BUFFTON CORP, 10-K, 1997-12-30

BUFFTON CORP
10-K, 1997-12-30
ELECTRONIC COMPONENTS, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934

For the fiscal year ended September 30, 1997

Transition report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934

For the transition period from _______ to ________

Commission file number 1-9822

BFX HOSPITALITY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 75-1732794
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

226 Bailey Avenue, Suite 101
Fort Worth, Texas 76107
(Address of principal executive office) (Zip Code)

Registrant's Telephone Number, Including Area Code:
(817) 332-4761

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common stock, $.05 par value American Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___

State the aggregate market value of the voting stock held by non-
affiliates of the registrant.

The aggregate market value of the voting stock held by non-
affiliates of the registrant as of December 15, 1997 was
$13,975,570.

The number of shares outstanding of the registrant's common
stock, $.05 par value, as of December 15, 1997 was 5,590,228.

Documents Incorporated By Reference

Portions of the following documents are incorporated by reference into the
indicated part or parts of this report:

Definitive proxy statement of the registrant relating to the
1998 Stockholders' meeting filed with the Commission pursuant to
Regulation 14A -Parts I and III.

1
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BFX HOSPITALITY GROUP, INC.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I PAGE
- ------ ----

Item 1. Business................................................... 3
Item 2. Properties................................................. 5
Item 3. Legal Proceedings.......................................... 6
Item 4. Submission of Matters to a Vote of Security Holders........ 6

PART II
- -------

Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... 7
Item 6. Selected Financial Data.................................... 8
Item 7. Management's Discussion and Analysis of Operations
and Financial Condition.................................. 9
Item 8. Financial Statements and Supplementary Data................ 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 15

PART III
- --------

Item 10. Directors and Executive Officers of the Registrant......... 16
Item 11. Executive Compensation..................................... 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 16
Item 13. Certain Relationships and Related Transactions............. 16

PART IV
- -------

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................. 17

Signatures ........................................................... 19

2
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PART I
------

ITEM 1 - BUSINESS
- -----------------

GENERAL DEVELOPMENT OF BUSINESS
- -------------------------------

BFX Hospitality Group, Inc (the registrant and Company) is a Delaware
corporation and was incorporated on December 17, 1980. In May 1997, the
Company's stockholders approved a proposal at the Annual Meeting of the
Stockholders to change the name of the Company from Buffton Corporation to BFX
Hospitality Group, Inc. The change became effective on July 8, 1997 upon filing
of an Amended and Restated Certificate of Incorporation.

At September 30, 1997, the Company owns and operates food service, lodging and
entertainment facilities in Texas and Louisiana.

By approval of the Company's Board of Directors in December 1994, in a
transaction effective January 1, 1995, the Company sold the operations of Flo
Control, Inc. (Flo Control), headquartered in Burbank, California. The
purchaser of these operations was Mr. Russell J. Sarno, President of Flo Control
and a board member of the Company. Mr. Sarno purchased virtually all of the
assets of Flo Control for $3,100,000 in cash and assumed $800,000 of Flo
Control's liabilities. As a condition of the sale, Mr. Sarno agreed to purchase
Flo Control's 95% ownership interest in the Florida Realty Joint Venture for
$150,000 in cash and assume the non-recourse mortgage approximating $2.3
million. As a result, the Company recognized a loss on disposal of $2,314,000,
net of income tax benefit, during fiscal 1995. The sale of Flo Control was
accounted for as a discontinued operation. The cash proceeds from the sale were
used to reduce the Company's outstanding debt with its lender. In addition, the
sale of Flo Control's 95% interest in the Florida Realty Joint Venture
eliminated the ongoing monthly expense of the Flo Control lease.

Effective January 1, 1996, the Company entered into an agreement to purchase the
assets of Cabo Tacobar One, Ltd., a Mexican restaurant concept, operating under
the name Cabo, The Original "Mix-Mex" Grill, with Central and South American
influences located in Houston, Texas, for $589,000 in cash and 375,000 shares of
the Company's common stock (with an estimated fair market value of $656,000).
Additionally, the Company issued 76,500 shares of its common stock for
commissions incurred in connection with the acquisition, which resulted in
additional acquisition costs of $153,000. Excess of purchase price over fair
value of net tangible assets acquired, recorded as goodwill, approximates
$1,300,000 and is being amortized on a straight line basis over 15 years.
Effective January 1, 1996, the Company also entered into an agreement to
purchase the assets and assume certain liabilities of the Stockyards Hotel,
located in Fort Worth, Texas, for $500,000 in cash, 450,000 shares of the
Company's common stock (with an estimated fair market value of $788,000) and the
refinancing of a $1,600,000 bank term loan. Under this agreement, the Company
guaranteed, until March 15, 1997, a sales price of $2.05 per share for stock
sold as of that date. No liability was incurred pursuant to the guarantee
agreement. These acquisitions were accounted for under purchase accounting and
are included in the Company's results of operations beginning on the
acquisitions' effective date of January 1, 1996.

Proforma results from continuing operations, as if the acquisitions had occurred
at the beginning of each respective period, are as follows:

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995
-------- --------
<S> <C> <C>

Revenues............................... $10,096 $ 9,429
Net loss from continuing operations.... (878) (71)
Primary loss per average common share.. (.13) (.01)
Fully diluted loss per common share.... (.13) (.01)
</TABLE>

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In April 1997, the Company acquired all of the outstanding stock, in a tax free
exchange, of Hotels of Distinction, Inc. (HOD), a hotel management company, from
Alan Tremain, O.B.E. and Jean-Claude Mathot in exchange for 300,000 shares of
the Company's common stock. In addition, Mr. Tremain became Chairman of the
Board of the Company and Mr. Mathot became President and Chief Operating Officer
of the Company. Because HOD has no assets or management contracts at the date
of purchase, the transaction, in substance, represents payment for employment
services. As a result, the Company expensed $824,000, the estimated fair market
value of the stock in 1997. In connection with the transaction, Non-Qualified
Stock Option Agreements were entered into with Mr. Tremain and Mr. Mathot, each
agreement granting options covering 250,000 shares of the Company's common stock
at an exercise price of $3.00 per share, approximately $0.25 per share in excess
of the fair market value at the date of grant. The options are fully vested and
must be exercised, if at all, within five years of the date of grant. The
options terminate upon termination of employment by the employee or a
termination by the Company for cause.

In May 1997, the Company's shareholders approved the sale of the Company's
electrical product segment, Current Technology, Inc. (CTI), to Danaher
Corporation. The sale was completed on June 3, 1997. Danaher purchased the
assets of CTI for $26,090,000 in cash and assumed approximately $1,300,000 in
liabilities. The Company incurred expenses of approximately $1,402,000
associated with the sale, including payments to Walter D. Rogers, then president
of CTI and a director of the Company, of $500,000 pursuant to an agreement with
the Company and $250,000 as consideration for agreeing to include non-
competition and non-disclosure provisions in his employment agreement with
Danaher. As a result of the above transactions, the Company recognized a gain
on disposal of $13,003,000, net of taxes.

NARRATIVE DESCRIPTION OF BUSINESS
- ---------------------------------

BFX HOSPITALITY GROUP, INC.

BFX Hospitality Group, Inc. ("BFX") owns and operates food service, lodging and
entertainment facilities in Texas and Louisiana, through three wholly owned
subsidiaries, American Food Classics, Inc., Hotels of Distinction, Inc. and BFX-
LA, Inc. d/b/a Bourbon Street Hospitality.

American Food Classics, Inc. ("AFC") was organized in 1992 to develop, own and
operate food service concepts that, once proven, can be expanded to multiple
locations throughout the United States as well as internationally. AFC
presently owns and operates Cabo, The Original "Mix Mex" Grill ("Cabo"), opened
in December 1994 in Houston, Texas, offering fish tacos, habanero shrimp and
other Mexican food with Central and South American influences. Cabo was
acquired by AFC in January 1996. Cabo is a yuppie taqueria with a distinctive
"diner look" decor. A second Cabo unit is under construction in leased space in
the downtown Houston historical district and is expected to open during the
second quarter of fiscal 1998. A third Cabo unit is under construction in
leased space in downtown Fort Worth's Sundance Square and is also expected to
open in the second quarter of fiscal 1998. Additional leases for Cabo locations
are near completion in Coral Gables, Florida and Austin, Texas. In addition,
negotiations are underway for a Cabo unit in West Palm Beach, Florida.

AFC also owns and operates Lucile's, A Stateside Bistro ("Lucile's"), opened in
April 1993, in Fort Worth, Texas. Lucile's offers a variety of menu items
centered around classic regional American dishes. Lucile's decor is a warm,
comfortable, traditional atmosphere. AFC will look to replicate Lucile's as a
destination food service concept.

Hotels of Distinction, Inc. ("HOD") is a hotel management company founded in
1974 by Alan Tremain, O.B.E. Since its establishment, HOD has managed numerous
hotel properties throughout the United States, Canada and the Caribbean
including notably The Copley Plaza Hotel in Boston, The Le Grand Montreal, The
Back Bay Hilton in Boston and The Cotton Bay Club in the Bahamas. HOD was
acquired by the Company in April 1997. HOD presently owns and operates the
Stockyards Hotel, which was acquired by the Company in January 1996. The
Stockyards Hotel is located in the historic Northside of Fort Worth, Texas and
offers guests 52 uniquely designed sleeping rooms that reflect the old West of
the early 1900's, over 3,500 square feet of meeting space and full

4
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service catering for corporate meetings, wedding receptions and family reunions.
Hunter Brother's H3 Ranch, Live Hickory Wood Grill, a 5,000 square foot
steakhouse concept is under construction in the hotel's first floor space and
scheduled to open in the second quarter of fiscal 1998.

