-----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, WzRsY7MWYJqBlfKkYeOW7XLEqGpc8zUCrH24fI1U7CxpMr/Q7DK5rz424Uns+9tB MMVsGcuspmIdDAZEIVKBrQ== 0001188112-06-002646.txt : 20060825 0001188112-06-002646.hdr.sgml : 20060825 20060825162952 ACCESSION NUMBER: 0001188112-06-002646 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060716 FILED AS OF DATE: 20060825 DATE AS OF CHANGE: 20060825 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26396 FILM NUMBER: 061056290 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-Q 1 t11433_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended July 16, 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 ---------------- NONE ---------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 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 Exchange Act). Yes No X ----- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock $.10 par value, 2,462,153 shares outstanding at July 31, 2006 Class A Common Stock $.10 par value, 7,453,000 shares outstanding at July 31, 2006 BENIHANA INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FOUR PERIODS ENDED JULY 16, 2006
TABLE OF CONTENTS PAGE PART I - Financial Information Item 1. Financial Statements - unaudited Condensed Consolidated Balance Sheets (unaudited) at July 16, 2006 and March 26, 2006 1 Condensed Consolidated Statements of Earnings (unaudited) for the Four Periods Ended July 16, 2006 and July 17, 2005 2 Condensed Consolidated Statement of Stockholders' Equity (unaudited) for the Four Periods Ended July 16, 2006 3 Condensed Consolidated Statements of Cash Flows (unaudited) for the Four Periods Ended July 16, 2006 and July 17, 2005 4 Notes to Condensed Consolidated Financial Statements (unaudited) 5 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 23 PART II - Other Information Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 6. Exhibits and Reports on Form 8-K 25 Signature 26 Certifications 27 - 30
BENIHANA INC. AND SUBSIDIARIES PART I - Financial Information ITEM 1. FINANCIAL STATEMENTS - UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share information) JULY 16, March 26, 2006 2006 - ---------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 17,798 $ 19,138 Receivables, net 1,552 2,437 Inventories 5,602 6,528 Income tax receivable 24 1,634 Prepaid expenses and other current assets 1,287 1,517 Deferred income tax asset, net 709 805 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 26,972 32,059 Property and equipment, net 129,187 123,578 Goodwill 29,900 29,900 Other assets 5,571 5,979 - ---------------------------------------------------------------------------------------------------------------------- $ 191,630 $ 191,516 ====================================================================================================================== LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,288 $ 8,044 Accrued expenses 16,810 20,821 Accrued put option liability 3,718 3,718 Current maturities of bank debt 3,333 4,166 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 31,149 36,749 Long-term debt - bank 1,667 2,500 Deferred obligations under operating leases 7,208 7,059 Deferred income tax liability, net 309 673 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 40,333 46,981 - ---------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6,8) 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 shares with a liquidation preference of $20 million plus accrued and unpaid dividends as of July 16, 2006 (Note 8) 19,300 19,273 - ---------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: Common stock - $.10 par value; convertible into Class A Common stock; authorized - 12,000,000 shares; issued and outstanding - 2,488,053 and 2,649,953 shares, respectively 249 265 Class A Common stock - $.10 par value; authorized - 20,000,000 shares; issued and outstanding - 7,415,600 and 7,111,671 shares, respectively 742 711 Additional paid-in capital 62,926 60,393 Retained earnings 68,223 64,036 Treasury stock - 10,828 shares of Common and Class A Common stock at cost (143) (143) - ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 131,997 125,262 - ---------------------------------------------------------------------------------------------------------------------- $ 191,630 $ 191,516 ====================================================================================================================== See notes to condensed consolidated financial statements
1 BENIHANA INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share information) FOUR PERIODS ENDED ---------------------------------- JULY 16, July 17, 2006 2005 - ----------------------------------------------------------------------------------------------------------------- REVENUES Restaurant sales $ 79,396 $ 73,617 Franchise fees and royalties 497 448 - ----------------------------------------------------------------------------------------------------------------- Total revenues 79,893 74,065 - ----------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of food and beverage sales 19,129 17,956 Restaurant operating expenses 46,214 42,271 Restaurant opening costs 481 289 Marketing, general and administrative expenses 7,249 6,256 - ----------------------------------------------------------------------------------------------------------------- Total operating expenses 73,073 66,772 - ----------------------------------------------------------------------------------------------------------------- Income from operations 6,820 7,293 Interest (income) expense, net (127) 117 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 6,947 7,176 Income tax provision 2,426 2,500 - ----------------------------------------------------------------------------------------------------------------- Income before minority interest 4,521 4,676 Minority interest - 178 - ----------------------------------------------------------------------------------------------------------------- NET INCOME 4,521 4,498 Less: accretion of issuance costs and preferred stock dividends 334 177 - ----------------------------------------------------------------------------------------------------------------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 4,187 $ 4,321 ================================================================================================================= EARNINGS PER SHARE Basic earnings per common share $ .43 $ .47 Diluted earnings per common share $ .40 $ .44 ================================================================================================================= See notes to condensed consolidated financial statements
