UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
June 11, 2002 000-22753
------------- ---------
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-2016614
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
9300 EAST CENTRAL AVENUE
SUITE 100
WICHITA, KANSAS 67206
(Address of principal executive offices) (Zip code)
(316) 634-0505
(Registrant's telephone number, including area code)
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.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS Outstanding at July 24, 2002
COMMON STOCK, $.01 PAR VALUE 10,219,493 SHARES
TOTAL ENTERTAINMENT RESTAURANT CORP.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION ------
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
JUNE 11, 2002 AND DECEMBER 25, 2001 2
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE WEEKS ENDED
JUNE 11, 2002 AND JUNE 12, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWENTY-FOUR WEEKS ENDED
JUNE 11, 2002 AND JUNE 12, 2001 4
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE TWENTY-FOUR WEEKS ENDED
JUNE 11, 2002 AND JUNE 12, 2001 5
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
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TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 11, 2002 December 25, 2001
----------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 729,407 $ 1,346,495
Inventories 1,355,810 1,230,636
Deferred income taxes 228,663 223,742
Other current assets 1,263,500 586,967
----------- -----------
Total current assets 3,577,380 3,387,840
Property and equipment:
Land 600,000 600,000
Buildings 670,629 670,629
Leasehold improvements 31,645,717 26,336,678
Equipment 18,140,469 15,284,124
Furniture and fixtures 4,632,042 3,890,170
----------- -----------
55,688,857 46,781,601
Less accumulated depreciation and amortization 14,293,417 12,249,339
----------- -----------
41,395,440 34,532,262
Other assets:
Goodwill, net of accumulated amortization 3,661,134 3,661,134
Deferred income taxes 932,398 982,875
Other assets 678,469 586,048
----------- -----------
Total other assets 5,272,001 5,230,057
----------- -----------
Total assets $50,244,821 $43,150,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,035,748 $ 3,741,281
Sales tax payable 897,326 529,852
Accrued payroll 897,409 873,765
Accrued payroll taxes 463,770 23,258
Accrued income taxes 1,884,589 2,155,170
Lease obligation for closed store 105,551 158,342
Other accrued liabilities 1,629,382 1,065,734
----------- -----------
Total current liabilities 9,913,775 8,547,402
Notes payable 11,130,000 10,350,000
Deferred revenue 90,029 103,875
Stockholders' equity:
Preferred stock - -
Common stock 88,695 86,656
Additional paid-in capital 19,071,958 17,134,953
Retained earnings 9,950,364 6,927,273
----------- -----------
Total stockholders' equity 29,111,017 24,148,882
----------- -----------
Total liabilities and stockholders' equity $50,244,821 $43,150,159
=========== ===========
See accompanying notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twelve weeks Twelve weeks
ended ended
June 11, 2002 June 12, 2001
------------------- ------------------
Sales:
Food and beverage $19,500,517 $13,201,258
Entertainment and other 1,908,331 1,341,938
----------- -----------
Total net sales 21,408,848 14,543,196
Costs and expenses:
Costs of sales 5,596,385 3,984,438
Restaurant operating expenses 11,272,784 7,588,472
Depreciation and amortization 1,054,611 829,641
Preopening costs 361,180 299,064
----------- -----------
Restaurant costs and expenses 18,284,960 12,701,615
----------- -----------
Restaurant operating income 3,123,888 1,841,581
General and administrative expenses 1,170,409 910,645
Goodwill amortization - 56,345
----------- -----------
Income from operations 1,953,479 874,591
Other income (expense):
Loss on disposal of assets - (28,538)
Other income, principally interest 4 154
Interest expense (118,745) (223,199)
----------- -----------
Income from continuing operations
before income taxes 1,834,738 623,008
Provision for income taxes 689,831 228,601
----------- -----------
Income from continuing operations 1,144,907 394,407
Loss from discontinued operations (19,279) (32,356)
----------- -----------
Net income $ 1,125,628 $ 362,051
=========== ===========
Basic earnings per share:
Income from continuing operations $ 0.13 $ 0.04
Loss from discontinued operations - -
----------- -----------
Basic earnings per share $ 0.13 $ 0.04
=========== ===========
Diluted earnings per share
Income from continuing operations $ 0.12 $ 0.04
Loss from discontinued operations - -
----------- -----------
Diluted earnings per share $ 0.12 $ 0.04
=========== ============