Bourbon Street Hospitality ("BSH") owns and operates Cat's Meow, an
entertainment facility at 701 Bourbon Street in New Orleans, Louisiana. Cat's
Meow was opened in 1989 and was acquired by BSH in January 1994. Cat's Meow is
housed in an historic French Quarter Building with approximately 3,000 square
feet. The building has a courtyard and second floor balcony. Cat's Meow has
attracted nationwide popularity and is considered one of the highest grossing
facilities per square foot in the United States. Entertainment features highly
produced karoake and includes MC's and DJ's with a variety of music.

COMPETITION
- -----------

The hospitality industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the markets where the Company's restaurants or lodging establishments will or
may be located. The hospitality business is often affected by changes in
consumer tastes, national, regional or local economic conditions, demographic
trends, traffic patterns and the type, number and location of competing
restaurants or lodging establishments. In addition, factors such as inflation,
increased food, labor and employee benefit costs and the availability of
experienced management and hourly employees may also adversely affect the
hospitality industry in general and the Company in particular.

PATENTS AND LICENSES
- --------------------

The Company owns trademarks relating to certain of its hospitality group
operations. There are no other patents, trademarks, franchises or concessions
that are materially significant.

ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
- ------------------------------------------------

See Item 7 - Management's Discussion and Analysis of Operations and Financial
Condition - "Liquidity and Capital Resources".

SEASONAL ASPECTS OF THE BUSINESS
- --------------------------------

The Company is not materially impacted by seasonality.

EMPLOYEES
- ---------

The Company and its subsidiaries employed approximately 141 full-time and 138
part-time employees as of September 30, 1997, none of which were represented by
unions. Relations with employees are satisfactory.

ITEM 2 - PROPERTIES
- -------------------

GENERAL
- -------

The Company and its subsidiaries have facilities with remaining primary lease
terms ranging from one to five years at annual rentals of approximately
$305,000. All leases provide for one or more renewal terms. All premises are
in good condition, adequate and appropriate for the operations presently being
conducted by the Company. The Company owns a manufacturing facility located in
Vestal, New York. The 127,000 square foot facility is situated on approximately
14 acres. In conjunction with the 1991 sale of National Pipe Company, the
buyer, LCP National Plastics, Inc. signed a ten year lease agreement with the
Company and is presently occupying sixty

5
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percent of the facility. Annual rental for this lease is approximately $310,000
plus real estate taxes and insurance. The Company is actively seeking a lessee
for the remainder of the facility.

Cat's Meow leases the facility in New Orleans, Louisiana for its entertainment
and beverage operations. The facility has 3,000 square feet. Lucile's in Fort
Worth, Texas leases approximately 5,000 square feet of space, while Cabo in
Houston, Texas leases approximately 3,000 square feet of space.

The real estate for the Stockyards Hotel located in Fort Worth, Texas is owned.

The Company leases approximately 3,500 square feet of space at 226 Bailey Avenue
in Fort Worth, Texas for its corporate headquarters.

ITEM 3 - LEGAL PROCEEDINGS
- --------------------------

In August 1997, the Company announced the settlement of its litigation against
Steel Partners II, L.P., which held 655,300 shares of the Company's stock, and
Ryback Management Corporation, which held 974,000 shares through Linder Mutual
Funds (which is managed by Ryback). The Company had alleged, among other
things, that Steel, Ryback and others had been operating as a "group" under
section 13(d) of the Securities Exchange Act. Under the terms of the
settlement, Ryback's shares of the Company's common stock were purchased by the
Company for total consideration of $2,240,200; Steel's shares of the Company's
common stock were purchased for total consideration of $1,638,250, a figure
which includes the reimbursement of certain expenditures incurred by Steel
Partners. The 1,629,300 shares of the Company's common stock held by Steel and
Ryback were thus acquired for total consideration of $3,878,450, or $2.38 per
share, the approximate fair market value at that time. In addition, the
defendants agreed that for a period of ten years none of them or their
affiliates or associates will, among other things, purchase the Company's
securities, solicit proxies with respect to the Company's voting securities, or
form or participate in any group with respect to the Company's securities.

The Company is a party to various legal actions, which are in the aggregate
immaterial, and due to the nature of the Company's business, it could be a party
in other legal or administrative proceedings arising in the ordinary course of
business. While occasional adverse settlements or resolutions may occur and
negatively impact earnings in the year of settlement, it is the opinion of
management that their ultimate resolution will not have a materially adverse
effect on the Company's financial position.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

No matters were submitted for a vote to security holders during the fourth
quarter of the fiscal year ended September 30, 1997.

6
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PART II
-------

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
-------

The Company's common stock is traded on the American Stock Exchange, under the
common stock ticker symbol "BFX". The quarterly trading range of common stock
follows:

<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----- -----
<S> <C> <C>
October 1 - December 31.. $2.50 $2.00
January 1 - March 31..... 3.00 2.00
April 1 - June 30........ 2.81 2.25
July 1 - September 30.... 3.94 2.13
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----- -----
<S> <C> <C>
October 1 - December 31.. $2.31 $1.50
January 1 - March 31..... 2.38 1.75
April 1 - June 30........ 2.38 1.75
July 1 - September 30.... 2.50 1.56
</TABLE>

The number of named stockholders of common stock as of September 30, 1997 was
approximately 1,599 as recorded by the transfer agent and registrar.

There are no restrictions on declaration or payment of dividends; however, no
dividends have been paid on common stock to date. The Company intends to
maintain a policy of retaining earnings for use in the development of the
business.

Continental Stock Transfer & Trust Company, 2 Broadway, New York, N.Y. 10004, is
the transfer agent and registrar for the Company's common stock.

7
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ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>

September 30,
--------------------------------------------------
FOR THE YEAR ENDED 1997 1996 1995 1994 1993
- ------------------ -------- ------- -------- ------- --------
(In thousands, except per share and ratio amounts)
<S> <C> <C> <C> <C> <C>
Net revenues..................................... $10,518 $ 9,298 $ 6,946 $ 5,481 $ 389
======= ======= ======= ======= =======

Loss from continuing operations (a).............. $(7,854) $ (921) $ (156) $ (450) $ (882)
Income (loss) from discontinued operations....... 14,512 2,315 (1,053) 2,358 1,146
------- ------- ------- ------- -------

Net income (loss)................................ $ 6,658 $ 1,394 $(1,209) $ 1,908 $ 264
======= ======= ======= ======= =======

Primary income (loss) per average common share:
Continuing operations.......................... $ (1.13) $ (.14) $ (.03) $ (.09) $ (.19)
Discontinued operations........................ 2.09 .36 (.19) .46 .25
------- ------- ------- ------- -------

Net income (loss).............................. $ .96 $ .22 $ (.22) $ .37 $ .06
======= ======= ======= ======= =======

Fully diluted income (loss) per common share:
Continuing operations.......................... $ (1.13) $ (.14) $ (.03) $ (.09) $ (.19)
Discontinued operation......................... 2.09 .35 (.19) .46 .25
------- ------- ------- ------- -------

Net income (loss).............................. $ .96 $ .21 $ (.22) $ .37 $ .06
======= ======= ======= ======= =======
</TABLE>

(a) Effective February 28, 1994, Contex Electronics, Inc., a wholly owned
subsidiary of the Company, sold all of the operating assets and liabilities of
MoldCon, Inc. (MoldCon) and Tri-Tec Engineering Corporation (Tri-Tec), two of
its wholly owned subsidiaries. During June 1994, the Company shut down its
Contex cable assembly plant in New York and sold or liquidated all remaining
assets. The Electronic Products business line of the Company at the time
included both Contex Electronics and CTI; therefore, the sale of Contex
Electronics and its subsidiaries did not constitute a discontinued operation at
that time. The sale of CTI during fiscal 1997 represented the discontinuation of
the Electronic Products line of business. As a result, the selected financial
data shows the effects if the sale of Contex Electronics and CTI had occurred at
the beginning of fiscal 1992 and had been reported as discontinued operations.

<TABLE>
<CAPTION>
AT YEAR END
- -----------

<S> <C> <C> <C> <C> <C>
Working capital.................... $10,797 $ 3,743 $ 2,824 $ 7,149 $ 8,126
Current assets..................... 16,563 6,917 5,429 11,125 16,636
Total assets....................... 28,084 23,164 17,224 25,070 31,168
Long-term debt..................... 1,212 2,493 - 5,507 9,855
Total liabilities.................. 6,978 5,671 2,605 9,813 18,643
Stockholders' equity............... 21,106 17,493 14,619 15,257 12,525
Current ratio...................... 2.87 2.18 2.08 2.80 1.95
Book value per share............... 3.53 2.67 2.57 2.89 2.68
Total liabilities to equity ratio.. .33 .32 .18 .64 1.49
</TABLE>

8
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
- -------------------------------------------------------------------------
CONDITION
---------

GENERAL INFORMATION

At September 30, 1997, the Company owned and operated food service, lodging and
entertainment facilities in Texas and Louisiana as discussed in Part I, Item 1 -
Business. During the years ended September 30, 1995, 1996 and 1997 the Company
entered into acquisition and disposition transactions as follows:

Effective January 1, 1996, the Company entered into agreements to purchase the
assets of Cabo Tacobar One, Ltd. (Cabo), located in Houston, Texas and to
purchase the assets and assume certain liabilities related to the Stockyards
Hotel (SYH), located in Fort Worth, Texas. See Liquidity and Capital Resources
in this section and Note 3 of Notes to Consolidated Financial Statements for
details of the acquisitions.

Effective April 1997, the Company acquired the stock of Hotels of Distinction,
Inc. (HOD). See Liquidity and Capital Resources in this section and Note 3 of
Notes to Consolidated Financial Statements for details of the acquisition.

