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
September 7, 1999 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 October 22, 1999
----- -------------------------------
Common Stock, $.01 par value 10,415,000 shares
<PAGE>
TOTAL ENTERTAINMENT RESTAURANT CORP.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 7, 1999 and December 29, 1998 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
September 7, 1999 and September 8, 1998 3
Condensed Consolidated Statements of
Operations for the thirty-six weeks ended
September 7, 1999 and September 8, 1998 4
Condensed Consolidated Statements of
Cash Flows for the thirty-six weeks ended
September 7, 1999 and September 8, 1998 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
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<PAGE>
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 7, 1999 December 29, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,395,847 $ 945,861
Inventories 947,718 854,686
Pre-opening costs - net -- 1,789,740
Other current assets 833,122 769,155
----------- -----------
Total current assets 4,176,687 4,359,442
Property and equipment:
Land 600,000 600,000
Buildings 655,798 655,795
Leasehold improvements 20,642,000 19,175,677
Equipment 13,174,504 11,922,806
Furniture and fixtures 3,183,400 2,633,742
----------- -----------
38,255,702 34,988,020
Less accumulated depreciation and amortization 4,926,089 2,830,656
----------- -----------
33,329,613 32,157,364
Other assets:
Goodwill, net of accumulated amortization 4,224,586 4,393,621
Deferred taxes 636,777 --
Other assets 407,903 374,007
----------- -----------
Total other assets 5,269,266 4,767,628
----------- -----------
Total assets $42,775,566 $41,284,434
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,758,919 $ 3,666,310
Accounts payable - affiliates -- 11,451
Accrued payroll 543,101 465,519
Accrued income taxes 762,052 358,583
Other accrued liabilities 1,132,312 804,257
Reserve for store closures 394,039 --
----------- -----------
Total current liabilities 4,590,423 5,306,120
Notes payable 15,545,000 $11,815,000
Deferred income taxes -- 427,537
Stockholders' Equity:
Preferred stock -- --
Common stock 104,150 104,150
Additional paid-in capital 20,571,178 20,571,178
Retained earnings 1,964,815 3,060,449
----------- -----------
Total stockholders' equity 22,640,143 23,735,777
----------- -----------
Total liabilities and stockholders' equity $42,775,566 $41,284,434
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Twelve weeks Twelve weeks
ended ended
Sept. 7, 1999 Sept. 8, 1998
------------- -------------
<S> <C> <C>
Net sales:
Food and beverage $ 10,235,619 $ 6,042,657
Entertainment and other 1,205,036 879,239
------------ ------------
Total net sales 11,440,655 6,921,896
Costs and expenses:
Costs of sales 3,133,568 1,922,163
Restaurant operating expenses 6,496,924 3,415,245
Depreciation and amortization 862,511 607,743
Store closure expense 1,086,785 --
------------ ------------
Entertainment and restaurant costs and expenses 11,579,788 5,945,151
------------ ------------
Entertainment and restaurant operating (loss) income (139,133) 976,745
General and administrative expenses 951,862 560,007
Goodwill amortization 56,346 56,346
------------ ------------
(Loss) income from operations (1,147,341) 360,392
Other income (expense):
Other income, principally interest -- 5,360
Interest expense (345,674) (9,285)
------------ ------------
(Loss) income before income taxes (1,493,015) 356,467
Income tax (benefit) expense (552,415) 131,874
------------ ------------
Net (loss) income $ (940,600) $ 224,593
============ ============
Basic (loss) earnings per share $ (0.09) $ 0.02
============ ============
Diluted (loss) earnings per share $ (0.09) $ 0.02
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirty-six Thirty-six
weeks ended weeks ended
Sept. 7, 1999 Sept. 8, 1998
------------- -------------
<S> <C> <C>
Net sales:
Food and beverage $ 34,664,130 $ 16,667,860
Entertainment and other 3,956,461 2,732,364
------------ ------------
Total net sales 38,620,591 19,400,224
Costs and expenses:
Costs of sales 10,644,389 5,232,219
Restaurant operating expenses 20,481,520 8,864,729
Depreciation and amortization 2,520,572 1,562,352
