This excerpt taken from the RRGB 10-K filed Apr 6, 2005.
2003 compared to 2002
Total revenues. Total revenues increased by $54.2 million, or 19.8%, to $328.6 million, from $274.4 million, due primarily to a $53.4 million increase in restaurant revenues. The increase in restaurant revenues was due to $28.1 million of revenues from 18 new restaurants opened and the one franchise restaurant we assumed operation of during 2003, $13.6 million in additional revenues from the non-comparable restaurants that we
opened in 2002, $1.7 million related to a full year of revenues for the ten restaurants we acquired from two franchisees during first quarter 2002 and $10.0 million from comparable restaurant sales increases of 4.1%. The increase in comparable restaurant sales was driven by an increase in guest counts of 4.0% and an increase in the average guest check of 0.1%.
Franchise royalties and fees increased $754,600, or 8.8%, to $9.3 million from $8.6 million. Franchise royalties increased $603,700, or 7.2%, to $9.0 million, from $8.4 million, due to an increase in royalties attributable to new franchise restaurants, comparable U.S. franchise restaurant revenues increases of 3.7%, and an increase in royalties from our Canadian franchisee primarily due to more favorable currency exchange rates. Royalties from the ten new franchise restaurants opened during 2003 were partially offset because four franchise restaurants closed and we assumed the operations of one additional franchise restaurant in April 2003. Franchise fees increased $150,900, or 91.0%, to $316,700, from $165,800, because ten franchise restaurants were opened in 2003 compared to five in 2002.
Cost of sales. Cost of sales increased by $14.1 million, or 23.0%, to $75.1 million, from $61.0 million, due primarily to more restaurants being operated during 2003. Cost of sales as a percentage of restaurant revenues increased 0.5%, to 23.5%, from 23.0%. Overall, the increase as a percentage of restaurant revenues was attributable to increases in certain food costs during 2003, including gourmet breads, hamburger, produce and pork.
Labor. Labor expenses increased by $18.9 million, or 20.0%, to $112.9 million, from $94.0 million, due primarily to more restaurants being operated in 2003. Overall, labor expense as a percentage of restaurant revenues was 35.4% in 2003 and 2002. Labor as a percentage of restaurant revenues was 35.1% at our comparable restaurants and 37.1% at our non-comparable restaurants. Total wages as a percentage of restaurant revenues decreased 0.7% during 2003, due to improvements in controllable labor and floor supervisory wages at our non-comparable restaurants and the ten restaurants we acquired in 2002. However, these improvements were entirely offset by an increase of 0.4% for self-insured workers compensation expenses, 0.2% for bonus expenses and 0.1% for payroll tax expenses. The increase in bonus expenses was primarily due to higher bonuses earned as a result of improved comparable restaurant sales. Our workers compensation expense increased during 2003 due to a combination of higher claims experienced and higher per claim costs.
Operating. Operating expenses increased by $7.7 million, or 18.9%, to $48.1 million, from $40.4 million, due primarily to more restaurants being operated in 2003. Operating expenses as a percentage of restaurant revenues decreased 0.1%, to 15.1%, from 15.2%. We believe the improvement as a percentage of restaurant revenues was due in part to our 4.1% increase in comparable restaurant sales and the discontinuance of one of our marketing funds midway through first quarter 2003, for which we had previously contributed 0.3% of restaurant revenues. These improvements were partially offset by higher utilities, paper packaging costs, telecommunications charges and credit card processing fees.
Occupancy. Occupancy expenses increased by $3.4 million, or 19.2%, to $21.2 million, from $17.8 million, due primarily to more restaurants being operated in 2003. Occupancy expense as a percentage of restaurant revenues was 6.7% for both 2003 and 2002.
Restaurant closures and impairment. We recorded a $1.4 million non-cash impairment charge in 2002 to fully write-down all of the long-lived assets related to one restaurant, which we continue to operate.