Effective June 3, 1997, the Company sold the assets of Current Technology, Inc.
(CTI) to Danaher Corporation. See Liquidity and Capital Resource in this
section and Note 2 of Notes to Consolidated Financial Statements for details of
the sale.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain matters discussed herein are forward-looking statements about the
business, financial condition and prospects of the Company. The actual results
could differ materially from those indicated by such forward-looking statements
because of various risks and uncertainties. Such risks and uncertainties may
include, but are not limited to regional and national economic conditions,
changes in customer demand for products offered by the Company, and other
matters that may adversely affect the availability of products and pricing,
state and federal regulatory environment, possible future acquisitions or
dispositions, amendments to the Record of Decision issued by the Environmental
Protection Agency (see Liquidity and Capital Resources) and other risks
indicated in the Company's previous filings with the Securities and Exchange
Commission. The Company cannot control these risks and uncertainties, and in
many cases, cannot predict the risks and uncertainties that could cause its
actual results to differ materially from those indicated by the forward-looking
statements.

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RESULTS OF CONTINUING OPERATIONS

1997 VERSUS 1996

Net revenues in 1997 increased 13% compared to 1996 due to the inclusion of the
results of operations of Cabo and SYH for a full twelve months versus nine
months in 1996. Cabo and SYH were acquired effective January 1, 1996. The
increases at Cabo and SYH were partially offset by the sale of 441 Bourbon
Street in July 1996. Revenues are expected to increase in fiscal 1998 as two
Cabo locations and a destination food and beverage restaurant at SYH are
expected to open during the second quarter of fiscal 1998 as well as additional
Cabo units planned to open during fiscal 1998.

Costs of goods sold (which consists primarily of food and beverage costs) during
1997 increased 6% compared to 1996. As a percent of related revenue, these
costs were 22% during 1997 versus 23% a year earlier. The absolute increase is
due to the inclusion of Cabo and SYH for a full year in 1997 versus nine months
in 1996. The decrease in costs as a percentage of revenues is due to the
increased sales at SYH which have lower costs of goods sold than the Company's
other concepts.

Selling, general and administrative expenses for 1997 increased 91% compared to
1996. The primary reasons for the increase are the expenses associated with the
acquisitions of HOD ($824,000), bonuses to the Company's management as a result
of the sale of CTI ($850,000), the reserve for collection of certain notes
receivable ($635,000), certain concept development expenditures ($810,000) and
professional fees incurred as a result of litigtion with certain shareholders
($500,000), see Item 3 - Legal Proceedings. In addition, selling, general and
administrative expenses increased due to the inclusion of the results of
operations of Cabo and Stockyards Hotel for a full twelve months in 1997 versus
nine months in 1996.

In 1997, the Company incurred expenses of $4,417,000 related to the revision of
the EPA remedy. See liquidity and capital resources for further details.

Depreciation and amortization expense during 1997 increased 6% compared to 1996
due to Cabo and SYH having a full twelve months of operation in 1997 compared to
1996. This was offset by the sale of 441 Bourbon Street in July 1996, which had
incurred approximately $117,000 in depreciation and amortization expense in
1996.

The increase in interest income to $485,000 in 1997 from $89,000 in 1996 is due
to increased cash balances as a result of the sale of CTI in June 1997. The
increase in interest expense to $193,000 in 1997 from $143,000 is primarily due
to the refinancing inclusion of the a $1,600,000 bank term note assumed in
connection with the acquisition of SYH in January 1996 resulting infor a full
twelve months of interest payments in 1997 compared to only nine months in 1996.

During 1997, the Company reported a loss from continuing operations before
income taxes of $11,397,000 compared to a loss of $1,459,000 in 1996. The
increased loss is due to increased selling, general and administrative expenses
discussed above.

The sale of CTI in 1997 resulted in a gain from discontinued operations of
$14,512,000, net of tax. The gain consists of income from operations of
$1,509,000 and a gain on disposal of $13,003,000, both net of income taxes.

Income tax benefit rate on the pre-tax loss from continuing operations was 31%
in 1997 compared to a benefit of 37% in 1996. The 1997 benefit rate is lower
than the federal statutory rate primarily as a result of the non deductible
expense of $824,000 associated with the acquisition of HOD, by a tax-free stock
exchange, in April 1997., which resulted in a book expense of $825,000 without
any corresponding tax benefit.

1996 VERSUS 1995

Revenues in 1996 increased 34% compared to 1995 primarily due to the inclusions
of results of operations of Cabo and SYH effective January 1, 1996. Costs of
goods sold increased 18% in absolute dollars and decreased to 23% from 26% due
to the inclusion of the results of operations of Cabo and SYH (which has have
lower costs of goods sold than the

10
<PAGE>

Company's other concepts) effective January 1, 1996. Selling, general and
administrative costs increased 34% and depreciation and amortization costs
increased 45% due to the inclusions of the results of operations of Cabo and SYH
effective January 1, 1996.

Interest income decreased to $89,000 in 1996 from $154,000 due to reduction in
cash as debt associated with CTI was reduced. Interest expense increased to
$143,000 in 1996 due to the refinancing of a $1,600,000 bank term loan assumed
in connection with the acquisition of SYH and the borrowing of $1,200,000 in
March 1996 from an insurance company, secured by a deed of trust on a commercial
office building located in Fort Worth, Texas.

CTI had income of $2,315,000, net of income tax, in 1996, which is reported as
discontinued operations.

Income tax benefit rate on the pre-tax loss from continuing operations was 37%
in 1996 compared to a benefit of 85% in 1995. The 1995 benefit rate is higher
than the federal statutory rate as a result of favorable state tax developments
that resulted in the reversal of certain state tax reserves approximating
$255,000 and the recognition of certain federal tax benefits aggregating
$314,000.

IMPACT OF INFLATION

From October 1994 to September 1997, inflation did not have a material impact on
the Company's operations.

LIQUIDITY AND CAPITAL RESOURCES

During March 1992, the United States Environmental Protection Agency (EPA),
issued a Record of Decision (ROD) with respect to the Company's Superfund Site
in Vestal, New York. An Administrative Order for Remedial Design and Remedial
Action was issued on October 1, 1992. The ROD required the Company to construct
a water treatment facility at the site and to pump contaminated ground water
from bedrock and overburden extraction wells for 15 to 30 years until
remediation goals were met. In December 1992, the Company's environmental
consultants prepared and submitted a Remedial Design Work Plan (RDWP) to the
EPA. The EPA issued comments on the RDWP on October 1, 1993, and a revised RDWP
was submitted to the EPA on October 21, 1993. During February 1994, the Company
received comments from the EPA with respect to the revised RDWP and the
Company's environmental consultants submitted a response. The EPA approved the
revised RDWP in October 1994. On November 14, 1994, engineering design and
related fieldwork was begun in order to meet the specifications of the revised
RDWP.

During fiscal 1997, 1996 and 1995, $199,000, $238,000 and $430,000,
respectively, were incurred for work related to the engineering design. These
costs were capitalized when incurred because the then proposed remedy would have
prevented further environmental contamination with respect to the contaminated
ground water being pumped from the extraction wells and improve the property
compared with its condition when acquired by the Company. Due to concerns about
the correctness of the remedy provided for in the ROD, additional fieldwork was
performed and in June 1995, an RDWP Addendum was prepared and submitted to the
EPA. The Company received comments from the EPA regarding this Addendum and the
Company's environmental consultants submitted a response shortly thereafter. On
August 24, 1995, the Company and its legal and environmental consultants met
with officials of the EPA and agreed on additional fieldwork deemed necessary by
the EPA to support the Company's position regarding the RDWP Addendum. At this
meeting, officials of the EPA agreed the remedy needed to be modified and that
certain requirements under the existing ROD needed to be eliminated or reduced
in scope.

11
<PAGE>

EPA to review the EPA's written response to this revised remedy. The revised
remedy would eliminate certain requirements of the existing ROD and would
primarily include removing and treating contaminated soil, significantly
reducing the time period and cost for remediation.

In April 1997, the EPA issued a proposed plan setting forth the expedited remedy
discussed above which was finalized in July 1997. As a result, during the
quarter ending June 30, 1997, the Company expensed $3,000,000, representing the
estimated net present value of the future costs of implementing this alternative
remedy. Additionally, all prior costs incurred, approximating $867,000 through
April 30, 1997, associated with the implementation of the original ROD, were
expensed.

In June 1997, the Company was told that the EPA was seeking reimbursement for
monies spent by the EPA at the Company's Vestal, New York property. According
to the EPA, the expenditures were incurred by the EPA over approximately ten
years, from October 1987 through April 1997. In September 1997, the Company
agreed to pay approximately $550,000 to the EPA for reimbursement of such costs.
As a result the Company has accrued this amount in 1997. The Company is
currently negotiating a Consent Decree with the EPA in regard to the
implementation of the remedy and ongoing monitoring of the property.

The Company is a party to various legal actions which are in the aggregate
immaterial, and due to the nature of the Company's business, it could be a party
in other legal or administrative proceedings arising in the ordinary course of
business. While occasional adverse settlements or resolutions may occur and
negatively impact earnings in the year of settlement, it is the opinion of
management that their ultimate resolution will not have a materially adverse
effect on the Company's financial position.

12
<PAGE>

Proforma results from continuing operations, as if the acquisitions had occurred
at the beginning of each respective period, are as follows:

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>

Revenues............................... $10,096 $9,429
Net loss from continuing operations.... (878) (71)
Primary loss per average common share.. (.13) (.01)
Fully diluted loss per common share.... (.13) (.01)
</TABLE>

In April 1997, the Company acquired all of the outstanding stock, in a tax free
exchange, of Hotels of Distinction (HOD), a hotel management company, from Alan
Tremain, O.B.E. and Jean-Claude Mathot in exchange for 300,000 shares of the
Company's common stock. In addition, Mr. Tremain became Chairman of the Board
of the Company and Mr. Mathot became President and Chief Operating Officer of
the Company. Because HOD has no assets or management contracts at the date of
purchase, the transaction, in substance, represents payment for employment
services. As a result, the Company expensed $824,000, the estimated fair market
value of the stock in 1997. In connection with the transaction, Non-Qualified
Stock Option Agreements were entered into with Mr. Tremain and Mr. Mathot, each
agreement granting options covering 250,000 shares of the Company's common stock
at an exercise price of $3.00 per share, approximately $0.25 per share in excess
of the fair market value at the date of grant. The options are fully vested and
must be exercised, if at all, within five years of the date of grant. The
options terminate upon termination of employment by the employee or a
termination by the Company for cause.