2 BENIHANA INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOUR PERIODS ENDED JULY 16, 2006 (UNAUDITED)
(In thousands, except share information) Class A Additional Total Common Common Paid-in Retained Treasury Stockholders' Stock Stock Capital Earnings Stock Equity - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 26, 2006 $ 265 $711 $60,393 $64,036 $(143) $125,262 Net income 4,521 4,521 Issuance of 137,029 shares of Class A common stock from exercise of options 14 1,586 1,600 Issuance of 5,000 shares of common stock from exercise of options 1 49 50 Conversion of 166,900 shares of common stock into 166,900 shares of Class A common stock at $.10 par value (17) 17 - Dividends declared on Series B Preferred Stock (307) (307) Accretion of issuance costs on Series B Preferred Stock (27) (27) Stock based compensation 104 104 Tax benefit from stock option exercises 794 794 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JULY 16, 2006 $ 249 $742 $62,926 $68,223 $(143) $131,997 ============================================================================================================================= See notes to condensed consolidated financial statements
3 BENIHANA INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) FOUR PERIODS ENDED ----------------------------------- JULY 16, July 17, 2006 2005 - ------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 4,521 $ 4,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,367 3,287 Minority interest - 178 Deferred income taxes (268) 156 Stock-based compensation 104 - Tax benefit from stock option exercises - 190 Loss on disposal of assets 34 60 Change in operating assets and liabilities that provided (used) cash: Receivables 903 (71) Inventories 866 (359) Prepaid expenses and other current assets 227 375 Income taxes 1,610 (325) Other assets (188) (206) Accounts payable (7) 579 Accrued expenses and deferred obligations under operating leases (1,278) 701 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 10,891 9,063 - ------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Expenditures for property and equipment (12,808) (4,677) Payment of contingent consideration on RA Sushi acquisition (228) (348) Cash proceeds from sale of Sushi Doraku 515 - Collection on Sushi Doraku note 6 - Cash proceeds from sale of property and equipment 2 - - ------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,513) (5,025) - ------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Repayment of long-term loan and obligations under capital leases (1,666) (1,691) Proceeds from issuance of common stock under exercise of stock options 1,650 717 Tax benefit from stock option exercises 794 - Dividends paid on Series B Preferred Stock (496) (247) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 282 (1,221) - ------------------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,340) 2,817 Cash and cash equivalents, beginning of year 19,138 3,278 - ------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,798 $ 6,095 ========================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the four periods: Interest $ 195 $ 181 Income taxes $ 246 $ 1,738 NONCASH INVESTING AND FINANCING ACTIVITIES: Acquired property and equipment for which cash payments had not yet been made $ 1,110 $ 1,383 Note receivable received as partial consideration for sale of Sushi Doraku $ 24 $ - Accrued but unpaid dividends on the Series B Preferred Stock $ 44 $ 23 ========================================================================================================================== See notes to condensed consolidated financial statements.
4 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) 1. GENERAL The accompanying condensed consolidated balance sheet as of March 26, 2006, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("US GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnotes normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto for the year ended March 26, 2006 appearing in the Benihana Inc. and Subsidiaries (the "Company") Annual Report on Form 10-K filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These unaudited interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations. The results of operations for the four periods (sixteen weeks) ended July 16, 2006 and July 17, 2005 are not necessarily indicative of the results to be expected for the full year. 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. The current fiscal year consists of 53 weeks and will end on April 1, 2007. The prior fiscal year ended on March 26, 2006 and consisted of 52 weeks. In the accompanying unaudited condensed consolidated statement of cash flows for the four periods ended July 17, 2005, 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 payments of $348,000 made during the four periods ended July 17, 2005 related to its RA Sushi acquisition as a use of cash related to investing activities in the accompanying unaudited condensed consolidated statement of cash flows for the four periods ended July 17, 2005. This payment had been previously presented within the change in operating liabilities and reduced net cash provided by operating activities. o Additions to property and equipment, during the four periods ended July 17, 2005, for which payments have not been made as of the respective period end. These amounts were previously presented as a change in operating liabilities and as an expenditure for property and equipment instead of as noncash investing activities. 5 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) These changes resulted in a net increase of $238,000 in net cash provided by operating activities, a net increase of $48,000 in net cash used in investing activities and an increase of $190,000 in net cash used in financing activities from amounts previously presented. 