Store closure expense 1,086,785 --
------------ ------------
Entertainment and restaurant costs and expenses 34,733,266 15,659,300
------------ ------------
Entertainment and restaurant operating income 3,887,325 3,740,924
General and administrative expenses 2,849,448 1,680,452
Goodwill amortization 169,036 169,036
------------ ------------
Income from operations 868,841 1,891,436
Other income (expense):
Other income, principally interest -- 70,793
Interest expense (817,562) (9,463)
------------ ------------
Income before income taxes 51,279 1,952,766
Provision for income taxes 19,377 722,294
------------ ------------
Income before cumulative effect of a
change in accounting principle 31,902 1,230,472
Cumulative effect of change in
accounting principle (net of income tax) (1,127,536) --
------------ ------------
Net (loss) income $ (1,095,634) $ 1,230,472
============ ============
Basic (loss) earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.00 $ 0.12
Cumulative effect of change in
accounting principle (net of income tax) (0.11) --
------------ ------------
Basic (loss) earnings per share $ (0.11) $ 0.12
============ ============
Diluted (loss) earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.00 $ 0.12
Cumulative effect of change in
accounting principle (net of income tax) (0.11) --
------------ ------------
Diluted (loss) earnings per share $ (0.11) $ 0.12
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirty-six weeks Thirty-six weeks
ended September 7, ended September 8,
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,095,634) $ 1,230,472
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 1,127,536 --
Reserve for store closure 1,086,785 --
Deferred income taxes (402,110) 60,037
Depreciation and amortization 2,689,608 1,731,388
Net change in operating assets and liabilities:
Change in operating assets (243,368) (1,652,737)
Change in operating liabilities (1,109,736) 955,270
----------- -----------
Net cash provided by operating activities 2,053,081 2,324,430
Cash flows from investing activities:
Purchases of property and equipment (4,333,095) (9,214,203)
Proceeds from sale of marketable securities -- 3,315,056
----------- -----------
Net cash used in investing activities (4,333,095) (5,899,147)
Cash flows from financing activities:
Proceeds from revolving note payable to bank, net 3,730,000 2,455,000
----------- -----------
Net cash provided by financing activities 3,730,000 2,455,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,449,986 (1,119,717)
Cash and cash equivalents at beginning of period 945,861 1,220,598
----------- -----------
Cash and cash equivalents at end of period $ 2,395,847 $ 100,881
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 789,900 $ 5,327
Cash paid for income taxes 15,400 589,008
</TABLE>
See accompanying notes.
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<PAGE>
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 1998 Form
10-K. The results of the twelve weeks and thirty-six weeks ended September 7,
1999 are not necessarily indicative of the results to be expected for the full
year ending December 28, 1999.
2. Stock Options
During the thirty-six week period ended September 7, 1999, the Company
granted to certain key employees stock options for 494,292 shares of Common
Stock at exercise prices ranging from $2.03125 to $4.75000 per share pursuant to
its 1997 Incentive and Nonqualified Stock Option Plan. The Company also granted
to certain non-employee Directors stock options for 46,000 shares of Common
Stock at exercise prices ranging from $2.25000 to $4.31250 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 all periods presented were 10,415,000.
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 September 7, 1999 and September 8, 1998 was 10,415,202 and
10,416,083, respectively, and for the thirty-six weeks ended September 7, 1999
and September 8, 1998 was 10,457,910 and 10,422,716, respectively.
4. Store Closure Expense
Store closure expense represents the estimated costs of closing the Fox &
Hound in Davenport, Iowa. The expense includes $394,039 of future lease costs,
$639,974 in abandoned leasehold improvements and $52,772 in abandoned furniture,
fixtures and equipment.
