Benihana." Thereafter, BOT filed an appeal with respect to the decision of the Chancery Court. The Company and its Board of Directors believe that the BFC financing was and is in the best interests of the Company and all of its shareholders, that there is no merit to the action brought by BOT, and intend to continue to vigorously defend and oppose the action. The appeal has been briefed and argued to the Delaware Supreme Court, and the parties are awaiting a decision from that court. The Company has not recorded a liability for this lawsuit, but legal expenses are being incurred and recognized to defend the Company and members of the Board of Directors. There can be no assurance that an adverse result from an appeal that overturns the Chancery Court's ruling will not have a material adverse effect on the Company's results of operations or financial position. The Company is not subject to any other pending legal proceedings, other than ordinary routine claims incidental to its business. The Company has entered into supply agreements for the purchase of beef, chicken and seafood, in the normal course of business, at fixed prices for twelve- and six-month terms, respectively, beginning on January 1, 2006. These supply agreements will eliminate volatility in the cost of the commodities over the terms of the agreements. These supply agreements are not considered derivative contracts. 14. CONVERTIBLE PREFERRED STOCK On July 1, 2004, the Company received net proceeds of $9,253,000, after transaction costs, representing the funding of the first $10,000,000 tranche of its sale of $20,000,000 aggregate principal amount of Series B Convertible Preferred Stock ("Series B Preferred Stock") to BFC Financial Corporation ("BFC"). In connection with the first tranche, the Company issued and sold 400,000 shares of its Series B Preferred Stock. John E. Abdo, a director of the Company, is a director and Vice Chairman of the Board of BFC and is a significant shareholder of BFC. On August 4, 2005, the Company completed the second and final tranche consisting of $10,000,000 aggregate principal amount of its Series B Preferred Stock sold to BFC. In connection with the second tranche, the Company issued and sold 400,000 shares of its Series B Preferred Stock. The Company received net proceeds of $9,884,000, after transaction costs, from the sale. The Series B Preferred Stock has a liquidation preference of $20,000,000, or $25.00 per share, (subject to anti-dilution provisions) plus accrued and unpaid dividends. The Series B Preferred Stock is convertible into Common Stock of the Company at a conversion price of $19.00 per share that is 1.32 shares of Common Stock for each share of Series B Preferred Stock (subject to anti-dilution provisions). The 800,000 shares of Series B Preferred Stock outstanding at March 26, 2006 are convertible into an aggregate 1,052,632 shares of Common Stock. The Series B Preferred Stock carries a dividend at the annual rate of $1.25 per share (or 5% of the purchase price) payable in cash or additional Series B Preferred Stock, and votes 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 Stock. In addition, under certain circumstances, the 29 approval of a majority of the Series B Preferred Stock is required for certain events outside the ordinary course of business, principally acquisitions or disposition of assets having a value in excess of 25% of the total consolidated assets of the Company. The Company pays quarterly dividends on the Series B Preferred Stock, and at March 26, 2006, accrued but unpaid dividends on the Series B Preferred Stock totaled $233,000 or $0.29 per share of the Series B Preferred Stock. Since the Series B Preferred Stock is convertible into Common Stock at a conversion price of $19.00 per share and the Common Stock was trading at $20.00 per share on August 4, 2005 when the second tranche was completed, a deemed dividend was recognized on the beneficial conversion feature, in connection with the second tranche, totaling $526,000. The deemed dividend will not result in any cash payments to the holders of the Series B Preferred Stock. The Company is obligated to redeem the Series B Preferred Stock at its original issue price on July 2, 2014, which date may be extended by the holders of a majority of the then-outstanding shares of Series B Preferred Stock to a date no later than July 2, 2024. The Company may pay the redemption in cash or, at its option, in shares of Common Stock valued at then-current market prices unless the aggregate market value of the Company's Common Stock and any other common equity is below $75.0 million. In addition, the Series B Preferred Stock may, at the Company's option, be redeemed in cash at any time beginning three years from the date of issue if the volume-weighted average price of the Common Stock exceeds $38.00 per share for sixty consecutive trading days. The holders of a majority of the outstanding Series B Preferred Stock are entitled to nominate one individual to the Company's board of directors. In the event that dividends are not paid for two consecutive quarters, the holders of the majority of the Series B Preferred Stock are entitled to elect one additional director. Consistent with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the conversion option of the Series B Preferred Stock is not a derivative liability that must be fair valued. 