See accompanyong notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twenty-four weeks Twenty-four weeks
ended ended
June 11, 2002 June 12, 2001
------------------ ------------------
Sales:
Food and beverage $ 39,376,430 $ 27,873,344
Entertainment and other 3,857,152 2,827,435
------------ ------------
Total net sales 43,233,582 30,700,779
Costs and expenses:
Costs of sales 11,327,872 8,356,361
Restaurant operating expenses 21,672,858 15,440,736
Depreciation and amortization 2,064,229 1,625,346
Preopening costs 851,821 370,471
------------ ------------
Restaurant costs and expenses 35,916,780 25,792,914
------------ ------------
Restaurant operating income 7,316,802 4,907,865
General and administrative expenses 2,325,674 1,777,493
Goodwill amortization - 112,690
------------ ------------
Income from operations 4,991,128 3,017,682
Other income (expense):
Loss on disposal of assets (18,239) (51,828)
Other income, principally interest 10 194
Interest expense (225,410) (477,838)
------------ ------------
Income from continuing operations
before income taxes 4,747,489 2,488,210
Provision for income taxes 1,737,230 906,989
------------ ------------
Income from continuing operations 3,010,259 $ 1,581,221
Income(loss) from discontinued operations 12,832 (27,961)
------------ ------------
Net income $ 3,023,091 $ 1,553,260
============ ============
Basic earnings per share:
Income from continuing operations $ 0.35 $ 0.18
Income (loss) from discontinued operations - -
------------ ------------
Basic earnings per share $ 0.35 $ 0.18
============ ============
Diluted earnings per share
Income from continuing operations $ 0.33 $ 0.18
Income (loss) from discontinued operations - -
------------ ------------
Diluted earnings per share $ 0.33 $ 0.18
============ ============
See accompanying notes.
- 4 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Twenty-four Twenty-four
weeks ended weeks ended
June 11, 2002 June 12, 2001
--------------- ---------------
Cash flows from operating activities:
Net income $ 3,023,091 $ 1,553,260
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of assets 15,739 51,828
Depreciation and amortization 2,093,378 1,803,091
Deferred income taxes 45,556 50,286
Net change in operating assets and liabilities:
Change in operating assets (911,872) (433,930)
Change in operating liabilities 702,173 (1,296,589)
----------- -----------
Net cash provided by operating activities 4,968,065 1,727,946
Cash flows from investing activities:
Purchases of property and equipment (8,069,683) (2,243,942)
Proceeds from disposal of assets 8,895 20,100
----------- -----------
Net cash used in investing activities (8,060,788) (2,223,842)
Cash flows from financing activities:
Proceeds from revolving note payable to bank 12,825,000 25,385,000
Payments of revolving note payable to bank (12,045,000) (24,115,000)
Proceeds from exercise of stock options 1,695,635 -
Purchases of common stock - (167,316)
----------- -----------
Net cash provided by financing activities 2,475,635 1,102,684
----------- -----------
Net (decrease) increase in cash and cash equivalents (617,088) 606,788
Cash and cash equivalents at beginning of period 1,346,495 2,244,606
----------- -----------
Cash and cash equivalents at end of period $ 729,407 $ 2,851,394
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 243,166 $ 433,703
Cash paid for income taxes 1,726,808 773,993
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts
payable $ 893,763 $ 135,887
Tax benefit related to stock options exercised 243,409 -
See accompanying notes.
- 5 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements in its 2001 Form
10-K. The results of the twelve weeks ended June 11, 2002 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2002.
2. STOCK OPTIONS
During the twelve week period ended June 11, 2002, the Company granted to
certain key employees stock options for 156,637 shares of Common Stock at a
weighted-average exercise price of $8.95 per share and options to purchase
180,722 shares were exercised at a weighted-average exercise price of $8.57 per
share pursuant to its 1997 Incentive and Nonqualified Stock Option Plan. Options
to purchase 29,000 shares were exercised at a weighted-average exercise price of
$5.09 per share pursuant to its 1997 Directors Stock Option Plan.
3. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. The number of weighted averaged
shares outstanding for the twelve week periods ended June 11, 2002 and June 12,
2001 were 8,787,019 and 8,666,111, respectively; the number of weighted average
shares outstanding for the twenty-four week periods ended June 11, 2002 and June
12, 2001 were 8,726,315 and 8,674,490, respectively.