2. STOCK-BASED COMPENSATION Prior to March 27, 2006, the Company accounted for stock options issued to employees under the intrinsic value method of accounting for stock-based compensation as defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company recognized no compensation expense with respect to such awards because stock options were granted at the fair market value of the underlying shares on the date of the grant. On March 27, 2006, the Company adopted Statement of Financial Accounting Standards ("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 25. 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. The Company elected to adopt SFAS 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior period presented in this Form 10-Q has not been restated to reflect the fair value method of expensing stock options. In accordance with SFAS 123R, tax benefits received of $794,000 related to equity award grants that are in excess of the tax benefits recorded on the Company's condensed consolidated statements of earnings are classified as a cash inflow in the financing section of the Company's condensed consolidated statements of cash flows beginning in the first quarter of fiscal 2007. The Company maintains employee stock option plans adopted in 1996, 1997 and 2000 and various directors' stock option plans. These plans make available for stock option grants a total of 3,085,000 shares of Class A Stock. Of these amounts, the Company has granted options to purchase 2,101,841 shares of Class A Stock; leaving 983,159 shares available for future grants. The purpose of the employee plans and the directors' plans is to enable the Company to attract, retain and motivate key employees and directors by providing them equity participation. The employee plans provide for incentive stock options (ISO's) under Section 422A of the Internal Revenue Code of 1986, as amended, and for options which are not ISO's. Options granted under the employee plans may not have terms exceeding ten years, and, in the case of the options which are ISO's, may not provide for an option exercise price of less than 100% of the fair market value of the Company's Common Stock or Class A Stock on the day of the grant (110% of such fair market value in the case of optionees holding 10% or more of the combined voting rights of the Company's securities). 6 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) The Company recorded $104,000 ($68,000 net of tax) in stock compensation expense during the four periods ended July 16, 2006, as a result of adopting SFAS 123R. The Company did not recognize any stock compensation expense during the four periods ended July 17, 2005. The pro-forma disclosures for the four periods ended July 17, 2005 below are provided as if the Company had adopted the fair value recognition requirements under SFAS 123. Under SFAS 123, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires the use of subjective assumptions that can materially affect fair value estimates, and therefore, this model does not necessarily provide a reliable single measure of the fair value of the Company's stock options. 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 four periods ended July 17, 2005 (in thousands, except per share information): FOUR PERIODS ENDED ---------------- July 17, 2005 ---------------- NET INCOME As reported $ 4,498 Less: Accretion of issuance costs and preferred stock dividends 177 ---------------- Net income attributable to common stockholders 4,321 Add: Stock-based compensation cost included in net income - Less: Total stock-based employee compensation expense determined under fair value based method for all awards 24 ---------------- Pro forma net income for computation of basic earnings per share $ 4,297 Add: Accretion of issuance costs and preferred stock dividends 177 ---------------- Pro forma net income for computation of diluted earnings per common share $ 4,474 ================ BASIC EARNINGS PER SHARE As reported $ .47 ================ Pro forma $ .47 ================ DILUTED EARNINGS PER SHARE As reported $ .44 ================ Pro forma $ .43 ================ 7 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) The Company will use the Black-Scholes option pricing model to estimate the fair value of options granted subsequent to the adoption of SFAS 123R. The estimated fair value of share-based compensation is amortized to expense over the vesting period, which is generally two years. There were no options granted during the four periods ended July 16, 2006 and July 17, 2005. Assumptions used in estimating the fair value of options granted during the remainder of fiscal 2006, as well as fiscal year 2005, are described in Note 1 to the consolidated financial statements for the year ended March 26, 2006 appearing in the Company's Annual Report on Form 10-K. The following is a summary of stock option activity for the four periods ended July 16, 2006:
Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Life Value -------------- --------------- --------------- --------------- Outstanding at March 26, 2006 1,173,184 $ 12.49 5.1 Granted - - Canceled/Expired (1,165) 7.99 Exercised (142,029) 11.61 -------------- --------------- --------------- --------------- Outstanding at July 16, 2006 1,029,990 $ 12.63 4.9 $10,525,000 ============== =============== ============== =============== Exercisable at July 16, 2006 976,659 $ 11.95 4.7 $10,352,000 ============== =============== ============== ===============