1997.....................................$10,891
1996..................................... 15,788
1995..................................... 12,056

Through its commercial real estate operation, Buffton Realty Ventures, the
Company acquired an office building located in Fort Worth, Texas during August
1995. The purchase price for the property was approximately $1,650,000. In
July 1997, by approval of the Company's Board of Directors, the Company sold the
building to a limited partnership controlled by Robert H. McLean, Chief
Executive Officer of the Company, for cash proceeds of $506,000 and assumption
of the related mortgage approximating $1,169,000. A disinterested majority of
the Board of Directors approved the sale of the building at a price equal to the
average of three independent, fair market value MAI appraisals. The Company
realized a gain of approximately $46,000 upon completion of the sale.

13
<PAGE>

Effective July 1, 1996, the Company sold one of its entertainment facilities
located in New Orleans, Louisiana. The proceeds of $464,000, consisting of cash
and a note receivable for $350,000, approximated the net book value of the
assets that were sold. During the third quarter of fiscal 1997, the note was
determined to be uncollectible and was written off.

During fiscal 1997, the Company purchased 1,839,000 shares of its common stock
at a total cost of $4,552,000 (average cost of $2.48 per share) and in fiscal
1996, purchased 183,350 shares of its common stock at a total cost of $356,000
(average cost of $1.94 per share). The shares are recorded as Treasury Stock
and will be available for employee stock plans and other corporate requirements.
The shares purchased in 1997 also include the purchase of 1,629,300 shares from
two shareholders in the amount of $3,878,450, or $2.38 per share. The purchase
of stock was in connection with the settlement of litigation against certain
shareholders in which the Company had alleged, among other things, that the
former shareholders had been operating as a "group" under section 13(d) of the
Securities Exchange Act. See Note 13 of Notes to Consolidated Financial
Statements for additional details.

The Company invested $450,000 and $1,613,000 in equipment, furniture, fixtures,
and enhancements to existing properties during 1997 and 1996, respectively, as
well as invested $1,212,000 for Cabo and SYH in 1996.

The Company currently has two Cabo units under construction. One is in the
historical district of downtown Houston, Texas and one in downtown Fort Worth,
Texas. The Company also has a destination restaurant under construction at SYH.
All three units are expected to open during the second quarter of fiscal 1998.
Capital expenditures for these three projects are expected to approximate
$2,750,000, which will be funded from existing cash and operating cash flow.

ACCOUNTING CHANGES

IMPAIRMENT OF ASSETS

In 1997, the Company adopted Financial Accounting Standard 121 on "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (FAS 121). This statement requires companies to investigate potential
impairments of long-lived assets, certain identifiable intangibles, and
associated goodwill on an exception basis, when there is evidence that events or
changes in circumstances have made recovery of an asset's carrying value
unlikely. Pursuant to FAS 121, the Company evaluates the carrying amount of its
long-lived assets and associated goodwill on an exception basis by estimating
future cash flows expected to result from the use of such assets and their
eventual disposition. If future cash flows (undiscounted and without interest
charges) are less than the net carrying amount of the assets, an impairment loss
would be recorded. The impairment loss is measured as the amount by which the
net carrying amount of the asset exceeds the fair estimated value of the asset.
Adoption of FAS 121 did not have an impact on the Company's results of
operations or financial condition.

ACCOUNTING FOR STOCK-BASED COMPENSATION

Effective October 1, 1996, the Company adopted Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" (FAS 123). FAS 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The pronouncement defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock option compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting as prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25). Entities electing
to remain with the accounting in APB 25 must make proforma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in FAS 123 had been applied. The Company will continue to account for
stock-based employee compensation plans under the intrinsic method pursuant to
APB 25 and will make the disclosures in its footnotes as required by FAS 123.

14
<PAGE>

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 128, Earnings per Share (FAS 128), which is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Effective December 31, 1997, the Company will
adopt FAS 128, which establishes standards for computing and presenting earnings
per share (EPS). The statement requires dual presentations of basic and diluted
EPS on the face of the income statement for entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS calculation of the numerator and denominator of the diluted EPS
calculation. Basic EPS excludes the effect of potentially dilutive securities
while diluted EPS reflects the potential dilution that would have occurred if
securities or other contracts to issue common stock had been exercised,
converted or resulted in the issuance of common stock that would have then
shared in the earnings of the entity. Had the Company already adopted the
provision of this statement, there would have been no impact on the EPS amounts
presented.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------

The financial statements and supplementary data are included under item 14(a)(1)
and (2) of this report.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------

No changes in accountants or disagreements with accountants on accounting and/or
financial disclosure have arisen.

15
<PAGE>

PART III
--------

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

The information required by this item with respect to Directors of the Company
appears in the "Election of Directors" and "Executive Officers of the Company"
sections of the definitive proxy statement of the Company relating to the
Company's 1998 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A.

ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------

The information required by this item appears in the "Remuneration of Directors
and Officers" section of the definitive proxy statement of the Company relating
to the Company's 1998 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

The information required by this item appears in the "Security Ownership" and
"Election of Directors" sections of the definitive proxy statement of the
Company relating to the Company's 1998 Annual Meeting of Stockholders to be
filed with the Commission pursuant to Regulation 14A.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

In accordance with Rule G(3) of the General Instructions, the information
required by this item will be included under the caption, "Transactions with
Management and Others" in the definitive proxy statement of the Company relating
to the Company's 1998 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A.

16
<PAGE>

PART IV
-------

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------

(a) The following documents are filed as a part of this report:

1. Financial Statements - The financial statements listed in the "Index
--------------------
to Consolidated Financial Statements and Financial Statement
Schedule" described at F-1.

2. Financial Statement Schedule - The financial statement schedule
----------------------------
listed in the "Index to Consolidated Financial Statements and
Financial Statement Schedule" described at F-1.

3. Exhibits - Refer to (c) below.
--------

(b) Reports on Form 8-K.
--------------------

Report dated August 18, 1997 reporting repurchase of 21% of
outstanding common stock and settlement of Steel and Ryback
Litigation.

3.1 Certificate of Incorporation (Exhibit 3.1 to Form S-1 Registration
Statement No. 2-71057 and incorporated herein by reference).

3.2 By-laws (Exhibit 3.2 to Form S-1 Registration Statement No. 2-71057
and incorporated herein by reference).

3.3 Certificate of Amendment to the Certificate of Incorporation
Creating Classified Board of Directors, eliminating a Stockholder's
right to call a special meeting, and adopting a fair price
supermajority provision dated February 21, 1989 (Exhibit 4.4 to Form
10-Q for the quarter ended March 31, 1989 and incorporated herein by
reference).

3.4 Restated by-laws of Buffton Corporation dated February 21, 1989
(Exhibit 4.5 to Form 10-Q for the quarter ended March 31, 1989 and
incorporated herein by reference).

3.5 Restated by-laws of Buffton Corporation dated April 7, 1997
incorporated herein by reference to Form 10-Q dated March 31, 1997.

3.6 Amended and Restated Certificate of Incorporation of Buffton
Corporation changing name of Company to BFX Hospitality Group
incorporated by reference to Form 10-Q dated June 30, 1997.

4 Rights Agreement (Exhibit 1 to Form 8-K dated June 23, 1988 and
incorporated herein by reference).

10 Asset Purchase Agreement dated January 19, 1996 incorporated herein
by reference to Form 8-K dated January 19, 1996.

17
<PAGE>

10.1 Agreement for Sale of Assets from Flo Control, Inc. dated as of
January 20, 1995, by and among Buffton Corporation, a Delaware
corporation, Flo Control, Inc., a Delaware corporation ("Seller")
and F.C. Acquisition, Inc., a California corporation ("Buyer")
incorporated herein by reference to Form 8-K dated January 20, 1995.

10.2 Agreement for sale of Florida Realty Joint Venture interests from
Flo Control, Inc., dated January 20, 1995 by and among Buffton
Corporation, a Delaware corporation, Flo Control, Inc. a Delaware
corporation, ("Seller") and F.L.C. Property Acquisition, Inc., a
California corporation ("Buyer") incorporated herein by reference to
Form 8-K dated January 20, 1995.

10.3 Agreement for Sale of Secondary Containment Assets from Flo Control,
Inc., dated January 20, 1995, by and among Buffton Corporation, a
Delaware corporation, Flo Control, Inc., a Delaware corporation
("Seller") and Patrick Hopkins and Flo-Safe Systems, Inc. a
Wisconsin corporation ("Buyer") incorporated herein by reference to
Form 8-K dated January 20, 1995.

10.4 Second Amendment to Accounts Financing Agreement dated January 20,
1995 by and among Congress Financial Corporation, Current
Technology, Inc., Electro-Mech, Inc., and Flo Control, Inc.
incorporated herein by reference to Form 8-K dated January 20, 1995.

10.5 Second Amended and Restated Revolving Credit Note incorporated
herein by reference to Form 8-K dated January 20, 1995.

10.6 Rights Amendment Agreement dated November 15, 1995 incorporated
herein by reference to Form 8-K dated November 15, 1995.

10.7 Asset Purchase Agreement of Current Technology, Inc. incorporated
herein by reference to the Definitive Proxy Statement dated
April 23, 1997.