For purposes of diluted computations, the number of shares that would be
issued from the exercise of stock options has been reduced by the number of
shares which could have been purchased from the proceeds at the average market
price of the Company's stock or the price of the Company's stock on the exercise
date if options were exercised during the period presented. The number of shares
resulting from this computation of diluted earnings per share for the twelve
weeks ended June 11, 2002 and June 12, 2001 were 9,366,333 and 8,693,211,
respectively, and for the twenty-four week periods ended June 11, 2002 and June
12, 2001 were 9,180,649 and 8,696,009, respectively.
4. GOODWILL
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective
December 26, 2001. SFAS No. 142 requires that an intangible asset that is
-6-
acquired shall be initially recognized and measured based on its fair value.
SFAS No. 142 also provides that goodwill shall not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment through a comparison of fair value to its carrying value.
No impairment losses were recorded upon the initial adoption of SFAS No. 142.
The effect of the adoption of SFAS No. 142 on net income and earnings per
share is as follows:
Twelve Twelve Twenty-four Twenty-four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
June 11, 2002 June 12, 2001 June 11, 2002 June 12, 2001
------------- ------------- ------------- -------------
Net income, as reported $1,125,628 $ 362,051 $3,023,091 $1,553,260
Goodwill amortization (net of income taxes) -- 42,135 -- 84,292
---------- ---------- ---------- ----------
Net income, as adjusted $1,125,628 $ 404,186 $3,023,091 $1,637,552
Basic earnings per share, as reported $ 0.13 $ 0.04 $ 0.35 $ 0.18
Goodwill amortization (net of income taxes) -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Basic earnings per share, as adjusted $ 0.13 $ 0.05 $ 0.35 $ 0.19
========== ========== ========== ==========
Diluted earnings per share, as reported $ 0.12 $ 0.04 $ 0.33 $ 0.18
Goodwill amortization (net of income taxes) -- 0.01 -- 0.01
---------- ---------- ---------- ----------
Diluted earnings per share, as adjusted $ 0.12 $ 0.05 $ 0.33 $ 0.19
========== ========== ========== ==========
5. NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED Assets. SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
develops a single accounting method under which long-lived assets that are to be
disposed of by sale are measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
the provisions of SFAS No. 144 effective December 26, 2001. The Company closed
and abandoned one restaurant on March 31, 2002. Pursuant to SFAS No. 144, each
restaurant is a component of the entity, and the operations of the closed
restaurant can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of the Company. Accordingly, the
operations of the closed restaurant, net of applicable income tax effect, have
been presented as
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discontinued operations and prior period statements of income have been
reclassified accordingly.
6. LEGAL PROCEEDINGS
Certain former employees have filed a complaint on their behalf and on the
behalf of similarly situated persons alleging the Company violated certain
provisions of the Fair Labor Standards Act. It is not possible at this time for
the Company to evaluate the merits of this claim, the Company's likelihood of
success or the range of potential loss.
7. SUBSEQUENT EVENT
On July 24, 2002 the Company issued 1,350,000 shares of stock at $10.50
per share in a public offering of its stock. Net proceeds from the offering were
$12.9 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this Form 10-Q.
As of June 11, 2002, the Company owned and operated 48 restaurants under
the Fox and Hound Smokehouse & Tavern and Fox and Hound English Pub & Grille
("Fox and Hound"), Bailey's Smokehouse & Tavern, Bailey's Sports Grille and
Bailey's Pub & Grille ("Bailey's") brand names. The Company's restaurants offer
a broad menu of mid-priced appetizers, entrees, and desserts served in generous
portions. In addition, each location features a full-service bar and offers a
wide selection of major domestic, imported and specialty beers. Each restaurant
emphasizes a high energy environment with multiple billiard tables and satellite
and cable coverage of a variety of sporting events and music videos. In addition
to our food, the Company believes that customers are attracted to the elegant
yet comfortable atmosphere of polished brass, embroidered chairs and booths,
hunter green and burgundy walls, and etched glass. The Fox and Hound and
Bailey's restaurants share identical design and operational principles and
menus. As of June 11, 2002, the Company owned and operated 34 Fox and Hound
restaurants and 14 Bailey's restaurants located in Alabama, Arizona, Arkansas,
Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Missouri,
Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee and
Texas. As of June 12, 2001, the Company owned and operated 27 Fox and Hound
restaurants and 13 Bailey's restaurants.
The components of the Company's net sales are food and non-alcoholic
beverages, alcoholic beverages, and entertainment and other (principally
billiard table rental fees). For the twelve weeks ended June 11, 2002, food and
non-alcoholic beverages were 33.2% of total sales, alcoholic beverages were
57.9% of total sales and entertainment and other were 8.9% of total sales. For
the twelve weeks ended June 12, 2001, food and non-alcoholic beverages were
30.9% of total sales, alcoholic beverages were 59.7% of total sales and
entertainment and other were 9.3% of total sales.