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. For the four periods ended July 16, 2006 and July 17, 2005, the total intrinsic value of stock options exercised was approximately $2,498,000 and $684,000, respectively. Proceeds from stock options exercised during the four periods ended July 16, 2006 and July 17, 2005 totaled $1,650,000 and $717,000, respectively. Upon the exercise of stock options, shares are generally issued from new issuances of stock. The tax benefit realized for tax deductions from stock options exercised during the four periods ended July 16, 2006 and July 17, 2005 totaled $794,000 and $190,000, respectively. As of July 16, 2006, total unrecognized compensation cost related to nonvested share-base compensation totaled $256,000 and is expected to be recognized over approximately 1.5 years. 3. INVENTORIES Inventories consist of (in thousands): JULY 16, March 26, 2006 2006 --------------- ---------------- Food and beverage $ 2,092 $ 3,152 Supplies 3,510 3,376 --------------- ---------------- $ 5,602 $ 6,528 =============== ================ 8 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) 4. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during each period. The diluted earnings per common share computation includes dilutive common share equivalents issued under the Company's various stock option plans and conversion rights of Series B Preferred Stock. The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock (in thousands):
FOUR PERIODS ENDED ----------------------------------- JULY 16, July 17, 2006 2005 --------------- --------------- Net income, as reported $ 4,521 $ 4,498 Less: Accretion of issuance costs and preferred stock dividends 334 177 --------------- --------------- Income for computation of basic earnings per common share 4,187 4,321 Add: Accretion of issuance costs and preferred stock dividends 334 177 --------------- --------------- Income for computation of diluted earnings per common share $ 4,521 $ 4,498 =============== =============== FOUR PERIODS ENDED ----------------------------------- JULY 16, July 17, 2006 2005 --------------- --------------- Weighted average number of common shares used in basic earnings per share 9,810 9,224 Effect of dilutive securities: Stock options 579 398 Series B Preferred Stock 1,055 697 --------------- --------------- Weighted average number of common shares and dilutive potential common stock used in diluted earnings per share 11,444 10,319 =============== ===============
During the four periods ended July 17, 2005, stock options to purchase 222,750 shares of common stock were excluded from the calculation of diluted earnings per share since the effect would be considered antidilutive. No stock options to purchase common stock were excluded from the calculation of diluted earnings per share for the four periods ended July 16, 2006. 9 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) 5. RESTAURANT OPERATING EXPENSES Restaurant operating expenses consist of the following (in thousands):
FOUR PERIODS ENDED ----------------------------------- JULY 16, July 17, 2006 2005 --------------- --------------- Labor and related costs $ 26,324 $ 25,294 Restaurant supplies 1,680 1,448 Credit card discounts 1,469 1,336 Utilities 1,938 1,772 Occupancy costs 4,701 4,384 Depreciation and amortization 4,225 3,148 Other restaurant operating expenses 5,877 4,889 --------------- --------------- Total restaurant operating expenses $ 46,214 $ 42,271 =============== ===============
6. LONG-TERM DEBT The Company presently has borrowings from Wachovia Bank, National Association ("Wachovia") under a term loan. At July 16, 2006, the Company had $5,000,000 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 July 16, 2006, the Company had an aggregate $1,975,000 in letters of credit outstanding against such facility. Accordingly, at July 16, 2006, the Company had $13,025,000 available for borrowing under the line of credit facility, as no borrowings were outstanding, on that date. The interest rate at July 16, 2006 of both the line of credit and the term loan was 6.50%. 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 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 July 16, 2006, the Company was in compliance with all covenants of the Company's credit agreement with Wachovia. 10 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) 7. RELATED PARTY TRANSACTION During April 2006, the Company sold the assets of its sole Sushi Doraku restaurant to Mr. Kevin Aoki, the Company's former Vice President of Marketing and a current member of the Board of Directors. The assets were sold for $539,000, after adjustment, as determined by an independent appraisal. The transaction was approved by the Board of Directors. Pursuant to the sale agreement, Mr. 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 the Company'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. The financial impact of this transaction was nominal. While the assets of the Sushi 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 Sushi Doraku's assets and results of operations, as the amounts are immaterial. Assets held for sale at March 26, 2006 totaled $499,000, and results of operations (net of taxes) were approximately $41,000, and $10,000 for the four periods ended July 16, 2006 and July 17, 2005, respectively. 8. COMMITMENTS AND CONTINGENCIES HARU MINORITY INTEREST 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. 11 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) BENIHANA OF TOKYO 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. 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 alleges 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, and 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, and on August 24, 2006, the Delaware Supreme Court issued an opinion affirming the trial court's ruling in favor of the Company and its Board of Directors in all respects. The Company is not subject to any other pending legal proceedings, other than ordinary routine claims incidental to its business. SUPPLY AGREEMENTS The Company has entered into supply agreements for the purchase of beef, chicken and certain seafood items, in the normal course of business, at fixed prices for periods between six and twelve months. 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. 9. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS109, Accounting for Income Taxes ("FIN 48"), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of April 2, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company's financial position and results of operations. 12 BENIHANA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUR PERIODS ENDED JULY 16, 2006 AND JULY 17, 2005 (UNAUDITED) 10. SEGMENT REPORTING Because of the increasing significance of the Company's RA Sushi and Haru concepts, as reflected in recent changes to the Company's management structure, the Company has determined that its reportable segments are those that are based on the Company's methods of internal reporting and management structure. The Company's reportable segments are based on restaurant concept. Prior to the first fiscal quarter of 2007, the Company operated as a single reporting segment. There were no material amounts of revenues or transfers between reportable segments. The table below presents information about reportable segments (in thousands):