10.8 Asset Purchase Agreement between Main Street Realty, Inc. and 100
Main Realty Ltd., a limited partnership controlled by Robert H.
McLean, CEO of the Company, dated July 1, 1997.

11 Statement of Computation of Earnings Per Share

21 Subsidiaries of the Company

23 Consent of Independent Accountants

27 Financial Data Schedule

18
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

BFX HOSPITALITY GROUP, INC. Date
---------------------

By: /s/ Robert H. McLean December 29, 1997
------------------------------------------ ---------------------
Robert H. McLean, Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacity and on the dates indicated.

/s/ Robert H. McLean December 29, 1997
------------------------------------------ ---------------------
Robert H. McLean, Chief Executive Officer;
(Principal Executive Officer)

/s/ Alan Tremain, O.B.E. December 29, 1997
------------------------------------------ ---------------------
Alan Tremain, O.B.E.
Chairman of the Board of Directors

/s/ Jean-Claude Mathot December 29, 1997
------------------------------------------ ---------------------
Jean-Claude Mathot
President and Chief Operating Officer

/s/ Robert Korman December 29, 1997
------------------------------------------ ---------------------
Robert Korman, Vice President and
Chief Financial Officer

/s/ Bruno D'Agostino December 29, 1997
------------------------------------------ ---------------------
Bruno D'Agostino, Director

/s/ John M. Edgar December 29, 1997
------------------------------------------ ---------------------
John M. Edgar, Director

/s/ Hampton Hodges December 29, 1997
------------------------------------------ ---------------------
Hampton Hodges, Director

/s/ H.T. Hunnewell December 29, 1997
------------------------------------------ ---------------------
H.T. Hunnewell, Director

/s/ Walter D. Rogers, Jr. December 29, 1997
------------------------------------------ ---------------------
Walter D. Rogers, Jr., Director

/s/ Russell J. Sarno December 29, 1997
------------------------------------------ ---------------------
Russell J. Sarno, Director

19
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

CONSOLIDATED FINANCIAL STATEMENTS: PAGE
- --------------------------------- ----

Report of Independent Accountants F-2

Consolidated Statements of Operations F-3

Consolidated Balance Sheets F-4

Consolidated Statements of Cash Flow F-5

Consolidated Statements of Changes in Stockholders' Equity F-6

Notes to Consolidated Financial Statements F-7

FINANCIAL STATEMENT SCHEDULE:
- ----------------------------

Schedule IX - Valuation and Qualifying Accounts F-21

Schedules other than the ones listed above have been omitted since they are
either not required, not applicable, or the required information is shown in the
financial statements or related notes.

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of BFX Hospitality Group, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of BFX Hospitality Group, Inc. and its subsidiaries at September 30,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

Fort Worth, Texas
November 12, 1997

F-2
<PAGE>

BFX HOSPITALITY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

For the Years Ended September 30,
-------------------------------------------
1997 1996 1995
-------------- ------------ -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>

Net revenues.............................................. $ 10,518 $ 9,298 $ 6,946
-------- ------- -------

Costs and expenses:
Cost of goods sold (exclusive of depreciation)........... 2,277 2,139 1,819
Selling, general and administrative...................... 14,483 7,595 5,661
Expenses associated with revised EPA remedy.............. 4,417 - -
Depreciation and amortization............................ 1,030 969 668
-------- ------- -------

Total costs and expenses................................. 22,207 10,703 8,148
-------- ------- -------

Net loss from continuing operations before other income
and income taxes......................................... (11,689) (1,405) (1,202)
-------- ------- -------

Other income (expense):
Interest income.......................................... 485 89 154
Interest expense......................................... (193) (143) -
-------- ------- -------
292 (54) 154
-------- ------- -------

Loss from continuing operations before income taxes....... (11,397) (1,459) (1,048)
Income tax benefit........................................ 3,543 538 892
-------- ------- -------
Loss from continuing operations........................... (7,854) (921) (156)
-------- ------- -------

Discontinued operations:
Income from operations, net of income tax expense of
$933,000, $1,349,000 and $754,000, respectively......... 1,509 2,315 1,261
Gain (loss) on disposal, net of income tax expense
of $7,252,000 and tax benefit of $754,000,respectively.. 13,003 - (2,314)
-------- ------- -------

Income (loss) from discontinued operations............... 14,512 2,315 (1,053)
-------- ------- -------

Net income (loss)......................................... $ 6,658 $ 1,394 $(1,209)
======== ======= =======

Primary income (loss) per average common share:
Continuing operations.................................... $ (1.13) $ (.14) $ (.03)
Discontinued operation................................... 2.09 .36 (.19)
-------- ------- -------
Net income (loss)........................................ $ .96 $ .22 $ (.22)
======== ======= =======

Weighted average common shares outstanding............... 6,957 6,441 5,465
======== ======= =======

Fully diluted income (loss) per common share:
Continuing operations.................................... $ (1.13) $ (.14) $ (.03)
Discontinued operation................................... 2.09 .35 (.19)
-------- ------- -------
Net income (loss)........................................ $ .96 $ .21 $ (.22)
======== ======= =======

Fully diluted common shares outstanding................... 6,957 6,649 5,465
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

BFX HOSPITALITY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>

September 30,
----------------------
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $16,356 $ 1,659
Accounts receivable, less allowance for doubtful accounts of
$35,000 in 1996....................................................... 66 3,370
Inventories............................................................ 79 1,396
Prepaid and other current assets....................................... 62 492
------- -------
Total current assets.................................................. 16,563 6,917
------- -------

Property, plant and equipment, net...................................... 6,417 9,631
------- -------

Patents, net of accumulated amortization of $1,529,000.................. - 1,451
Goodwill, net of amortization of $1,206,000 and $845,000, respectively.. 3,758 4,120
Deferred income taxes................................................... 833 -
Long-term notes receivable.............................................. - 540
Other assets, net....................................................... 513 505
------- -------

$28,084 $23,164
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................... $ 138 $ 187
Accounts payable....................................................... 300 1,152
Accrued liabilities.................................................... 5,014 1,524
Income taxes........................................................... 314 311
------- -------
Total current liabilities............................................. 5,766 3,174

Long-term debt.......................................................... 1,212 2,493
Deferred income taxes................................................... - 4
------- -------
6,978 5,671
------- -------
Stockholders' equity:
Preferred stock $.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding...................................... - -
Common stock $.05 par value; 30,000,000 shares authorized;
outstanding shares 7,786,878 and 6,726,878, respectively.............. 389 337
Additional paid-in capital............................................. 16,578 14,354
Retained earnings...................................................... 9,816 3,158
Treasury stock, at cost, 1,812,350 and 183,350 shares, respectively.... (4,487) (356)
Employee notes for stock purchases..................................... (1,190) -
------- -------
21,106 17,493
Commitments and contingencies (Notes 3 and 12)..........................
------- -------

$28,084 $23,164
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

BFX HOSPITALITY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>

For the Years Ended September 30,
------------------------------------
1997 1996 1995
----------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 6,658 $ 1,394 $(1,209)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation............................................ 764 704 594
Amortization............................................ 475 577 564
Deferred income taxes................................... (837) 594 (920)
Bad debt provision...................................... (35) 40 (84)
Net (gain) loss on sale of assets....................... (20,301) - 3,068
Expenses associated with revised EPA remedy............. 4,417 - -
Issuance of common stock in payment for services........ 412 139 571
Expenses associated with acquisition.................... 824 - -
Change in components of current assets and liabilities
(exclusive of acquisitions and dispositions):
Accounts receivable.................................... 1,392 (662) (1,137)
Inventories............................................ 143 639 (958)
Prepaid and other...................................... 256 - (536)
Accounts payable....................................... (36) 34 191
Accrued liabilities.................................... 349 119 (297)
Income taxes payable................................... 259 75 (18)
-------- ------- -------
Net cash provided by (used for) operating activities....... (5,260) 3,653 (171)
-------- ------- -------

Cash flows from investing activities:
Additions to property, plant and equipment................ (450) (1,613) (1,337)
Proceeds from sale of operating assets.................... 25,194 100 3,750
Acquisitions.............................................. - (1,212) (1,653)
Additions to other assets................................. (89) - (55)
-------- ------- -------

Net cash provided by (used for) investing activities....... 24,655 (2,725) 705
-------- ------- -------

Cash flows from financing activities:
Additions to debt......................................... - 1,200 -
Repayments of debt........................................ (161) (120) (3,723)
Exercise of stock options................................. 15 - -
Treasury stock purchases.................................. (4,552) (356) -
-------- ------- -------

Net cash provided by (used for) financing activities....... (4,698) 724 (3,723)
-------- ------- -------

Net increase (decrease) in cash............................ 14,697 1,652 (3,189)

Cash at beginning of year.................................. 1,659 7 3,196
-------- ------- -------

Cash at end of year........................................ $ 16,356 $ 1,659 $ 7
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

BFX HOSPITALITY GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Years Ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>

Employee
Additional Note for
Common Paid-in Treasury Retained Stock
Stock Capital Stock Earnings Purchases Total
------ ----------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>

Balance at September 30, 1994............. $ 264 $12,020 $ - $ 2,973 $ - $15,257

Issuance of 407,356 shares of $.05 par
value common stock for services.......... 20 551 - - - 571

Net loss.................................. - - - (1,209) - (1,209)
------ ------- -------- -------- --------- -------

Balance at September 30, 1995............. 284 12,571 - 1,764 - 14,619

Issuance of 951,500 shares of $.05 par
value common stock for acquisitions...... 48 1,649 - - - 1,697

Issuance of 90,000 shares of $.05 par
value common stock for services.......... 5 134 - - - 139

Purchase of 183,350 shares of $.05
par value common stock................... - - (356) - - (356)

Net income................................ - - - 1,394 - 1,394
------ ------- -------- -------- --------- -------

Balance at September 30, 1996............. 337 14,354 (356) 3,158 - 17,493

Issuance of 300,000 shares of $.05
par value common stock for acquisition... 14 810 - - - 824

Issuance of 760,000 shares of $.05
par value common stock in exercise of
options.................................. 38 1,152 - - (1,190) -

Issuance of 200,000 shares of $.05
par value common stock from treasury
for services............................. - 12 400 - - 412

Issuance of 10,000 shares of $.05
par value common stock from treasury
in exercise of stock options............. - (6) 21 - - 15

Purchase of 1,839,000 shares of $.05
par value common stock................... - - (4,552) - - (4,552)

Tax benefit of exercise of stock options.. - 256 - - - 256

Net income................................ - - - 6,658 - 6,658
------ ------- -------- -------- --------- -------

Balance at September 30, 1997............. $ 389 $16,578 $ (4,487) $ 9,816 (1,190) $21,106
====== ======= ======== ======== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>

BFX HOSPITALITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

BFX Hospitality Group, Inc. (the Company) is principally engaged in the
operation of food and beverage and lodging establishments. These consolidated
financial statements include all of the assets, liabilities, revenues, and costs
and expenses of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

In May 1997, the Company's stockholders approved a proposal at the Annual
Meeting of the Stockholders to change the name of the Company from Buffton
Corporation to BFX Hospitality Group, Inc. The change became effective on July
8, 1997 upon filing of an Amended and Restated Certificate of Incorporation.