5. Recently Issued Accounting Standards
The Company adopted Statement of Position 98-5, Reporting on Costs of
Start-Up Activities, which requires that preopening and other start-up costs be
expensed as incurred rather than capitalized. The adoption has been made
effective as of the beginning of the Company's current fiscal year. As a result
of the adoption, the Company has begun to report preopening costs as part of its
entertainment and restaurant operating expenses, which in turn will result in
lower future amortization expense. The Company had amortized preopening costs
over a one-year period following the opening of its restaurants. The cumulative
effect of the change in accounting,
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<PAGE>
which totaled approximately $1,128,000 net of taxes of $662,000 or $0.11 per
share, was recorded as a one-time charge in the Company's first quarter results.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 defines derivative instruments and requires that these items be recognized
as assets or liabilities in the statement of financial position. This Statement
was originally effective for fiscal quarters and fiscal years beginning after
June 15, 1999; however, the FASB has delayed the effective date of SFAS No. 133
to fiscal quarters and fiscal years beginning after June 15, 2000. As of
September 7, 1999, the Company does not have any derivative instruments.
Item 2. Management's Discussion and Analysis 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 September 7, 1999, the Company owned and operated 36 entertainment
and restaurant locations under the Fox and Hound English Pub & Grille ("Fox and
Hound"), Bailey's Sports Grille and Bailey's Pub & Grille ("Bailey's") brand
names. The Company's entertainment restaurant locations combine a comfortable
and inviting social gathering place, full menu and full-service bar,
state-of-the-art audio and video systems for sports and music entertainment,
traditional games of skill such as pocket billiards and a late-night dining
alternative, all in a single location. As of September 7, 1999, the Company
owned and operated 24 Fox and Hounds and 12 Bailey's located in Alabama,
Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Missouri, Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina,
Tennessee and Texas. As of September 8, 1998, the Company owned and operated 13
Fox and Hounds and 10 Bailey's.
The components of the Company's net sales are food and non-alcoholic
beverages, alcoholic beverages, and entertainment and other. For the thirty-six
weeks ended September 7, 1999, food and non-alcoholic beverages were 35.5% of
total sales, alcoholic beverages were 54.3% of total sales and entertainment and
other were 10.2% of total sales. For the thirty-six weeks ended September 8,
1998, food and non-alcholic beverages were 30.5% of total sales, alcoholic
beverages were 55.4% of total sales and entertainment and other were 14.1% of
total sales.
Components of restaurant operating expenses include operating payroll and
fringe benefits, occupancy, advertising and promotion. These costs are generally
variable and will fluctuate with changes in sales volume and sales mix. 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 of specified minimum levels.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide an
infrastructure to support future growth. In addition, certain expenses of
recruiting and training unit management personnel are also included. 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.