Four Periods Ended ----------------------------------------------------------------------------------------------- July 16, 2006 ----------------------------------------------------------------------------------------------- Sushi Teppanyaki RA Sushi Haru Doraku Corporate Consolidated ------------- ------------- ------------ ---------- ------------- -------------- Revenues $58,490 $11,289 $9,432 $185 $497 $79,893 Operating income 6,827 1,077 1,893 69 (3,046) 6,820 Capital expenditures 10,694 1,779 335 - - 12,808
Four Periods Ended ----------------------------------------------------------------------------------------------- July 17, 2005 ----------------------------------------------------------------------------------------------- Sushi Teppanyaki RA Sushi Haru Doraku Corporate Consolidated ------------- ------------- ------------ ---------- ------------- -------------- Revenues $57,789 $7,037 $8,234 $557 $448 $74,065 Operating income 7,357 707 1,519 17 (2,307) 7,293 Capital expenditures 2,840 421 1,416 - - 4,677
Revenues for each of the segments consist of restaurant sales. Franchise revenues, while generated from Benihana franchises, have not been allocated to the Teppanyaki segment. Franchise revenues are reflected as corporate revenues. 13 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's revenues consist of sales of food and beverages at our restaurants and licensing fees from franchised restaurants. 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. Restaurant revenues and expenses are dependent upon a number of factors including the number of restaurants in operation, restaurant patronage and the average check amount. Expenses are additionally dependent upon commodity costs, average wage rates, marketing costs and the costs of administering restaurant operations. The following table reflects changes in restaurant count during the four periods ended July 16, 2006 and July 17, 2005:
FOUR PERIODS ENDED ------------------------------------------------------------------------------- JULY 16, 2006 ------------------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU TOTAL --------------- ------------- ----------- ------------ ------------ Restaurant count, beginning of year 56 9 7 1 73 Openings 1 2 - - 3 Sale to related party - - - (1) (1) --------------- ------------- ----------- ------------ ------------ Restaurant count, end of period 57 11 7 - 75 =============== ============= =========== ============ ============
FOUR PERIODS ENDED ------------------------------------------------------------------------------- JULY 17, 2005 ------------------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU TOTAL --------------- ------------- ----------- ------------ ------------ Restaurant count, beginning of year 56 8 6 1 71 Openings - - 1 - 1 --------------- ------------- ----------- ------------ ------------ Restaurant count, end of period 56 8 7 1 72 =============== ============= =========== ============ ============
Revenues increased 7.9% in the current four periods when compared to the corresponding periods a year ago. Net income increased 0.5% in the current four periods when compared to the corresponding periods a year ago. Earnings per diluted share decreased 9.1%, in the current four periods when compared to the corresponding periods a year ago. For purposes of calculating diluted earnings per share, the increase in net income was offset by an increase of 10.9% in the diluted weighted average shares outstanding. 14 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES FOUR PERIODS ENDED JULY 16, 2006 COMPARED TO JULY 17, 2005 -- The amounts of revenues and the changes in amount and percentage change in amount of revenues when compared to the same periods in the prior year are shown in the following tables (in thousands).
FOUR PERIODS ENDED CHANGE FROM PRIOR YEAR ---------------------------------- -------------------------------- JULY 16, July 17, 2006 2005 $ % -------------- ---------------- ------------- ------------- Restaurant sales $ 79,396 $ 73,617 $ 5,779 7.9% Franchise fees and royalties 497 448 49 10.9% -------------- ---------------- ------------- ------------- Total revenues $ 79,893 $ 74,065 $ 5,828 7.9% ============== ================ ============= =============
Components of restaurant revenues consisted of the following (in thousands):
FOUR PERIODS ENDED ---------------------------- CHANGE JULY 16, JULY 17, -------------------------- 2006 2005 $ % ------------ ------------ ---------- ------------ TOTAL RESTAURANT SALES BY CONCEPT: Benihana $58,490 $57,789 $701 1.2% RA Sushi 11,289 7,037 4,252 60.4% Haru 9,432 8,234 1,198 14.5% Sushi Doraku 185 557 (372) -66.8% ------------ ------------ ---------- ------------ Total restaurant sales $79,396 $73,617 $5,779 7.9% ============ ============ ========== ============ COMPARABLE RESTAURANT SALES BY CONCEPT: Benihana $57,516 $53,394 $4,122 7.7% RA Sushi 8,350 7,037 1,313 18.6% Haru 9,104 8,234 870 10.6% Sushi Doraku 185 175 10 5.7% ------------ ------------ ---------- ------------ Total comparable restaurant sales $75,155 $68,840 $6,315 9.2% ============ ============ ========== ============
The increase in teppanyaki comparable sales was the result of a 2.3% increase in the average per person guest check, as well as an increase of 4.9% in guest counts for teppanyaki restaurants opened longer than one year. RA Sushi's increase in comparable sales was driven by a 16.9% increase in guest counts at locations opened longer than one year and a 1.4% increase in the average per person guest check. Haru's comparable sales increase was comprised of a 5.7% increase in guest counts at locations opened longer than one year and a 3.4% increase in average per person guest check. 15 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the changes in restaurant sales between the four periods ended July 16, 2006 and July 17, 2005 (in thousands):