15. STOCKHOLDERS' EQUITY 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 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 981,994 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. There are 126,667 shares of Class A Common Stock available for grant under the 2003 Directors' 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. 30 The following table summarizes information about fixed-price stock options outstanding at March 26, 2006:
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 - $7.99 149,184 3.8 $ 7.25 149,184 $ 7.25 9.89 - 10.65 264,750 3.5 10.42 264,750 10.42 11.03 - 13.48 481,500 5.2 12.11 468,166 12.14 15.00 - 16.78 217,750 6.3 16.74 216,083 16.76 22.36 60,000 9.9 22.36 - - ---------- ---------- 1,173,184 1,098,183 ========== ==========
Transactions under the above plans for the years ended are as follows:
March 26, 2006 March 27, 2005 March 28, 2004 ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------------------------------------- Balance, beginning of year 1,710,855 $11.20 1,727,453 $11.07 1,762,709 $10.72 Granted 60,000 22.36 70,000 11.87 85,000 11.93 Canceled/Expired (10,501) 11.02 (15,000) 12.04 (4,313) 8.32 Exercised (587,170) 9.74 (71,598) 8.55 (115,943) 6.54 ------------------------------------------------------------------------ Balance, end of year 1,173,184 $12.49 1,710,855 $11.20 1,727,453 $11.07 ======================================================================== Weighted average fair value of options granted during year $6.67 $3.37 $4.15 ========================================================================
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. 16. RELATED PARTY TRANSACTIONS As discussed in Note 14, the Company sold an aggregate 800,000 shares of its Series B Preferred Stock to BFC for $20,000,000. John E. Abdo, a director of the Company, is a director and Vice Chairman of the Board of BFC and is a significant shareholder of BFC. The sale of Series B Preferred Stock was completed in two tranches between during fiscal years 2005 and 2006. The sale of Series B Preferred Stock resulted in net aggregate proceeds of $19,137,000 ($9,253,000 in fiscal 2005 and $9,884,000 in fiscal 2006). As discussed in Note 13, BOT, a significant holder of the Company's Common Stock, commenced a lawsuit in the Chancery Court against the Company, individuals who were then members of the Company's Board of Directors and BFC, in connection with the closing of the $20.0 million sale of Series B Preferred Stock of the Company to BFC. While the Chancery Court has rejected all claims asserted against the Company and its directors in the suit brought by BOT, BOT has filed an appeal with respect to the decision of the Chancery Court. The appeal has been briefed and argued to the Delaware Supreme Court, and the parties are awaiting a decision from that court. BOT owns a Benihana restaurant in Honolulu, Hawaii (the "Honolulu Restaurant") and all rights to the Benihana name and trade names, service marks and proprietary systems outside the territory served by the Company which consists of the United States (except for rights related to the State of Hawaii) and Central 31 and South America and the islands of the Caribbean Sea. The Company also granted to BOT a perpetual license to operate the Honolulu Restaurant and an exclusive license to own and operate Benihana restaurants in Hawaii. This license is royalty free with respect to any Hawaiian restaurant beneficially owned by Rocky H. Aoki. The Company has a right of first refusal to purchase any Hawaiian restaurant or any joint venture or sublicensing thereof proposed to be made by BOT with an unaffiliated third party; and, in the event any Hawaiian restaurant is sold, sublicensed or transferred to a third party not affiliated with Rocky H. Aoki, the Company will be entitled to receive royalties from such restaurant equal to 6% of gross revenues. Subsequent to fiscal 2006, the Company sold the assets of its sole Doraku restaurant to Kevin Aoki, the Company's former Vice President of Marketing and a current