-8-
The components of the Company's cost of sales primarily include direct
costs of food, non-alcoholic beverages and alcoholic beverages. These costs are
generally variable and will fluctuate with changes in sales volume and sales
mix.
Components of restaurant operating expenses include operating payroll and
fringe benefits, and occupancy, maintenance and utilities. All but one of the
Company's locations are leased and provide for a minimum annual rent, with some
leases calling for additional rent based on sales volume at the particular
location in excess of specified minimum sales levels.
Depreciation and amortization costs primarily include depreciation and
amortization of capital expenditures for restaurants.
Preopening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide an
infrastructure to support future growth. Management, supervisory and staff
salaries, employee benefits, travel, information systems, training, rent and
office supplies as well as accounting services fees are major items of costs in
this category.
In calculating comparable restaurant sales, the Company includes a
restaurant in the comparable restaurant base after it has been in operation for
18 full months. As of June 11, 2002, there were 35 restaurants in the comparable
restaurant base. Annualized average weekly sales are computed by dividing net
sales during the period by the number of store operating weeks and multiplying
the result by 52.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Operations bear to net sales, and (ii) other selected operating data. The
Company operates on a 52 or 53 week fiscal year ending the last Tuesday in
December. Fiscal year 2001 consisted of 52 weeks and fiscal year 2002 consists
of 53 weeks. Fiscal quarters consist of three accounting periods of 12 weeks
each and a final period of 16 or 17 weeks.
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------ -----------------------
JUNE 11, JUNE 12, JUNE 11, JUNE 12,
2002 2001 2002 2001
----- ----- ----- -----
OPERATING STATEMENT DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales....................................... 26.1 27.4 26.2 27.2
Restaurant operating expenses........................ 52.7 52.2 50.1 50.3
Depreciation and amortization........................ 4.8 5.7 4.8 5.3
Preopening costs..................................... 1.7 2.0 2.0 1.2
----- ----- ----- -----
Restaurant costs and expenses.................... 85.3 87.3 83.1 84.0
----- ----- ----- -----
Restaurant operating income.............................. 14.7 12.7 16.9 16.0
General and administrative expenses...................... 5.5 6.3 5.4 5.8
-9-
Goodwill amortization.................................... -- 0.4 -- 0.4
----- ----- ----- -----
Income from operations................................... 9.2 6.0 11.5 9.8
Loss on disposal of assets............................... -- 0.2 -- 0.2
Interest expense 0.5 1.5 0.5 1.5
----- ----- ----- -----
Income from continuing operations before income taxes.... 8.7 4.3 11.0 8.1
Provision for income taxes 3.3 1.6 4.0 2.9
----- ----- ----- -----
Income from continuing operations........................ 5.4 2.7 7.0 5.2
Loss from discontinued operations (0.1) (0.2) -- (0.1)
----- ----- ----- -----
Net income............................................... 5.3% 2.5% 7.0% 5.1%
RESTAURANT OPERATING DATA (DOLLARS IN THOUSANDS):
Annualized average weekly sales per location............. $1,976 $1,626 $2,052 $1,748
Number of restaurants at end of the period............... 48 40 48 40
TWELVE WEEKS ENDED JUNE 11, 2002 COMPARED TO TWELVE WEEKS ENDED JUNE 12, 2001
Net sales increased $6,866,000 (47.2%) for the twelve weeks ended June 11,
2002 to $21,409,000 from $14,543,000 for the twelve weeks ended June 12, 2001.
This increase was due to a 19.7% increase in store weeks (564 versus 471) as a
result of nine restaurants opened and one restaurant closed since June 12, 2001
and a 21.5% increase in annualized average weekly sales primarily as a result of
increased customer traffic. Comparable restaurant sales increased 10.7% for the
quarter ended June 11, 2002.
Costs of sales increased $1,612,000 (40.5%) for the twelve weeks ended
June 11, 2002 to $5,596,000 from $3,984,000 in the twelve weeks ended June 12,
2001, and decreased as a percentage of sales to 26.1% from 27.4%. This decrease
as a percentage of sales is principally attributable to lower food costs
associated with new barbecue menu items and price increases on selected menu
items implemented in the fourth quarter of fiscal year 2001.