- 7 -
<PAGE>
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:
<TABLE>
<CAPTION>
Twelve Weeks Ended(1) Thirty-six Weeks Ended(1)
--------------------- -------------------------
Sept. 7, Sept. 8, Sept. 7, Sept. 8,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Statement Data:
Net sales .............................................. 100.0 100.0 100.0 100.0
Costs and expenses:
Costs of sales ...................................... 27.4 27.8 27.6 27.0
Restaurant operating expenses ....................... 56.8 49.3 53.0 45.6
Depreciation and amortization ....................... 7.5 8.8 6.5 8.1
Store closure expense ............................... 9.5 -- 2.8 --
-------- -------- -------- --------
Restaurant costs and expenses .................... 101.2 85.9 89.9 80.7
-------- -------- -------- --------
Restaurant operating (loss) income ..................... (1.2) 14.1 10.1 19.3
General and administrative expenses .................... 8.3 8.1 7.4 8.7
Goodwill amortization .................................. 0.5 0.8 0.4 0.9
-------- -------- -------- --------
(Loss) income from operations .......................... (10.0) 5.2 2.3 9.7
Other income, principally interest ..................... -- 0.1 -- 0.4
Interest expense ....................................... (3.0) -- (2.2) --
-------- -------- -------- --------
(Loss) income before provision for income taxes and
cumulative effect of a change in accounting principle (13.0) 5.2 0.1 10.1
Income tax (benefit) expense............................ (4.8) 1.9 -- 3.7
-------- -------- -------- --------
(Loss) income before cumulative effect of a change in
accounting principle ................................ (8.2) 3.3 0.1 6.4
Cumulative effect of change in accounting principle .... -- -- (2.9) --
-------- -------- -------- --------
Net (loss) income ...................................... (8.2) 3.3 (2.8) 6.4
======== ======== ======== ========
Restaurant Operating Data (dollars in thousands):
Annualized average weekly sales per location (2) ....... $ 1,377 $ 1,460 $ 1,570 $ 1,544
Number of restaurants at end of the period ............ 36 23 36 23
</TABLE>
(1) The Company operates on a fifty-two or fifty-three week fiscal year ending
the last Tuesday in December. The fiscal quarters for the Company consist
of accounting periods of twelve, twelve, twelve and sixteen or seventeen
weeks, respectively.
(2) Annualized average weekly sales per location are computed by dividing net
sales for full weeks open during the period by the number of full weeks
open and multiplying the result by fifty-two.
Twelve Weeks Ended September 7, 1999 Compared to Twelve Weeks Ended September 8,
1998
Net sales increased $4,519,000 (65.3%) for the twelve weeks ended
September 7, 1999 to $11,441,000 from $6,922,000 for the twelve weeks ended
September 8, 1998, which is principally attributable to sales from the fourteen
new locations opened since September 8, 1998. Same store sales increased 0.5% in
the twelve weeks ended September 7, 1999 compared to the twelve weeks ended
September 8, 1998.
Costs of sales (primarily food and beverages) increased $1,212,000 (63.1%)
for the twelve weeks ended September 7, 1999 to $3,134,000 from $1,922,000 in
the twelve weeks ended
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<PAGE>
September 8, 1998, and decreased as a percentage of sales to 27.4% from 27.8%.
This decrease is principally attributable to an improvement in controls over
food and beverage costs.
Restaurant operating expenses increased $3,082,000 (90.2%) for the twelve
weeks ended September 7, 1999 to $6,497,000 from $3,415,000 in the twelve weeks
ended September 8, 1998, and increased as a percentage of net sales to 56.8%
from 49.3%. This increase is attributable to higher labor costs resulting from
the increase in food sales as a portion of the overall sales mix (which has a
higher labor cost compared to beverages and entertainment), higher maintenance
costs, higher travel costs associated with training new managers, higher
occupancy costs for units opened since September 1998, a one-time charge for a
state sales tax assessment, and the overall deleveraging of fixed operating
expenses as a result of lower average sales volumes per location.
Depreciation and amortization increased $255,000 (41.9%) for the twelve
weeks ended September 7, 1999 to $863,000 from $608,000 in the twelve weeks
ended September 8, 1998, and decreased as a percentage of sales to 7.5% from
8.8%. This percentage decrease is due principally to the change in accounting
method for preopening expenses which, prior to 1999, were capitalized and then
amortized over a twelve month period. The preopening amortization expense
included for the twelve weeks ended September 8, 1998 was 2.6% of sales.
Store closure expense was $1,087,000 and represents the estimated costs
associated with closing the Fox & Hound in Davenport, Iowa. The expense includes
$394,000 of future lease costs, $640,000 in abandoned leasehold improvements
and $53,000 in abandoned furniture, fixtures and equipment. This unit was opened
in June 1998 and has been experiencing consistent negative cash flows due to low
sales volumes.
General and administrative expenses increased $392,000 (70.0%) for the
twelve weeks ended September 7, 1999 to $952,000 from $560,000 in the twelve
weeks ended September 8, 1998, and increased as a percentage of sales to 8.3%
from 8.1%.