member of the Board of Directors. The assets were sold for $536,000, based on arm's length negotiations. The transaction was approved by the Board of Directors. Pursuant to the sale agreement, Kevin Aoki extended the non-competition provision of his employment agreement through August 31, 2008, but Mr. Aoki is permitted (i) to own, operate and manage Sushi Doraku restaurants in Hawaii and in Miami-Dade County, Florida, provided any such restaurants in Miami-Dade County are not within a seven mile radius of any existing or proposed restaurants then being operated by the Company or any of its subsidiaries or franchisees and (ii) to have an interest in any other additional Sushi Doraku restaurants with the prior written consent, not to be unreasonably withheld, of a committee of Benihana's Board of Directors. Additionally, the Company paid Mr. Aoki approximately $56,000 upon his resignation from the Company, representing the remainder of his unearned salary under an employment agreement. Consistent with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," these items will be reflected in the Company's fiscal 2007 results. The financial impact of this transaction will be nominal. While the assets of the Doraku restaurant meet the definition of "discontinued operations," as defined in SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company has not segregated Doraku's assets and results of operations, as the amounts are immaterial. Assets held for sale totaled $499,000, and results of operations (net of taxes) were approximately $24,000, $(296,000), and $(105,000) for fiscal years 2006, 2005 and 2004 respectively. Darwin C. Dornbush, the Company's Secretary and a retired Director of the Company, is a partner in Dornbush Schaeffer Strongin & Weinstein, LLP, formerly known as Dornbush Mensch Mandelstam & Schaeffer, LLP, a law firm. In the fiscal years 2006, 2005 and 2004, the Company incurred approximately $660,000, $650,000 and $670,000, respectively, in legal fees and expenses to Dornbush Schaeffer Strongin & Weinstein, LLP. 17. 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 equity at the beginning of each fiscal year 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. The Company's annual incentive compensation plan ties key employees' bonus earning potential to individually-designed performance objectives. Under the plan, each plan participant is provided a range of potential annual cash incentive awards based on his or her individually-designed performance objectives. Actual awards paid under the plan are based on exceeding goals tied to certain budgeted results of the Company. A portion of awards is also determined by achieving other performance and management goals. For fiscal 2006, the maximum incentive awards that could be awarded to the Company's named executive officers pursuant to the incentive compensation plan are as follows: for the president and chief executive officer; executive vice president of operations; senior vice president - finance; vice president - marketing; senior vice president - chief operating administrative officer; and the vice president - sushi division: their annual base salary multiplied by 30%. The controller and the other senior directors are eligible to receive their annual base salary multiplied by 20%. Incentive compensation earned during fiscal 2006 is payable in a lump sum payment. For fiscal 2005 and 2004, the amount of the awards is capped at 50% of the eligible salary of the employee. 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 stock deferred in a non-qualified deferred compensation plan. Target rates are 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 Company recorded $461,000, $75,000 and $125,000 of corporate incentive compensation expense for 32 fiscal years 2006, 2005 and 2004, 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 balances. Investment earnings are credited to their accounts. 18. QUARTERLY FINANCIAL DATA (UNAUDITED) Fiscal quarter ended (in thousands except for per share information)
March 26, 2006 March 27, 2005 --------------------------------------------------------------- ------------------------------------------ Fourth Third Second First Fourth Third Second First Revenues $61,222 $55,644 $54,622 $74,065 $54,779 $50,051 $48,110 $65,391 Gross profit 46,104 41,869 41,384 55,661 41,649 37,931 36,149 47,655 Net income 3,919 3,300 2,845 4,498 2,230 2,017 1,661 1,912 Basic earnings per share $ .38 $ .33 $ .22 $ .47 $ .23 $ .21 $ .17 $ .21 Diluted earnings per $ .35 $ .30 $ .21 $ .44 $ .22 $ .20 $ .16 $ .20 share