Restaurant operating expenses increased $3,685,000 (48.6%) for the twelve
weeks ended June 11, 2002 to $11,273,000 from $7,588,000 in the twelve weeks
ended June 12, 2001, and increased as a percentage of net sales to 52.7% from
52.2%. This increase as a percentage of sales is principally attributable to
higher hourly labor costs on new units during the initial months after opening.
Depreciation and amortization increased $225,000 (27.1%) for the twelve
weeks ended June 11, 2002 to $1,055,000 from $830,000 in the twelve weeks ended
June 12, 2001, and decreased as a percentage of sales to 4.8% from 5.7%. This
increase in expense is due to additional depreciation on nine restaurants opened
net of one restaurant closed since June 12, 2001.
Preopening costs increased $62,000 for the twelve weeks ended June 11,
2002 to $361,000 from $299,000 in the twelve weeks ended June 12, 2001. This
increase is attributable to the costs incurred for two units that opened during
the twelve weeks ended June 11, 2002 and partial preopening expenses for four
restaurants which have yet to open. Two restaurants were opened in the twelve
weeks ended June 12, 2001.
General and administrative expenses increased $259,000 (28.5%) for the
twelve weeks ended June 11, 2002 to $1,170,000 from $911,000 in the twelve weeks
ended June 12, 2001, due to an increase in corporate infrastucture to support
the Company's expansion. General and administrative expenses decreased as a
percentage of net sales to 5.5% from 6.3%, due to the leverage of infrastructure
expense against a higher sales volume.
Loss on disposal of assets was $29,000 for the twelve weeks ended June 12,
2001. The losses reflect the disposal of certain video games.
-10-
Interest expense was $119,000 for the twelve weeks ended June 11, 2002 and
$223,000 for the twelve weeks ended June 12, 2001. This decrease is due to both
a lower interest rate and lower average balance applicable to the revolving note
payable in the current fiscal year compared with the prior fiscal year.
The effective income tax rate was 37.6% for the twelve weeks ended June
11, 2002 and 36.7% for the twelve weeks ended June 12, 2001.
TWENTY-FOUR WEEKS ENDED JUNE 11, 2002 COMPARED TO TWENTY-FOUR WEEKS ENDED JUNE
12, 2001
Net sales increased $12,533,000 (40.8%) for the 24 weeks ended June 11,
2002 to $43,234,000 from $30,701,000 for the 24 weeks ended June 12, 2001. This
increase was due to an 19.0% increase in store weeks (1,103 versus 927) as a
result of nine restaurants opened and one restaurant closed since June 12, 2001
and a 17.4% increase in annualized average weekly sales primarily as a result of
increased customer traffic. Comparable restaurant sales increased 10.0% for the
24 weeks ended June 11, 2002.
Costs of sales increased $2,972,000 (35.6%) for the 24 weeks ended June
11, 2002 to $11,328,000 from $8,356,000 in the 24 weeks ended June 12, 2001, and
decreased as a percentage of sales to 26.2% from 27.2%. This decrease as a
percentage of sales is principally attributable to lower food costs associated
with new barbecue menu items and price increases on selected menu items
implemented in the fourth quarter of fiscal year 2001.
Restaurant operating expenses increased $6,232,000 (40.4%) for the 24
weeks ended June 11, 2002 to $21,673,000 from $15,441,000 in the 24 weeks ended
June 12, 2001, and decreased as a percentage of net sales to 50.1% from 50.3%.
This decrease as a percentage of sales was attributable to the leveraging of
fixed costs against higher average unit volumes offset by higher hourly labor
costs on new units during the initial months after opening.
Depreciation and amortization increased $439,000 (27.0%) for the 24 weeks
ended June 11, 2002 to $2,064,000 from $1,625,000 in the 24 weeks ended June 12,
2001, and decreased as a percentage of sales to 4.8% from 5.3%. This increase in
expense is due to additional depreciation on nine restaurants opened net of one
restaurant closed since June 12, 2001.
Preopening costs increased $482,000 for the 24 weeks ended June 11, 2002
to $852,000 from $370,000 in the 24 weeks ended June 12, 2001. This increase is
attributable to the costs incurred for six units that opened during the 24 weeks
ended June 11, 2002 and partial preopening expenses for four restaurants which
have yet to open. Two restaurants were opened in the 24 weeks ended June 12,
2001.