The interest earned during the twelve weeks ended September 8, 1998 was
from the investment of the net proceeds of the initial public offering of the
Company, which commenced on July 17, 1997 (the "Initial Public Offering"). The
decrease in interest earned resulted from the prior utilization of the proceeds
from the Initial Public Offering to develop additional locations. Interest
expense increased $337,000 for the twelve weeks ended September 7, 1999 to
$346,000. This increase reflects the borrowings made to fund additional unit
development since June 1998.
The effective income tax rate for the twelve weeks ended September 7, 1999
and September 8, 1998 was 37.0%.
Thirty-six Weeks Ended September 7, 1999 Compared to Thirty-six Weeks Ended
September 8, 1998
Net sales increased $19,220,000 (99.1%) for the thirty-six weeks ended
September 7, 1999 to $38,620,000 from $19,400,000 for the thirty-six weeks ended
September 8, 1998, which is principally attributable to sales from the fourteen
new locations opened since June 1998. Same store sales decreased 2.1% in the
thirty-six weeks ended September 7, 1999 compared to the thirty-six weeks ended
September 8, 1998.
Costs of sales (primarily food and beverages) increased $5,412,000
(103.4%) for the thirty-six weeks ended September 7, 1999 to $10,644,000 from
$5,232,000 in the thirty-six weeks ended September 8, 1998, and increased as a
percentage of sales to 27.6% from 27.0%. This increase is principally
attributable to an increase in food sales as a portion of the overall sales mix,
which has a higher cost of sales compared to beverages and entertainment.
Restaurant operating expenses increased $11,617,000 (131.0%) for the
thirty-six weeks ended September 7, 1999 to $20,482,000 from $8,865,000 in the
thirty-six weeks ended September 8, 1998, and increased as a percentage of net
sales to 53.0% from 45.6%. Most of this increase is
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<PAGE>
attributable to higher labor costs resulting from the increase in food sales as
a portion of the overall sales mix (which has a higher labor cost compared to
beverages and entertainment), higher maintenance costs, higher travel costs
associated with training new managers, higher occupancy costs for units opened
since September 1998, and a one-time charge for a state sales tax assessment.
This increase is also attributable to the change in accounting method for
preopening expenses which, prior to 1999, were capitalized and then amortized
over a twelve month period. The preopening expenses included in restaurant
operating expenses for the thirty-six week period ended September 7, 1999 was
$484,000 or 1.3% of sales.
Depreciation and amortization increased $959,000 (61.4%) for the
thirty-six weeks ended September 7, 1999 to $2,521,000 from $1,562,000 in the
thirty-six weeks ended September 8, 1998, and decreased as a percentage of sales
to 6.5% from 8.1%. This percentage decrease is due principally to the change in
accounting method for preopening expenses. The preopening amortization expense
included in depreciation and amortization for the thirty-six weeks ended
September 8, 1998 was $472,000 or 2.4% of sales.
Store closure expense was $1,087,000 and represents the estimated costs
associated with closing the Fox & Hound in Davenport, Iowa. The expense includes
$394,000 of future lease costs, $640,000 in abandoned leasehold improvements
and $53,000 in abandoned furniture, fixtures and equipment. This unit was opened
in June 1998 and has been experiencing consistent negative cash flows due to low
sales volumes.
General and administrative expenses increased $1,169,000 (69.6%) for the
thirty-six weeks ended September 7, 1999 to $2,849,000 from $1,680,000 in the
thirty-six weeks ended September 8, 1998, and decreased as a percentage of sales
to 7.4% from 8.7%. This percentage decrease reflects the leveraging of sales
from the fourteen new units added since September 1998. For fiscal 1998 and
through February 28, 1999, certain accounting and administrative services were
contracted from Coulter Enterprises, Inc. ("CEI"), a restaurant management
services company owned by the Company's former Chairman of the Board, Jamie B.