SUSHI TEPPANYAKI RA SUSHI HARU DORAKU TOTAL --------------- ------------- ------------ ----------- ------------- Restaurant sales during the four periods ended July 17, 2005 $57,789 $7,037 $8,234 $557 $73,617 Increase in comparable sales 4,122 1,313 870 10 6,315 Increase from new or acquired restaurants 1,043 2,939 328 - 4,310 Decrease from closed or sold restaurants (526) - - (382) (908) Decrease from temporary closures (3,938) - - - (3,938) --------------- ------------- ------------ ----------- ------------- Restaurant sales during the four periods $58,490 $11,289 $9,432 $185 $79,396 ended July 16, 2006 =============== ============= ============ =========== =============
COSTS AND EXPENSES FOUR PERIODS ENDED JULY 16, 2006 COMPARED TO JULY 17, 2005 -- The following table summarizes costs and expenses by concept, as well as consolidated, for the four periods ended July 16, 2006 and July 17, 2005 (in thousands):
FOUR PERIODS ENDED ------------------------------------------------------------------------------------- JULY 16, 2006 ------------------------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU CORPORATE CONSOLIDATED ------------ ---------- -------- --------- ------------ --------------- Cost of food and beverage sales $14,131 $ 2,860 $2,075 $ 63 $ - $19,129 Restaurant operating expenses 34,823 6,159 5,179 53 - 46,214 Restaurant opening costs 197 284 - - - 481 Marketing, general and administrative expenses 2,512 909 285 - 3,543 7,249 ------------ ---------- -------- --------- ------------ --------------- Total operating expenses $51,663 $10,212 $7,539 $116 $3,543 $73,073 ============ ========== ======== ========= ============ ===============
FOUR PERIODS ENDED -------------------------------------------------------------------------------------- JULY 17, 2005 -------------------------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU CORPORATE CONSOLIDATED ------------ ---------- -------- --------- ------------ --------------- Cost of food and beverage sales $14,209 $1,803 $1,796 $148 $ - $17,956 Restaurant operating expenses 33,514 3,853 4,512 392 - 42,271 Restaurant opening costs 112 15 162 - - 289 Marketing, general and administrative expenses 2,597 659 245 - 2,755 6,256 ------------ ---------- --------- -------- ----------- ---------------- Total operating expenses $50,432 $6,330 $6,715 $540 $2,755 $66,772 ============ ========== ========= ======== =========== ================
16 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes costs and expenses as a percentage of restaurant sales by concept, as well as consolidated, for the four periods ended July 16, 2006 and July 17, 2005:
FOUR PERIODS ENDED ---------------------------------------------------------------------- JULY 16, 2006 ---------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU CONSOLIDATED ------------- ---------- ------- --------- --------------- Cost of food and beverage sales 24.2% 25.3% 22.0% 34.1% 24.1% Restaurant operating expenses 59.5% 54.6% 54.9% 29.2% 58.2% Restaurant opening costs 0.3% 2.5% 0.0% 0.0% 0.6% Marketing, general and administrative expenses 4.3% 8.1% 3.0% 0.0% 9.1% ------------- ---------- ------- --------- --------------- Total operating expenses 88.3% 90.5% 79.9% 63.2% 92.0% ============= ========== ======= ========= ===============
FOUR PERIODS ENDED ---------------------------------------------------------------------- JULY 17, 2005 ---------------------------------------------------------------------- SUSHI TEPPANYAKI RA SUSHI HARU DORAKU CONSOLIDATED ------------- ---------- ------- --------- --------------- Cost of food and beverage sales 24.6% 25.6% 21.8% 26.6% 24.4% Restaurant operating expenses 58.0% 54.8% 54.8% 70.4% 57.4% Restaurant opening costs 0.2% 0.2% 2.0% 0.0% 0.4% Marketing, general and administrative expenses 4.5% 9.4% 3.0% 0.0% 8.5% ------------- ---------- ------- -------- --------------- Total operating expenses 87.3% 90.0% 81.6% 96.9% 90.7% ============= ========== ======= ======== ===============
COST OF FOOD AND BEVERAGE SALES The cost of food and beverage sales increased in the current four periods in total dollar amount. Costs of food and beverage sales, which are generally variable with sales, increased with the increase in restaurant sales during the current four periods ended July 16, 2006. In general, however, the cost of food and beverage sales when expressed as percentage of restaurant sales decreased slightly in the current four periods when compared to the corresponding periods in the prior year. The decrease when expressed as a percentage of sales during the current four periods can be attributed to the continued stability of commodity prices. RESTAURANT OPERATING EXPENSES Consolidated restaurant operating expenses increased in amount and when expressed as a percentage of restaurant sales when compared to the corresponding periods a year ago. The majority of the increase in amount is consistent with the increase in sales experienced between periods. However, the Company recognized additional depreciation expense totaling approximately $955,000 during the first four periods of fiscal 2007, which resulted from the Company reevaluating the remaining useful lives of assets at teppanyaki restaurants to be renovated as part of its renovation program. This additional depreciation expense is primarily responsible for the increase in restaurant operating expenses when expressed as a percentage of restaurant sales, specifically in the teppanyaki segment. Also, during the four periods ended July 16, 2006, the Company continued to incur approximately $400,000 in ongoing expenses at teppanyaki restaurants which were temporarily closed for remodeling. RESTAURANT OPENING COSTS Restaurant opening costs increased in the current four periods ended July 16, 2006 compared to the prior year corresponding periods. The increase in the current four periods when compared to the equivalent periods a year ago is attributable to the fact that we currently have more