33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Benihana Inc. Miami, Florida We have audited the accompanying consolidated balance sheets of Benihana Inc. and subsidiaries (the "Company") as of March 26, 2006 and March 27, 2005, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended March 26, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the 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 the Company as of March 26, 2006 and March 27, 2005, and the results of its operations and its cash flows for each of the three years in the period ended March 26, 2006, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of March 26, 2006, based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 20, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Deloitte & Touche LLP Certified Public Accountants Fort Lauderdale, Florida June 20, 2006 34 EVALUATION DISCLOSURE CONTROLS AND PROCEDURES We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company and our subsidiaries required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of March 26, 2006 based on the criteria in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based upon this evaluation, our management concluded that the Company's internal control structure and consequently, the Company's internal control over financial reporting were effective as of March 26, 2006. Deloitte & Touche LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10K, has also audited our management's assessment of the effectiveness of the Company's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting as of March 26, 2006. Deloitte & Touche LLP expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of March 26, 2006 as stated in their report included herein. /s/ Joel A. Schwartz ------------------------ Joel A. Schwartz President /s/ Michael R. Burris ------------------------ Michael R. Burris Chief Financial Officer 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Benihana Inc. Miami, Florida We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Benihana Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of March 26, 2006, based on criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of March 26, 2006, is fairly stated, in all material respects, based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 26, 2006, based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended March 26, 2006 of the Company and our report dated June 20, 2006 expressed an unqualified opinion on those financial statements. Deloitte & Touche LLP Certified Public Accountants Fort Lauderdale, Florida June 20, 2006 36 OFFICERS AND DIRECTORS CORPORATE OFFICERS Joel A. Schwartz - CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Taka Yoshimoto - EXECUTIVE VICE PRESIDENT, OPERATIONS Michael R. Burris - SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER Juan C. Garcia - SENIOR VICE PRESIDENT, CHIEF OPERATING ADMINISTRATIVE OFFICER Darwin C. Dornbush - SECRETARY DIRECTORS Joel A. Schwartz Taka Yoshimoto John E. Abdo - VICE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHAIRMAN OF THE EXECUTIVE COMMITTEE, BFC FINANCIAL CORPORATION; VICE CHAIRMAN OF THE BOARD AND CHAIRMAN OF THE EXECUTIVE COMMITTEE, BANKATLANTIC BANCORP., INC.; VICE CHAIRMAN AND PRESIDENT, LEVITT CORPORATION; AND VICE CHAIRMAN OF THE BOARD, BLUEGREEN CORPORATION. Kevin Aoki - PRESIDENT, AOKI GROUP LLC Norman Becker - INDEPENDENT CONSULTANT, CERTIFIED PUBLIC ACCOUNTANT J. Ronald Castell - REELRON LLC Lewis Jaffe - CEO, OXFORD MEDIA INC. Robert B. Sturges - INDEPENDENT CONSULTANT Joseph J. West - DEAN, SCHOOL OF HOSPITALITY AND TOURISM MANAGEMENT, FLORIDA INTERNATIONAL UNIVERSITY 37 CORPORATE INFORMATION COMMON STOCK NASDAQ Symbols Common Stock BNHN Class A Common Stock BNHNA GENERAL COUNSEL Dornbush Schaeffer Strongin & Weinstein, LLP 747 Third Avenue New York, New York 10017 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 200 East Las Olas Boulevard Suite 1400 Fort Lauderdale, Florida 33301 10-K REPORT AVAILABILITY A copy of the Benihana Inc. Form 10-K, filed with the U.S. Securities and Exchange Commission, is available on our corporate website at WWW.BENIHANA.COM or can be obtained by writing us at: 8685 N.W. 53rd Terrace Miami, Florida 33166 TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company Shareholder Services Group 10150 Mallard Creek Drive, Suite 307 Charlotte, North Carolina 28262 (800) 937-5449 CORPORATE HEADQUARTERS 8685 Northwest 53rd Terrace Miami, Florida 33166 (305) 593-0770 38 COMMON STOCK INFORMATION The Company's Common Stock and Class A Common Stock are traded on the Nasdaq National Market System. There were 199 holders of record of the Company's Common Stock and 446 holders of record of the Class A Common Stock at March 26, 2006. The table below sets forth high and low prices for the Company's Common Stock and Class A Common Stock for the periods indicated.