Coulter. The service agreement provided for specified accounting and
administrative services to be provided on a cost pass-through basis. For fiscal
1998 and through February 28, 1999, the fixed annual charge was $194,500, plus
an additional fee of $466 per restaurant per 28-day accounting period.
On October 19, 1998, Lone Star Steakhouse & Saloon, Inc. ("Lone Star"), a
restaurant company of which Mr. Coulter is chairman and CEO, purchased certain
assets and assumed certain liabilities of CEI, including the former services
agreement with the Company. From October 19, 1998 to February 28, 1999, such
services were provided by Lone Star. Beginning March 1, 1999, these services
were provided by Franchise Services Company ("FSC") at a market rate.
The interest earned during the thirty-six weeks ended September 8, 1998
was from the investment of the net proceeds of the Initial Public Offering. The
decrease in interest earned resulted from the prior utilization of the proceeds
from the Initial Public Offering to develop additional locations. Interest
expense increased $809,000 for the thirty-six weeks ended September 7, 1999 to
$818,000. This increase reflects the borrowings made to fund additional unit
development since September 1998.
The effective income tax rate for the thirty-six weeks ended September 7,
1999 and September 8, 1998 was 37.0.
Quarterly Fluctuations, Seasonality and Inflation
As a result of the revenues associated with each new location, the timing
of new unit openings will result in significant fluctuations in quarterly
results. The Company expects seasonality to be a factor in the operation or
results of its business in the future due to expected lower second and
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<PAGE>
third quarter revenues during the summer season. The primary inflationary
factors affecting the Company's operations include food, liquor and labor costs.
Although a large number of the Company's restaurant personnel are paid at the
federal minimum wage level, the majority of personnel are tipped employees, and
therefore, recent as well as future minimum wage changes are likely to have
little 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 and improved operating procedures. To date, inflation has not had a
material impact on operating margins.
Liquidity and Capital Resources
For the thirty-six week period ending September 7, 1999, cash flows from
operations were $2,053,000, purchases of property and equipment were $4,333,000,
and net proceeds from the revolving note payable to bank were $3,730,000. At
September 7, 1999, the Company had $2,396,000 in cash and cash equivalents. The
Company intends to open no additional new locations during the remainder of
1999. Depending upon the number of shares of the Company's stock which are
repurchased pursuant to the Repurchase Program described below, the Company may
open up to 4 locations in 2000. One lease has been executed and one unit is
currently under a non-binding letter of intent to lease with pending
contingencies. 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 Company to locate
suitable sites and negotiate favorable leases. Depending upon the number of
shares of the Company's stock which are repurchased pursuant to the Repurchase
Program described below, the Company expects to expend approximately up to $5.0
million to open new locations over the next twelve months. In order to fund new
unit development, the Company has entered into a $20 million line of credit with
Intrust Bank, N.A. (the "Facility"), of which $4,455,000 is available at
September 7, 1999.
On October 5, 1999 the Company announced a program to repurchase up to
1,000,000 shares of the Company's common stock (the "Repurchase Program"). The
timing, price, quantity and manner of purchases will be made at the discretion
of management and will depend upon market conditions. The Company will fund any
share repurchases by utilizing the Facility. Depending upon the number of shares
repurchased and the price paid for each share, the Repurchase Program could
reduce the number of restaurants to be opened by the Company in fiscal year
2000.
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 as outlined above,
lower than anticipated revenues, increased expenses, 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.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 defines derivative instruments and requires that these items be recognized
as assets or liabilities in the statement of financial position. This Statement
is
- 11 -
<PAGE>
effective for fiscal quarters and fiscal years beginning after June 15, 1999;
however, the FASB has delayed the effective date of SFAS No. 133 to fiscal
quarters and fiscal years beginning after June 15, 2000. As of September 7, 1999
the Company does not have any derivative instruments.