restaurants in the development stage when pre-opening costs are incurred than we did in the comparable periods a year ago. 17 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARKETING, GENERAL AND ADMINISTRATIVE COSTS Marketing, general and administrative costs increased in absolute amount and when expressed as a percentage of sales in the current four periods when compared to the equivalent periods a year ago. These increases are primarily due to increases in corporate general and administrative costs. The increases in corporate expenses were primarily attributable to the increase in administrative salaries attributable to additional corporate personnel hired to accommodate the Company's growth plans. The Company has added personnel in various corporate departments, most notably the Construction Department. Increases in professional fees relating to Sarbanes-Oxley Section 404 compliance were realized during the four periods ended July 16, 2006 when compared to the corresponding periods in the prior year. Additionally, during the four periods ended July 16, 2006, the Company began recognizing compensation expense, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment." No similar expense was incurred during the four periods ended July 17, 2005. INTEREST (INCOME) EXPENSE AND INCOME TAXES Interest expense, net, decreased in the current four periods when compared to the corresponding periods of the prior year. The decrease in the current four periods was attributable to lower average borrowings outstanding offset by higher interest rates in the current periods compared to the equivalent periods a year ago. Additionally, interest expense, net, has decreased due to an increase in interest income resulting from increased cash investments during the current periods compared to the equivalent periods a year ago. The Company's effective income tax rate was consistent between the current four periods and prior year's four periods at 34.9% and 34.8%, respectively. 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 is 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 July 16, 2006, the Company had $5,000,000 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 July 16, 2006, the Company had an aggregate $1,975,000 in letters of credit outstanding against such facility. Accordingly, at July 16, 2006, the Company had $13,025,000 available for borrowing, as no borrowings were outstanding, on that date. The interest rate at July 16, 2006 of both the line of credit and the term loan was 6.50%. 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. As further discussed in Part II. Item 1. Legal Proceedings, the sale of the Series B Preferred Stock was the subject of litigation. The Delaware Court of Chancery (the "Chancery Court") rejected all claims asserted against the Company and certain directors. Thereafter, the decision was appealed, and the Delaware Supreme Court issued its decision on August 24, 2006, affirming the Chancery Court's ruling in favor of the Company and its directors. The Company has entered into supply agreements for the purchase of beef, chicken and certain seafood items, in the normal course of business, at fixed prices for periods between six and twelve months. 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. 18 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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):
FOUR PERIODS ENDED --------------------------------------------- JULY 16, July 17, 2006 2005 ----------------- ----------------- Cash provided by operating activities $ 10,891 $ 9,063 Cash used in investing activities (12,513) (5,025) Cash provided by (used in) financing activities 282 (1,221) ----------------- ----------------- (Decrease) increase in cash and cash equivalents $ (1,340) $ 2,817 ================= =================
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, which was discussed above. 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 three Benihana teppanyaki restaurants, six RA Sushi restaurants, and one Haru restaurant. 19 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to investments in new restaurant units and 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. 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. OPERATING ACTIVITIES Cash provided by operations increased during the four periods ended July 16, 2006 compared to the equivalent period in the previous year. The increase resulted mainly from the increase in net income offset by the changes in working capital during the current four periods when compared to the comparable four periods a year ago. INVESTING ACTIVITIES Expenditures for property and equipment increased during the four periods ended July 16, 2006 from the prior comparable periods. Capital expenditures are expected to continue at increased levels, as the Company recently accelerated the pace of its renovation and new store construction program. The Company currently has ten restaurants under development, consisting of three Benihana teppanyaki restaurants, six RA Sushi restaurants and one Haru restaurant. During the first four periods of fiscal 2007, the Company sold its sole Sushi Doraku restaurant to Mr. Kevin Aoki, a director of the Company and the Company's former Vice President of Marketing. The restaurant facility was sold for $539,000, of which $515,000 was paid in cash and $24,000 is payable over twelve months. FINANCING ACTIVITIES During the current four periods, there were stock option exercises with cash proceeds to the Company of $1,650,000. Our total indebtedness decreased by $1,666,000 during the four periods ended July 16, 2006, related to scheduled payments on the term loan. 20 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and estimates and a description of accounting policies that are considered critical may be found in the Company's 2006 Annual Report on Form 10-K, filed on June 23, 2006, in the Notes to Consolidated Financial Statements, Note 1, and the Critical Accounting Policies section of Management's Discussion and Analysis. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS109, Accounting for Income Taxes ("FIN 48"), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of April 2, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company's financial position and results of operations. FORWARD-LOOKING STATEMENTS This quarterly report contains various "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements 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, harsh weather conditions in areas in which we and our franchisees operate restaurants or plan to build new restaurants, acceptance of our 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, an adverse outcome in the dispute between the Company and the Minority Stockholders of Haru, and other factors that we cannot presently foresee. 21 BENIHANA INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE IMPACT OF INFLATION Inflation has not been a significant factor in our business for the past several years. The Company has been able to keep increasing menu prices at a low level by strictly maintaining cost controls. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain risks of increasing interest rates and commodity prices. The interest on our indebtedness is largely variable and is benchmarked to the prime rate in the United States or to the London interbank offering rate. The Company may protect itself from interest rate increases from time-to-time by entering into derivative agreements that fix the interest rate at predetermined levels. The Company has a policy not to use derivative agreements for trading purposes. The Company has no derivative agreements as of July 16, 2006. The Company purchases commodities such as chicken, beef, lobster and shrimp for our restaurants. The prices of these commodities may be volatile depending upon market conditions. The Company does 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. The Company has entered into supply agreements for the purchase of beef, chicken and certain seafood items, in the normal course of business, at fixed prices for periods between six and twelve months. 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 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. The current fiscal year consists of 53 weeks and will end on April 1, 2007. The prior fiscal year ended on March 26, 2006 and consisted of 52 weeks. The Company's business is not highly seasonal although we do have more patrons 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 of each year, New Year's Eve falls in the third quarter and Valentine's Day falls in the fourth quarter. 22 BENIHANA INC. AND SUBSIDIARIES ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities and Exchange Act Rule 13a-15. Based upon this evaluation as of July 16, 2006, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 23 BENIHANA INC. AND SUBSIDIARIES PART II - Other Information Item 1. 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 alleges 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, and 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. By opinion dated August 24, 2006, the Delaware Supreme Court affirmed the Chancery Court ruling in favor of the Company and its directors. The Company is not subject to any other pending legal proceedings, other than ordinary routine claims incidental to its business. Item 1A. RISK FACTORS In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended March 26, 2006, which could materially affect the Company's business, financial condition or future results. The risks described in the Company's Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management may materially adversely affect the Company's business, financial condition, and/or operating results. 24 BENIHANA INC. AND SUBSIDIARIES PART II - Other Information Item 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 31.1 - Chief Executive Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Chief Financial Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Chief Executive Officer's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 - Chief Financial Officer's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25 SIGNATURE 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. BENIHANA INC. ------------------------------------- (Registrant) Date: August 25, 2006 /s/ Joel A. Schwartz - ---------------------------- ------------------------------------- Joel A. Schwartz President and Chief Executive Officer and Director 26 EX-31.1 2 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Joel A. Schwartz, President and Chief Executive Officer and Director, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. 5. The registrant's other certifying officer 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 functions): 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. Date: August 25, 2006 /s/ Joel A. Schwartz ------------------------- Joel A. Schwartz President and Chief Executive Officer and Director EX-31.2 3 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Michael R. Burris, Senior Vice President - Finance and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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 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 controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. 5. The registrant's other certifying officer 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 functions): 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. Date: August 25, 2006 /s/ Michael R. Burris --------------------------- Michael R. Burris Senior Vice President - Finance and Chief Financial Officer EX-32.1 4 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Benihana Inc. (the "Company") on Form 10- Q for the period ended July 16, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel A. Schwartz, President and Chief Executive Officer and Director 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 and Director August 25, 2006 EX-32.2 5 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Benihana Inc. (the "Company") on Form 10-Q for the period ended July 16, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael R. Burris, Senior Vice President - Finance and 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 Senior Vice President - Finance and Chief Financial Officer August 25, 2006 -----END PRIVACY-ENHANCED MESSAGE-----