FISCAL YEAR ENDED March 26, 2006 March 27, 2005 ----------------------------------------------------------------- COMMON STOCK HIGH LOW HIGH LOW ---------------------------------------------------------------------------------------------- 1st Quarter $16.05 $13.00 $18.25 $14.09 2nd Quarter 21.66 14.25 16.25 11.62 3rd Quarter 23.73 16.97 16.60 12.90 4th Quarter 30.53 21.60 16.50 14.25
FISCAL YEAR ENDED CLASS A March 26, 2006 March 27, 2005 ----------------------------------------------------------------- COMMON STOCK HIGH LOW HIGH LOW ---------------------------------------------------------------------------------------------- 1st Quarter $16.10 $13.07 $18.12 $14.26 2nd Quarter 20.64 14.20 15.43 11.25 3rd Quarter 23.20 16.23 16.70 12.48 4th Quarter 30.50 20.89 16.60 14.30
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. The Company has not declared or paid a cash dividend on common equity since its organization and has no present intention of paying any such dividend in the foreseeable future. The Company intends to retain all available cash for the operation and expansion of its business. In addition, the Company's present loan agreement restricts the payment of cash dividends on common stock. 39 EX-21.1 4 ex21-1.txt EXHIBIT 21.1 EXHIBIT 21.01
SUBSIDIARY NAME STATE OF INCORPORATION - --------------- ---------------------- 1501 Broadway Restaurant Corp. New York Benihana Bethesda Corp. New York Benihana Brickell Station Corp. Delaware Benihana Carlsbad Corp. Delaware Benihana Encino Corp. California Benihana International Inc. Delaware Benihana Las Colinas Corp. Texas Benihana Lincoln Road Corp. Florida (formerly known as Rudy's Sirloin SteakBurgers, Inc.) Benihana Lombard Corp. Illinois Benihana Marina Corp. California Benihana Monterey Corporation Delaware (formerly known as Benihana Development Corp.) Benihana National Corp. Delaware Benihana National of Florida Corp. Delaware Benihana New York Corp. Delaware (formerly known as Benihana Frozen Food Corp.) Benihana of Puente Hills Corp. Delaware Benihana of Texas, Inc. Texas Benihana Ontario Corp. Delaware Benihana Orlando Corp. Delaware Benihana Park Central Club, Inc. Texas (D/B/A Benihana Private Club) Benihana Schaumburg Corp. Delaware Benihana Sunrise Corp. Delaware Benihana Tucson Corp. Delaware Benihana Westbury Corp. Delaware Benihana Wheeling Corp. Delaware Benihana Woodlands Corp. Texas Big Splash Kendall Corp. Delaware Haru Amsterdam Avenue Corp. New York Haru Food Corp. New York Haru Gramercy Park Corp. New York (formerly known as Haru Soho Corp.) Haru Holding Corp. Delaware Haru Park Avenue Corp. Delaware Haru Philadelphia Corp. Delaware Haru Third Avenue Corp. New York Haru Too, Inc. New York Maxwell's International Inc. Delaware Noodle Time Inc. Florida Ra Ahwatukee Restaurant Corp. Delaware Ra Houston Corp. Texas Ra Kierland Restaurant Corp. Delaware Ra Scottsdale Corp. Delaware Ra Sushi Chicago Corp. (f/k/a Benihana State & Elm Corp., Delaware f/k/a Benihana Beachplace, Inc.) Ra Sushi Corona Corp. Delaware Ra Sushi Glenview Corp. Delaware Ra Sushi Holding Corp. Delaware Ra Sushi Huntington Beach Corp. Delaware Ra Sushi Las Vegas Corp. Nevada Ra Sushi Palm Beach Gardens Corp. Delaware Ra Sushi San Diego Corp. Delaware Ra Sushi Tucson Corp. Delaware Ra Tempe Corp. Delaware Ra Torrance Corp. Delaware Ra Tustin Corp. Delaware Rudy's Restaurant Group, Inc. Nevada Teppan Restaurants Ltd. Oregon The Samurai, Inc. New York
EX-23.1 5 ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.01 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-33880, 333-63783 and 333-13973 on Form S-8 and Registration Statement Nos. 333-83585 and 333-13977 on Form S-3 of our reports dated June 20, 2006, relating to the consolidated financial statements of Benihana Inc. and subsidiaries (the "Company") and management's report on the effectiveness of internal control over financial reporting incorporated by reference in the Annual Report on Form 10-K of the Company for the year ended March 26, 2006. Deloitte & Touche LLP Fort Lauderdale, Florida June 23, 2006 EX-31.1 6 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.01 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 June 23, 2006 EX-31.2 7 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.02 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 June 23, 2006 EX-32.1 8 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.01 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 26, 2006 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 June 23, 2006 EX-32.2 9 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.02 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 26, 2006 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 June 23, 2006 -----END PRIVACY-ENHANCED MESSAGE-----