General and administrative expenses increased $549,000 (30.8%) for the 24
weeks ended June 11, 2002 to $2,326,000 from $1,777,000 in the 24 weeks ended
June 12, 2001, due to an increase in corporate infrastucture to support the
Company's expansion. General and administrative expenses decreased as a
percentage of net sales to 5.4% from 5.8%, due to the leverage of infrastructure
expense against a higher sales volume.
Loss on disposal of assets was $18,000 for the 24 weeks ended June 11,
2002 and $52,000 for the 24 weeks ended June 12, 2001. The losses reflect the
disposal of certain video games.
Interest expense was $225,000 for the 24 weeks ended June 11, 2002 and
$478,000 for the 24 weeks ended June 12, 2001. This decrease is due to both a
lower interest rate and lower average
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balance applicable to the revolving note payable in the current fiscal year
compared with the prior fiscal year.
The effective income tax rate was 36.6% for the 24 weeks ended June 11,
2002 and 36.5% for the 24 weeks ended June 12, 2001.
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QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
The timing of new unit openings will result in significant fluctuations in
quarterly results. The Company expects seasonality to be a factor in the results
of its business in the future due to expected lower second and third quarter
revenues due to the summer season. The primary inflationary factors affecting
the Company's operations include food, liquor and labor costs. A large number of
the Company's restaurant personnel are tipped employees who are paid at the
federal subminimum wage level; therefore, future subminimum wage changes will
have a significant effect on labor costs. As costs of food and labor have
increased, the Company has historically been able to offset these increases
through economies of scale, improved operating procedures and menu price
changes; however, short-term fluctuations in raw product pricing may have an
impact on the Company's costs of food. To date, inflation has not had a material
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES
As is customary in the restaurant industry, the Company operates with
negative working capital. Negative working capital increased $1,176,000 to
$6,336,000 as of June 11, 2002 from $5,160,000 as of December 25, 2001. This
increase is attributable primarily to the excess of cost of purchases of
property and equipment in excess of working capital provided by operations and
net proceeds from the line of credit. Cash decreased $617,000 at June 11, 2002
compared to the balance at December 25, 2001. The Company does not have
significant receivables or inventory and receives trade credit based upon
negotiated terms in purchasing food and supplies. Because funds available from
cash sales are not needed immediately to pay for food and supplies, or to
finance inventory, they may be considered as a source of financing for
noncurrent capital expenditures.
On September 1, 1998 the Company entered into a loan agreement with
Intrust Bank, N.A. (the "Line of Credit") which provides for a line of credit of
$20,000,000 subject to certain limitations based on earnings before interest,
taxes, depreciation and amortization of the past fifty-two weeks and the amount
of capital lease obligations on personal property. The Line of Credit is secured
by substantially all of the Company's assets. The Line of Credit requires
monthly payments of interest only until November 1, 2003, at which time equal
monthly installments of principal and interest are required as necessary to
fully amortize the outstanding indebtedness plus future interest over a period
of four years. Interest is accrued at 1/2% below the prime rate as published in
THE WALL STREET JOURNAL. Proceeds from the Line of Credit are being used for
restaurant development. As of June 11, 2002 the Company had borrowed $11,130,000
under the Line of Credit. The Company is in compliance with all debt covenants.
Cash flows from operations were $4,968,000 in the 24 weeks ended June 11,
2002 compared to $1,728,000 in the 24 weeks ended June 12, 2001. Purchases of
property and equipment were $8,070,000 in the 24 weeks ended June 11, 2002
compared to $2,244,000 in the 24 weeks ended June 12, 2001. Net advances of the
revolving note payable to bank was $780,000 for the 24 week period ending June
11, 2002 compared to $1,270,000 for the 24 week period ending June 12, 2001. At
June 11, 2002, the Company had $729,000 in cash and cash equivalents.
The Company intends to open ten to twelve new locations in both fiscal
year 2002 and fiscal year 2003. At June 11, 2002, six units had been opened in
fiscal 2002, four units were under construction and an additional two leases had
been executed. The Company is currently evaluating locations in markets familiar
to its management team. However, the number of locations actually opened and the
timing thereof may vary depending upon the ability of the
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Company to locate suitable sites and negotiate favorable leases. The Company
expects to expend approximately $14.0 to $18.0 million to open new locations
over the next twelve months.