CASH AND CASH EQUIVALENTS

For purposes of the Consolidated Statements of Cash Flow, cash and cash
equivalents consist of cash in banks and cash investments in immediately
available interest bearing accounts.

The weighted average interest rate was 5.35% at September 30, 1997 for cash
equivalents totaling $15,775,000.

INVENTORIES

Inventories are stated at the lower of cost (first in, first out) or market and,
at September 30, 1997, consist primarily of food and beverage.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost and depreciated by the
straight-line method over estimated useful lives of three to forty years.

Maintenance and repairs are charged to income as incurred. The Company
capitalizes renewals and betterments, which significantly enhance the value or
extend the useful life of an asset. Upon the sale or retirement of depreciable
assets, the cost and related accumulated depreciation are removed from the
accounts, and the resulting gain or loss is credited to or charged against
income.

INTANGIBLES

Patents are carried at the Company's cost as determined at acquisition and were
amortized on a straight-line basis over their remaining legal lives. All
patents related to discontinued operations sold in 1997. See Note 2.

Goodwill represents the excess of cost over net assets acquired and is being
amortized on a straight-line basis principally over fifteen years.

F-7
<PAGE>

IMPAIRMENT OF LONG-LIVED ASSETS

ACCOUNTING FOR STOCK-BASED COMPENSATION

INCOME TAXES

The Company records deferred income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for expected
future tax consequences of temporary differences between the book and tax basis
of assets and liabilities and other tax attributes, including tax loss and
credit carryforwards. The Company provides a valuation allowance for the amount
of tax assets not expected to be realized.

ADVERTISING COST

The Company's advertising expenditures are expensed in the period the
advertising first occurs. Advertising expense for fiscal years ended September
30, 1997, 1996 and 1995 approximated $85,000, $77,000 and $66,000, respectively.

NET INCOME (LOSS) PER SHARE

Primary net income (loss) per share has been computed on the basis of the
weighted average number of common shares outstanding; the effect of outstanding
stock options is immaterial for purposes of calculating primary net income
(loss) per share for 1997, 1996, and 1995. Fully diluted net income (loss) per
share for fiscal 1996 includes an additional 208,000 shares relating to
outstanding stock options calculated using the treasury stock method. The
effect of outstanding stock options was immaterial for purposes of calculating
fully diluted net income (loss) per share for 1997 and 1995.

F-8
<PAGE>

PERVASIVENESS OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues and
expenses, and disclosure of gain and loss contingencies at the date of the
financial statements. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior years' amounts have been reclassified to conform to the 1997
presentation.

NOTE 2 - DISCONTINUED OPERATIONS

By approval of the Company's Board of Directors in December 1994, in a
transaction effective January 1, 1995, the Company sold the operations of Flo
Control, Inc. (Flo Control), headquartered in Burbank, California. The
purchaser of these operations was Mr. Russell J. Sarno, President of Flo Control
and a board member of the Company. Mr. Sarno purchased virtually all of the
assets of Flo Control for $3,100,000 in cash and assumed $800,000 of Flo
Control's liabilities. As a condition of the sale, Mr. Sarno agreed to purchase
Flo Control's 95% ownership interest in the Florida Realty Joint Venture for
$150,000 in cash and assume the related non-recourse mortgage approximating $2.3
million. As a result, the Company recognized a loss on disposal of $2,314,000,
net of income tax benefit, during fiscal 1995. The sale of Flo Control was
accounted for as a discontinued operation. The cash proceeds from the sale were
used to reduce the company's outstanding debt with its lender. Revenues for Flo
Control in 1995 were $2,435,000.

In 1995, income from operations of the discontinued operations was $1,261,000,
consisting of income from CTI of $1,460,000, net of taxes expense of $861,000
and a loss from operations from Flo Control of $199,000, net of tax benefits of
$107,000.

F-9
<PAGE>

NOTE 3 - OTHER ACQUISITIONS AND DISPOSITIONS

Effective January 1, 1996, the Company entered into an agreement to purchase the
assets of Cabo Tacobar One, Ltd., a Mexican restaurant concept, operating under
the name Cabo, The Original "Mix-Mex" Grill, with Central and South American
influences located in Houston, Texas, for $589,000 in cash, 375,000 shares of
the Company's common stock (with an estimated fair market value of $656,000),
and a one year option to purchase an additional 150,000 shares of the Company's
common stock at a price of $2.00 per share. Additionally, the Company issued
76,500 shares of its common stock for commissions incurred in connection with
the acquisition, which resulted in additional acquisition costs of $153,000.
Excess of purchase price over fair value of net tangible assets acquired,
recorded as goodwill, approximates $1,300,000 and is being amortized on a
straight-line basis over 15 years. Effective January 1, 1996, the Company also
entered into an agreement to purchase the assets and assume certain liabilities
of the Stockyards Hotel, located in Fort Worth, Texas, for $500,000 in cash,
450,000 shares of the Company's common stock (with an estimated fair market
value of $788,000) and the refinancing of a $1,600,000 bank term loan. Under
this agreement, the Company guaranteed, until March 15, 1997, a sales price of
$2.05 per share for stock sold as of that date. No liability was incurred
pursuant to the guarantee agreement. These acquisitions were accounted for
under purchase accounting and are included in the Company's results of
operations beginning on the acquisitions' effective date of January 1, 1996.

Unaudited proforma results from continuing operations, as if the acquisitions
had occurred at the beginning of each respective period, are as follows:
<TABLE>
<CAPTION>

Year Ended September 30,
------------------------
1996 1995
---------- ----------
<S> <C> <C>

Revenues............................... $10,096 $9,429
Net loss from continuing operations.... (878) (71)
Primary loss per average common share.. (.13) (.01)
Fully diluted loss per common share.... (.13) (.01)
</TABLE>

F-10
<PAGE>

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
---------------
1997 1996
------ -------
(In thousands)
<S> <C> <C>
Building and improvements............. $7,583 $ 9,290
Machinery and equipment............... 405 568
Furniture and fixtures................ 1,124 1,724
------ -------

9,112 11,582
Less accumulated depreciation
and amortization..................... 2,970 2,626
------ -------
6,142 8,956
Land.................................. 275 675
------ -------

Net property, plant and equipment.. $6,417 $ 9,631
====== =======
</TABLE>
NOTE 5 - LONG-TERM DEBT

In January 1996, the Company refinanced a $1,600,000 bank term loan assumed in
the acquisition of the Stockyards Hotel, which is secured by a deed of trust on
the hotel property. The interest on the note was at the established prime rate;
however, this rate could increase, subject to certain financial ratios, to a
maximum of 1% above the prime rate. The note was payable in 59 monthly
installments of $13,350 plus accrued interest, with the balance due on January
19, 2001. At September 30, 1996, the balance owed on the debt was $1,493,000.
In July 1997, the note was refinanced with another bank. This note is payable
in 120 monthly installments of $11,442 plus accrued interest and bears interest
at the established prime rate. At September 30, 1997, the balance owed on this
debt was $1,350,000.

In March 1996, one of the Company's subsidiaries (CTI) entered into a one year
financing agreement with a bank to replace its existing line of credit. The
commitment consisted of a $2,000,000 revolving line of credit, all of which was
available for borrowing at September 30, 1996, and was secured by the accounts
receivable and inventory of the subsidiary. The terms of the finance agreement
provided for interest to be paid monthly at a floating rate equal to the
established prime rate. The agreement also provided for a commitment fee of
0.25% per annum of the unused portion of the facility. The commitment agreement
was terminated upon the sale of CTI.

In March 1996, the Company borrowed $1,200,000 from an insurance company. The
note was secured by a deed of trust on a commercial office building located in
Fort Worth, Texas. The note bears interest at 7.75%, payable in 119 monthly
installments of $9,852 with a final payment of $831,000 due April 1 ,2006. At
September 30, 1996, the balance owed on this debt was $1,187,000. The note was
assumed by the purchaser upon completion of the sale of the building. See
Note 3.

The prime rate at September 30, 1997 was 8.5%.