Year 2000 Readiness Disclosures
The Company utilizes and is dependent upon computer systems and software
to conduct its business. In 1997, the Company initiated a review and assessment
of all hardware and software to confirm they will function properly in the year
2000. The systems and software include those developed and maintained by FSC's
in-house computer department as well as purchased software which is run on
in-house computer systems, including POS systems and back-of-house systems in
the units. FSC has informed the Company that the systems and software utilized
by FSC are year 2000 compliant. The Company has recently completed an upgrade of
its POS and back-of-house systems to allow for a seamless interface with FSC's
accounting systems. Certain back-of-house applications were made year 2000
compliant as part of this upgrade.
As noted above, the Company believes it has completed all necessary phases
of the year 2000 project and believe that all systems and software are now year
2000 compliant. In the event the Company does not have systems and software that
are year 2000 compliant, the Company might be unable to process transactional
and financial reporting information. In addition, disruptions in the economy
generally resulting from the year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
The Company has contingency plans for certain applications and is working
on such plans for others. These contingency plans involve, among other actions,
manual workarounds and adjusting staffing strategies.
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. 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 and liquor costs, competition and
the inability to find suitable new locations. 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.
- 12 -
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's Facility has a variable rate which is directly affected by
changes in U.S. interest rates. The average interest rate of the Facility was
7.32% for the thirty-six weeks ended September 7, 1999. The following table
presents the quantitative interest rate risks at September 7, 1999:
<TABLE>
<CAPTION>
Principal Amount by Expected Maturity
-------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 1999 2000 2001 2002 2003 after Total 9/7/99
---------------------- ---- ---- ---- ---- ---- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt -- -- $772 $4,849 $5,238 $4,685 $15,545 $15,545
Average Interest Rate--
1/2% below prime 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
</TABLE>
PART II. OTHER INFORMATION
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 September 7, 1999:
<TABLE>
<CAPTION>
Number of Shares
Description of Sold/Issued Subject Offering/Exercise
Date of Sale/Issuance Securities Issued to Options or Warrants Price Per Share
--------------------- ----------------- ---------------------- ---------------
<S> <C> <C> <C>
July 9, 1999 Common Stock Options 5,000 $ 3.000
July 14, 1999 Common Stock Options 5,000 $ 2.438
July 17, 1999 Common Stock Options 3,000 $ 2.250
July 17, 1999 Common Stock Options 3,000 $ 2.250
July 21, 1999 Common Stock Options 5,000 $ 2.031
</TABLE>
All of the above options were granted to certain key employees pursuant to
the 1997 Incentive and Nonqualified Stock Option Plan or to non-employee
directors pursuant to the Directors Stock Option Plan. The options for
employees have a vesting period of three to five years and a life of ten
years. The options for non-employee directors have a vesting period of
three years and a life of five years.
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.
- 13 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits
The following exhibits are filed as part of this report:
Exhibit No.
27........................................Financial Data Schedule
Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the quarterly
period ended September 7, 1999:
Current Report on Form 8-K dated and filed October 5, 1999, Items 4 and 7.
Current Report on Form 8-K dated and filed October 5, 1999, Items 5 and 7.
- 14 -
<PAGE>
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 on its behalf by the
undersigned thereunto duly authorized.
Total Entertainment Restaurant Corp.
(Registrant)
Date October 22, 1999 /s/ James K. Zielke
---------------- ----------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
- 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 7, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> SEP-07-1999
<CASH> 2,396
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 948
<CURRENT-ASSETS> 4,177
<PP&E> 33,330
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,776
<CURRENT-LIABILITIES> 4,590
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 22,536
<TOTAL-LIABILITY-AND-EQUITY> 42,776
<SALES> 11,441
<TOTAL-REVENUES> 11,441
<CGS> 3,134
<TOTAL-COSTS> 11,580
<OTHER-EXPENSES> 1,008
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346
<INCOME-PRETAX> (1,493)
<INCOME-TAX> (552)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (941)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