The Company believes the funds available from the Facility and its cash
flow from operations will be sufficient to satisfy its working capital and
capital expenditure requirements for at least the next twelve months. There can
be no assurance, however, that changes in the Company's operating plans, the
acceleration or modification of the Company's expansion plans, lower than
anticipated revenues, increased expenses, stock repurchases, potential
acquisitions or other events will not cause the Company to seek additional
financing sooner than anticipated, prevent the Company from achieving the goals
of its expansion strategy or prevent any newly opened locations from operating
profitably. There can be no assurance that additional financing will be
available on terms acceptable to the Company or at all.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this report
will prove to be accurate. Our actual results may differ materially from the
forward-looking statements contained herein. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to, potential increases in food, alcohol, labor,
and other operating costs, changes in competition, the inability to find
suitable new locations, changes in consumer preferences or spending patterns,
changes in demographic trends, the effectiveness of our operating and growth
initiatives and promotional efforts, and changes in government regulation.
Further information about the factors that might affect the Company's financial
and other results are included in the Company's 10-K, filed with the Securities
and Exchange Commission. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's Line of Credit has a variable rate which is directly
affected by changes in U.S. interest rates. The average interest rate of the
Facility was 4.25% for the twelve weeks ended June 11, 2002. The interest rate
at June 11, 2002 was 4.25%. The following table presents the quantitative
interest rate risks at June 11, 2002:
Principal Amount by Expected Maturity
--------------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2002 2003 2004 2005 2006 after Total 6/11/02
---------------------- ---- ---- ---- ---- ---- ----- ----- -------
Variable rate debt - $427 $2,627 $2,740 $2,859 $2,477 $11,130 $11,130
Average Interest Rate--
1/2% below prime - 4.25% 4.25% 4.25% 4.25% 4.25%
The Line of Credit was repaid on July 24, 2002 with the proceeds of the
public offering of the Company's stock as discussed in Note 7 to the Financial
Statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 28, 2001, Patrick O'Shea, David W. Faber, Ann Swanson, Stacy
Gregory, Wes L. Patterson, Dale Sproat, Mark Thagard and Patrick Wilson filed a
complaint on their own behalf and on behalf of other similarly situated persons
against us; Fox & Hound of Indiana, Inc., our subsidiary; Gary Judd, our
President; Steven M. Johnson, our Chief Executive Officer; J.C. Weinberg, our
former Chief Operating Officer; and Kenneth Syvarth, our former Vice President
-- Operations and current Chief Operating Officer, in the United States District
Court for the Southern District of Indiana.
The plaintiffs allege that they were employed by the defendants with the
titles of manager-in-training, assistant manager and/or general manager, and
that we and the other defendants willfully and in bad faith failed to pay the
defendants overtime pay for hours worked in excess of forty hours per week in
violation of the provisions of the Fair Labor Standards Act. The plaintiffs'
complaint seeks (i) a declaratory judgment that we and other defendants violated
the plaintiffs' legal rights; (ii) an accounting of compensation to which the
defendants are owed; (iii) monetary damages in the form of back pay compensation
and benefits, unpaid entitlements, liquidated damages and pre-judgment and
post-judgment interest; and (iv) attorneys' fees and costs. We and other
defendants have filed answers to the plaintiffs' complaint.
On June 4, 2002, the court entered an order allowing the plaintiffs to
send a notice to all persons who have worked for us under the above
employee-manager titles since February 29, 1998, so that such persons may decide
whether to opt-in to the collective action. The court specifically excluded from
the collective action those employees who have arbitration agreements with us
(which we estimate to be approximately 40% of the persons alleged by the
plaintiffs to be similarly situated) and those employees whose claims are barred
by the statute of
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limitations. Persons receiving notice will have a period of 120 days after the
notice is sent to opt into the action. The trial of the case is currently
scheduled for March 2003.
On October 2, 2000, R&A Bailey & Company of Dublin, Ireland, filed a
notice of opposition with the Trademark Trial and Appeal Board of the U.S.
Patent and Trademark Office to our U.S. service mark applications for "BAILEY'S
PUB & GRILLE" (color), "BAILEY'S PUB & GRILLE" (stylized), and "BAILEY'S PUB &
GRILLE." Additionally, on November 14, 2000, R&A Bailey & Company filed a
petition with the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office to cancel our U.S. service mark registrations for "7 BAILEY'S
SPORTS GRILLE" (+ Design), "SERIOUS FUN 7 BAILEY'S SPORTS GRILLE" (+ Design),
and "BAILEY'S SPORTS GRILLE."