At September 30, 1997, future principal payments on long-term debt are due as
follows:
<TABLE>
<CAPTION>

<S> <C>
1998......................................... $ 138
1999......................................... 138
2000......................................... 138
2001......................................... 138
2002 and thereafter.......................... 798
-------
$ 1,350
=======

</TABLE>

F-11
<PAGE>

NOTE 6 - ACCRUED LIABILITIES

Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------
1997 1996
------- --------
(In thousands)
<S> <C> <C>
Accrued EPA costs.......................... $ 3,550 $ -
Accrued commissions........................ - 653
Accrued payroll............................ 43 232
Accrued bonus.............................. 813 270
Other...................................... 608 369
------- -------
$ 5,014 $ 1,524
======= =======
</TABLE>

NOTE 7 - INCOME TAXES

The provision (benefit) for income taxes includes the following:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................... $ 5,049 $ 47 $ (72)
State..................................... 430 170 100
Deferred federal................................ (837) 594 (412)
Decrease in valuation allowance................. - - (508)
------- ------ -----
$ 4,642 $ 811 $(892)
======= ====== =====
</TABLE>

The income tax provision (benefit) is categorized as follows:
<TABLE>
<CAPTION>

Years Ended September 30,
-------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Continuing operations............................................. $(3,543) $ (538) $ (892)
Discontinued operations........................................... 8,185 1,349 -
------- ------- -------
$ 4,642 $ 811 $ (892)
======= ======= =======
</TABLE>

Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax liabilities and assets are comprised of the
following:
<TABLE>
<CAPTION>

September 30,
-----------------
1997 1996
------- --------
(In thousands)
<S> <C> <C>
Gross deferred tax liabilities
------------------------------
Depreciation $ 276 $ 396
------ -----
Gross deferred tax assets
--------------------------
Capital loss carryforwards - 271
Alternative minimum tax credit
carryforwards - 272
EPA liability 1,003 -
Other 106 120
------ -----
1,109 663
Valuation allowance - (271)
------ -----
1,109 392
------ -----
Deferred income tax (benefit) liability $ (833) $ 4
====== =====
</TABLE>

F-12
<PAGE>

As a result of the disposition of Flo Control (see Note 2) with its historical
losses and the improved profitability of the Company's continuing operations,
the Company reduced its valuation allowance by approximately $314,000 in 1995.

In connection with the exercise of certain stock options (see Note 8), the
Company will receive a tax benefit of approximately $256,000, which has been
credited directly to paid in capital.

The Company's consolidated income tax expense (benefit) from continuing
operations differs from that amount calculated by applying the federal statutory
rate for the following reasons (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax benefit at 34% federal statutory rate..... $ (3,875) $ (554) $ (356)
Loss of deduction from HOD stock received in
tax-free exchange............................ 298 - -
Adjustments to valuation allowance for
deferred tax assets.......................... - - (314)
Reversal of income tax accrual................ - - (255)
Other, net.................................... 34 16 33
-------- -------- --------
$ (3,543) $ (538) $ (892)
======== ======== ========
</TABLE>

NOTE 8 - STOCKHOLDERS' EQUITY

STOCK OPTIONS

In September 1989, the Board of Directors adopted the Buffton Corporation Equity
Participation Plan (the "1989 Plan") to afford key employees the opportunity to
purchase shares of the Company's common stock as a reward for past performance
and an incentive for future performance. Under the 1989 Plan, 500,000 shares of
the Company's stock may be issued. At February 3 and August 2, 1995, 450,000
options and 50,000 options, respectively, were granted to certain officers of
the Company at an exercise price of $1.50 per share which was the fair market
value at date of grant. The non-qualified options are fully vested and must be
exercised within five years of the date of grant. The options do not terminate
upon termination of the officer's employment and may be transferred by will or
by the laws of descent and distribution. At September 30, 1997 and 1996 there
were no shares available for grant.

In August 1996, the Board of Directors adopted the Buffton Corporation Equity
Participation Plan (the "1996 Plan") to afford key employees the opportunity to
purchase shares of the Company's common stock as a reward for past performance
and an incentive for future performance. Under the 1996 Plan, 300,000 shares of
the Company's stock may be issued. In August and September, 1996, 260,000
options were granted to certain officers of the Company at an exercise price of
$1.62-$1.94 per share which was the fair market value at date of grant. The
non-qualified options are fully vested and must be exercised within five years
of the date of grant. The options do not terminate upon termination of the
officer's employment and may be transferred by will or by the laws of descent
and distribution. The options may be exchanged for options that are
substantially equivalent in number, percentage of ownership and price (as it
relates to book value) in each of the Company's subsidiaries. Additionally, in
September 1996, 40,000 options were granted under the 1996 Plan to certain
employees of the Company at an exercise price of $1.94 which was the fair market
value at date of grant. The term of the options is for six years and become
exercisable at a rate of 20% per year beginning one year after the date of
grant. The options terminate and become unexercisable upon termination of the
employee, unless such termination is without cause or is due to death or total
and permanent disability. At September 30, 1997 there were no shares available
for grant.

F-13
<PAGE>

A summary of these outstanding options is as follows:
<TABLE>
<CAPTION>

Weighted Weighted
1989 Equity Average 1996 Equity Average
Partici- Exercise Partici- Exercise
pation Plan Price pation Plan Price
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Options outstanding
September 30, 1994........... - $ - - $ -

Issued....................... 500 1.50 - -
---------- -------- ----------- --------

Options outstanding
September 30, 1995........... 500 1.50 - -

Issued....................... - 300 1.73
---------- -------- ----------- --------

Options outstanding
September 30, 1996........... 500 1.50 300 1.73

Issued - -
Exercised 500 1.50 260 1.69
Cancelled - -
---------- -------- ----------- --------
Options outstanding
September 30, 1997 - $ - 40 $ 1.94
=========== ======== =========== ========

Options currently exercisable
September 30, 1997........... - $ - 8 $ 1.94
=========== ======== =========== ========
</TABLE>

The Company currently maintains an Employee Incentive Stock Option Plan
(Employee Plan), which allows certain employees and officers of the Company,
other than officers serving on the Board of Directors to acquire or increase
their proprietary interest in the success of the Company and encourage such
individuals to remain in the employ of the Company. A total of 100,000 shares
of the Company's common stock can be issued under the Employee Plan. Stock
options issued are subject to certain terms and conditions. Options granted
must be exercised within ten years of the date of such grant or within five
years, if an option is granted to an employee who owns in excess of 10% of all
outstanding common stock of the Company. Generally options are not exercisable
until the employee has been continuously employed by the Company for one year.
Options terminate and become unexercisable upon the termination of the employee,
unless such termination is without cause or is due to death or total and
permanent disability. On August 2, 1995, and December 26, 1995, 80,000 and
20,000 options, respectively, were granted to certain employees of the Company
at an exercise price of $1.50 per share which was the fair market value at date
of grants. At September 30, 1996, there were no shares available for grant. In
1997, 40,000 options were cancelled after certain employees terminated their
employment.

In connection with the acquisition of Cabo, the Company granted 150,000 options
to purchase shares of its common stock to the Seller under a non-qualified stock
option agreement. The options were granted at an exercise price of $2.00 per
share, which was the fair market value at date of grant. The option agreement
terminated on December 31, 1996 unexercised. On January 1, 1997, in connection
with the execution of a consulting agreement with the Seller, the Company
granted 150,000 options to purchase shares of its common stock under a non-
qualified stock option agreement at an exercise price of $2.25 per share through
December 31, 1997 and at $2.50 per share through December 31, 1998.

In connection with the acquisition of HOD, the Company entered into non-
qualified stock option agreements. See Note 3.

F-14
<PAGE>

On July 1, 1997, the Company's Board of Directors approved a non-qualified stock
option agreement with Robert H. McLean, Chief Executive Officer of the Company.
Under the agreement, 300,000 options to purchase shares of the Company's stock
at an exercise price of $3.00 (approximately $0.25 per share in excess of the
fair market value at the date of issuance). The options are fully vested and
must be exercised within five years of the date of issuance. The options do not
terminate upon termination of Mr. McLean's employment and may be transferred by
will or by the laws of descent and distribution.

A summary of outstanding options is as follows:
<TABLE>
<CAPTION>

Weighted Weighted
Incentive Average Other Non- Average
Stock Exercise Qualified Exercise
Options Price Options Price
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding
September 30, 1994........... - $ - - $ -

Issued....................... 80 1.50 - -
-------- -------- ---------- --------

Options outstanding
September 30, 1995........... 80 1.50 - -

Issued....................... 20 1.50 150 2.00
-------- -------- ---------- --------

Options outstanding
September 30, 1996........... 100 1.50 150 2.00

Issued - 950 2.88
Exercised 10 1.50 -
Cancelled 40 1.50 150 2.00
-------- -------- ---------- --------

Options outstanding
September 30, 1997........... 50 $ 1.50 950 $ 2.88
======== ======== ========== ========

Options currently exercisable
September 30, 1997........... 17 $ 1.50 950 $ 2.88
======== ======== ========== ========

</TABLE>
The following table summarizes stock options outstanding and exercisable at
September 30,1997:
<TABLE>
<CAPTION>

Outstanding Exercisable
----------------------------------------- ---------------------------
Exercise Weighted Weighted Weighted
Price Average Average Average
Range Shares Remaining Life Exercise Price Shares Exercise Price
----------- --------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.50-1.94 90,000 6.6 $1.70 25,000 $1.64
2.25 150,000 1.3 2.25 150,000 2.25
3.00 800,000 4.6 3.00 800,000 3.00
--------- -------
1,040,000 4.3 2.78 975,000 2.85
========= =======
</TABLE>

F-15
<PAGE>

The Company applies APB Opinion 25, "Accounting for Stock Issued To Employees",
and related interpretations in accounting for options granted under the Plans.
Accordingly, no compensation cost has been recognized at the grant date for
options issued at fair market value. Had compensation cost for the Company's
stock option plan been determined based on the fair value at grant date for
awards in fiscal 1997 and 1996 in accordance with the provisions of FAS 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have been adjusted to the pro forma amounts indicated
below (in thousands, except per share amount):
<TABLE>
<CAPTION>

Fiscal 1997 Fiscal 1996
----------- -----------
<S> <C> <C>
Net income, as reported $6,658 $1,394
Net income, pro forma 5,716 1,293
Net income per share, as reported 0.96 0.22
Net income per share, pro forma 0.82 0.20
</TABLE>

The fair value of each option grant is calculated on the date of grant using the
Black Scholes option-pricing model based upon the following assumptions:
expected volatility of 45%; risk-free interest rate of 6.0%; expected lives of 1
to 5 years and no expected dividend payments. The weighted average fair value
of options granted during fiscal 1997 and fiscal 1996 was $1.00 and $0.40,
respectively.