Depreciation and amortization. Depreciation and amortization increased $3.2 million, or 24.2%, to $16.4 million, from $13.2 million. The increase was primarily due to the addition of 18 new restaurants opened in 2003 and a full year of depreciation related to the ten restaurants we opened during 2002. Depreciation and amortization expense as a percentage of total revenues increased 0.2%, to 5.0%, from 4.8%. The increase as a percentage of total revenues is primarily a result of newer restaurants having a higher depreciable costs basis than older restaurants.
General and administrative. General and administrative expenses increased by $1.8 million, or 8.6%, to $22.0 million, from $20.2 million, generally due to additional headcount, higher salaries and related costs attributable to operating more company-owned restaurants and to costs associated with our public company reporting requirements. General and administrative expenses as a percentage of total revenues, however, improved 0.7%, to 6.7%, from 7.4%. The improvement in general and administrative expenses as a percentage of total revenues is due primarily to a decrease in marketing expenditures and to our 4.1% increase in comparable restaurant sales. In addition, we had unfilled positions in 2003 that we did not fill until fourth quarter 2003 that positively impacted our results in 2003.
Franchise development. Franchise development expenses decreased $407,900, or 12.5%, to $2.8 million, from $3.3 million. Franchise development expenses as a percentage of total revenues decreased 0.3%, to 0.9%, from 1.2%, due primarily to several unfilled positions that we did not fill until fourth quarter 2003 and to a related reduction in other franchise development expenses, including travel and legal.
Pre-opening costs. Pre-opening costs increased $1.6 million, or 71.8%, to $3.9 million, from $2.3 million, due primarily to the fact that there were 18 company-owned restaurants opened during 2003, compared to ten during 2002. Pre-opening costs as a percentage of total revenues increased 0.4%, to 1.2%, from 0.8%. Pre-opening costs for the restaurants we opened in 2003 averaged $209,900 per restaurant compared to an average of $207,600 per restaurant for news restaurants we opened in 2002.
Gain on lease buy-out. During 2002, we realized a non-recurring gain of $945,000 due to a landlord lease buy-out of one of our company-owned restaurants and, as a result, we relocated the restaurant to a new location during 2002.
Impairment of property held for sale. During 2002, we recognized a $150,000 charge to reduce the carrying value of real estate held for sale to its estimated fair value less cost to sell. This property was subsequently sold in 2002 for its approximate carrying value.
Interest expense. Interest expense decreased by $2.8 million, or 48.4%, to $3.0 million, from $5.8 million. The decrease was due primarily to lower average borrowings outstanding and a reduction in the overall interest rate of our debt in 2003, compared to 2002. Our average borrowings outstanding decreased because net proceeds from our July 2002 initial public offering and our November 2003 secondary offering were used to repay significant portions of our then outstanding borrowings.
Interest income. Interest income decreased $57,200, or 14.4%, to $340,700, from $397,900. The 2003 results include interest income of $298,800 from related party notes receivable, compared to $252,200 in 2002. The remaining change was attributable to decreases in interest income from franchisees and interest earned on our overnight sweep accounts.
Loss on extinguishment of debt. During 2003, we incurred $257,500 of charges related to debt extinguishment, which included a non-cash write-off of $186,400 of capitalized debt issuance costs. During 2002, we incurred $4.3 million of charges related to prepayment penalties of $1.9 million and a $2.4 million non-cash write-off of capitalized debt issuance costs. Debt extinguished in 2003 had a carrying value of $11.4 million compared to $52.9 million in 2002, excluding penalties and fees.
Other. Other income was $14,200 in 2003, compared to other expense of $105,800 in 2002. Other expense principally includes holding costs associated with real estate held for sale, offset in 2003 by a gain on the sale of real estate.
Income before income taxes. As a result of the above, income before income taxes increased $11.6 million, or 98.7%, to $23.3 million, from $11.7 million.
Provision for income taxes. The provision for income taxes increased $4.0 million, or 104.5%, to $7.9 million, from $3.9 million. The increase was due primarily to increased pre-tax earnings and an increase in our estimated effective income tax rate. Our effective income tax rate for 2003 was 33.8%, compared to 32.8% for 2002.
Net income. As a result of the above, net income increased by $7.6 million, or 95.8%, to $15.4 million, from $7.9 million.