R&A Bailey & Company claims to be the owner of several U.S. trademark
registrations, including "BAILEYS ORIGINAL IRISH CREAM" (+ Design), "BAILEYS,"
"BAILEYS THE ORIGINAL LIGHT CREAM," "BAILEYS" (+ Design), and "BAILEYS YUM,"
that are claimed to be used in association with liqueurs, distilled spirits, ice
cream, coffee cups and other ceramic accessories. R&A Bailey & Company has
alleged that our cited registrations and applications cause it damage, are
likely to create a likelihood of confusion, mistake or deception, and would
likely dilute and lessen its "famous" marks in violation of the Lanham Act. R&A
Bailey & Company seeks cancellation of our registrations and opposes the
registration of our applications for registration of the above-listed marks.
On December 29, 2000, we filed an answer to R&A Bailey & Company's notice
of opposition, denying its allegations. One February 16, 2001, we filed a
Stipulated Motion to Extend Answer to Petition in response to the petition to
cancel by R&A Bailey & Company. The actions have been suspended by the Trademark
Trial and Appeal Board to allow the parties time to negotiate for possible
settlement of these pending actions. We are actively pursuing settlement, and we
are of the opinion that any resulting liability should not have a material
adverse effect on our financial performance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SECURITIES SOLD
(c) The following unregistered securities were issued by the Company during
the twelve weeks ended June 11, 2002:
Number of Shares
Description of Sold/Issued/Subject Offering/Exercise
Date of Sale/issuance Securities Issued to Options or Warrants Price Per Share
--------------------- ----------------- ---------------------- ---------------
April 2, 2002 Common Stock Options 100,000 $ 7.62
April 2, 2002 Common Stock 3,922 $ 3.19
April 18, 2002 Common Stock 5,883 $ 4.25
April 18, 2002 Common Stock 1,250 $ 1.75
April 18, 2002 Common Stock 166,667 $ 9.00
April 30, 2002 Common Stock Options 56,637 $ 11.30
May 22, 2002 Common Stock 10,000 $ 3.38
May 22, 2002 Common Stock 2,000 $ 1.69
May 22, 2002 Common Stock 1,000 $ 1.88
May 23, 2002 Common Stock 10,000 $ 9.00
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May 23, 2002 Common Stock 3,000 $ 4.00
May 23, 2002 Common Stock 2,000 $ 2.25
May 23, 2002 Common Stock 1,000 $ 2.19
May 31, 2002 Common Stock 3,000 $ 2.75
All of the above options were granted to certain key employees pursuant
to the 1997 Incentive and Nonqualified Option Plan ("the Employee Option
Plan"). The options for employees have a vesting period three to five
years and a life of ten years. All of the above common stock was issued
to an aggregate of six current or former key employees or directors upon
the exercise of options previously granted pursuant to the Employee
Option Plan or the 1997 Directors Stock Option Plan.
The issuance of these securities is claimed to be exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, as transactions by an issuer not involving a public offering.
There were no underwriting discounts or commissions paid in connection
with the issuance of any of these securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On May 17, 2002, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, the stockholders elected Steven M. Johnson, Gary M.
Judd, and John D. Harkey, Jr. to the Board of Directors to serve until the 2005
Annual Meeting of Stockholders and until their successors have been duly elected
and qualified. As to the new elected Directors, there were 7,976,496 votes "For"
and 80,206 votes "Withheld" for Steven M. Johnson, 7,976,496 votes "For" and
80,206 votes "Withheld" for Gary M. Judd, and 7,981,496 votes "For" and 75,206
votes "Withheld" for John D. Harkey, Jr. The continuing directors and the
expiration of their current terms as directors are as follows:
C. Wells Hall, III........................2003
James K. Zielke...........................2003
E. Gene Street............................2003
Dennis L. Thompson........................2004
Stephen P. Hartnett.......................2004
Thomas A. Hager...........................2004
The stockholders also ratified the appointment of KPMG LLP as the
Company's independent auditors for the year ending December 31, 2002. As to the
ratification of auditors, there were 8,051,356 votes "For," 406 votes "Against,"
and 4,940 votes "Abstained."
In addition, the stockholders voted to amend the Company's 1997 Directors
Stock Option Plan to increase the number of authorized shares reserved for
issuance pursuant to the Plan, from 150,000 shares of Common Stock to 400,000
shares of Common Stock. As to the amendment, there were 7,754,155 votes "For,"
300,224 votes "Against," and 2,323 votes "Abstained."
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None
Reports on Form 8-K
None
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TOTAL ENTERTAINMENT RESTAURANT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Registrant)
Date July 25, 2002 /s/ James K. Zielke
-------------------- ------------------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
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