On March 21, 1997, Robert H. McLean, Chief Executive Officer and Director of the
Company, Robert Korman, Chief Financial Officer and Walter D. Rogers, then
President of CTI and a Director of the Company, exercised outstanding options to
purchase 500,000 shares at $774,000, 110,000 shares at $169,400 and 150,000
shares at $247,000, respectively. The fair market value at the date of exercise
was $2.56 per share. Pursuant to the terms of their stock option agreements,
each paid the purchase price by executing a promissory note, with full recourse,
in the principal amount of the respective purchase price payable one year from
date of exercise. The notes are recorded as a reduction of stockholders' equity
in the Company's accompanying Consolidated Balance Sheet. The Company will
receive a tax benefit of approximately $256,000, which has been credited
directly to paid in capital.

In October 1997, pursuant to the terms of their respective note agreements, Mr.
McLean and Mr. Korman tendered to the Company 284,430 and 62,825 shares,
respectively, of the Company's stock to repay their loans and to reimburse the
Company for certain taxes paid by the Company on behalf of Mr. McLean and Mr.
Korman in the amount of $400,695 and $90,065, respectively. The shares were
tendered on October 8, 1997 at a value of $4.13 per share, which was the closing
price per share of the Company's common stock on that date.

In October 1997, pursuant to the terms of his note agreement, Mr. Rogers
tendered to the Company 52,045 shares of its common stock owned by Mr. Rogers in
payment of one-half of the principal balance of the note in the amount of
$123,500 and to reimburse the Company for certain taxes paid by the Company on
Mr. Rogers' behalf in the amount of $91,446. Mr. Rogers tendered the shares on
October 8, 1997 at a value of $4.13 per share, which was the closing price per
share of the Company's common stock on that date. The Company also amended the
note described above, as of October 21, 1997, to (i) extend the due date for the
principal sum of $26,500 until February 3, 2000; (ii) extend the due date for
the principal sum of $97,000 until September 6, 2001; (iii) eliminate any
interest charges prior to maturity; and (iv) provide for the payment of the note
by the delivery of shares of the Company's common stock valued at the greater of
book or market value.

F-16
<PAGE>

PREFERRED RIGHTS

On June 23, 1988, the Company declared a dividend of one Preferred Share
Purchase Right (the Right) on each outstanding share of common stock. Under
certain conditions, each Right may be exercised to purchase one one-hundredth
share of Series A Junior Participating Preferred Stock at a purchase price of
$28.50, subject to adjustment. The Rights may only be exercised 10 days after
public announcement that a third party has acquired or obtained the right to
acquire 20% or more of the Company's common stock or has commenced a tender
offer to acquire more than 30% of the Company's common stock. On November 15,
1995, the Company amended its Rights Agreement to provide for exercise of the
Rights 10 days after public announcement that a third party has acquired or
obtained the right to acquire 15% or more of the Company's common stock or has
commenced a tender offer to acquire more than 15% of the Company's common stock.
The Rights, which do not have voting rights, expire on July 5, 1998 and may be
redeemed by the Company at a price of $.01 per Right at any time prior to their
becoming exercisable. Once the Rights become exercisable should the Company be
the surviving company after certain transactions, each holder of a Right will
thereafter have the right, upon exercise, to receive common stock of the Company
having a value of two times the exercise price of the Right. However, Rights
acquired by a person or group acquiring 15%, as amended, or more of the
Company's common stock prior to such transaction will be null and void.
Similarly, once the Rights become exercisable, should the Company not be the
surviving company after certain transactions, each holder of a Right will
thereafter have the right, upon exercise, to receive common stock of the
acquiring Company having a value equal to two times the exercise price of the
Right.

NOTE 9 - EMPLOYEE BENEFIT PLANS

The Company has established a Defined Contribution Plan ("the Plan") written in
conformity with Section 401(k) of the Internal Revenue Code covering all
employees subject to certain eligibility requirements. Under the Plan the
Company contributes a discretionary amount to a trust each year. The amounts
charged against income for the Company's contribution for the years ended
September 30, 1997, 1996 and 1995 were $30,000, $19,000 and $12,000,
respectively.

NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and cash equivalents,
receivables, accounts payable, accrued liabilities and amounts outstanding under
a certain debt agreement. Management believes the fair values of these
instruments approximate the related carrying values as of September 30, 1997
because of their short-term nature and/or variable interest rates.

F-17
<PAGE>

NOTE 11 - RELATED PARTY TRANSACTIONS

By approval of the Company's Board of Directors in December 1994, in a
transaction effective January 1, 1995, the Company sold the operations of Flo
Control, headquartered in Burbank, California. The purchaser of these
operations was Mr. Russell J. Sarno, President of Flo Control and a board member
of the Company. Mr. Sarno purchased virtually all of the assets of Flo Control
for $3,100,000 in cash and assumed $800,000 of Flo Control's liabilities. As a
condition of the sale, Mr. Sarno agreed to purchase Flo Control's 95% ownership
interest in the Florida Realty Joint Venture for $150,000 in cash and assume the
related non-recourse mortgage approximating $2.3 million.

In July 1997, by approval by the Company's Board of Directors, the Company sold
an office building to a limited partnership controlled by Robert H. McLean,
Chief Executive Officer of the Company, for cash proceeds of $506,000 and
assumption of the related mortgage approximating $1,169,000. A disinterested
majority of the Board of Directors approved the sale of the building at a price
equal to the average of three independent, fair market value MAI appraisals.
The Company realized a gain of approximately $46,000 upon completion of the
sale.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company has various leases for real property and equipment. In addition to
rental payments, certain leases provide that the Company pay taxes, insurance
and other operating expenses applicable to the leased property. Rental expense
under operating leases for the years ended September 30, 1997, 1996 and 1995 was
$467,000, $795,000 and $645,000, respectively.

At September 30, 1997, future minimum payments for non-cancelable operating
leases for facilities and equipment with terms in excess of one year were as
follows (in thousands):
<TABLE>
<CAPTION>

<S> <C>
1998...................... $ 297
1999...................... 281
2000...................... 262
2001...................... 261
2002 and beyond........... 1,968
------
$3,069
======
</TABLE>

F-18
<PAGE>

Additional fieldwork provided for in the RDWP Addendum was conducted at the site
and resulted in the formulation of a revised remedy. On December 19, 1995, the
Company and its legal and environmental consultants presented to the EPA the
RDWP Addendum and the recommended changes to the ROD in the form of a revised
remedy. On July 16, 1996, the Company and its legal and environmental
representatives met with the EPA to review the EPA's written response to this
revised remedy. The revised remedy would eliminate certain requirements of the
existing ROD and would primarily include removing and treating contaminated
soil, significantly reducing the time period and cost for remediation.

NOTE 13 - SETTLEMENT OF SHAREHOLDER LITIGATION

F-19
<PAGE>

NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

SUPPLEMENTAL SCHEDULE OF CASH PAYMENTS:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash paid for:
Interest.......................... $ 193 $ 231 $ 249
Income taxes...................... 5,218 44 58

</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Effective January 1, 1995, the Company disposed of the Florida Realty Joint
Venture in conjunction with the sale of Flo Control (see Note 2) and the
purchaser assumed the related $2.3 million mortgage.

During the years ended September 30, 1997, 1996 and 1995, the Company issued
500,000 (including 200,000 shares from treasury), 90,000 and 407,356 shares,
respectively, of common stock to key employees and certain officers and
directors as payment for services and bonuses. The Company recognized
$1,237,000, $139,000 and $571,000, respectively, as compensation related to the
issuance of the shares which amount represented fair market value at date of
issuance.

During the year ended September 30, 1996, the Company acquired the operating
assets of Cabo and acquired the assets and assumed certain liabilities of the
Stockyards Hotel. In connection with the acquisitions, cash was paid as
follows:
<TABLE>
<CAPTION>

<S> <C>
Noncash investing and financing activities:
Fair value of assets acquired
(including purchased goodwill) $ 4,759
Liabilities assumed (1,754)
Stock issued (1,698)
-------
Cash paid 1,307
Less: cash acquired (95)
-------
Net cash paid for acquisitions $ 1,212
=======
</TABLE>

In April 1997, the Company acquired all the outstanding stock, in a tax free
exchange, of Hotels of Distinction in exchange for 300,000 shares of the
Company's common stock.

F-20
<PAGE>

SCHEDULE IX
-----------

BFX HOSPITALITY GROUP, INC.
---------------------------

VALUATION AND QUALIFYING ACCOUNTS

Balance Charged to Charged to Balance
at beginning costs and other at end
Description of period expenses accounts Deductions of period
- --------------------------------- ------------ ----------- ---------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Reserve for estimated losses
on accounts receivable - trade:

September 30, 1997 $ 35 $ - (35)(b) $ - -
September 30, 1996 75 (25) - (15) 35
September 30, 1995 150 84 (159)(a) - 75

Reserve for estimated losses
on notes receivable:

September 30, 1997 - 635 - (635) -

</TABLE>

(a) Includes amounts associated with Flo Control (see Note 2).
(b) Includes amounts associated with CTI (see Note 2).

F-21
<PAGE>

BFX HOSPITALITY GROUP, INC.
---------------------------

1997 FORM 10-K

EXHIBIT INDEX

EXHIBITS
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