BFX HOSPITALITY GROUP INC, 10-K, 1998-12-28

BFX HOSPITALITY GROUP INC
10-K, 1998-12-28
ELECTRONIC COMPONENTS, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended September 30, 1998

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 17, 1998 was $4,275,620.

The number of shares outstanding of the registrant's common stock,
$.05 par value, as of December 17, 1998 was 4,091,728.

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.

1998 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 7A. Quantitative and Qualitative Disclosures About Market Risk. 14
Item 8. Financial Statements and Supplementary Data................ 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 14

PART III
- --------

Item 10. Directors and Executive Officers of the Registrant......... 15
Item 11. Executive Compensation..................................... 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 15
Item 13. Certain Relationships and Related Transactions............. 15

PART IV
- -------

Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................. 16

Signatures ........................................................... 18

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, 1998, the Company owns and operates food service, lodging and
entertainment facilities in Texas and Louisiana.

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, approximated
$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. 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 the year ended September 30, 1996, are as follows:

Revenues.................................. $10,096
Net loss from continuing operations....... (878)
Basic and diluted earnings per share...... (.13)

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 had no assets or management contracts at the date of
purchase, the transaction, in substance, represented 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 terminated upon
termination of employment by Mr. Tremain and Mr. Mathot as described below.

3
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employment agreements, which required the Company to purchase any common stock
held by Mr. Tremain and Mr. Mathot at the greater of fair market value or their
cost, the Company purchased 280,000 shares of the Company's common stock from
Mr. Tremain for $700,000 and 260,000 shares of the Company's common stock from
Mr. Mathot for $656,000. As a result of these transactions, the Company recorded
an expense of $744,000 during fiscal 1998.

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., Boutique Inns, 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 an upscale taqueria with a distinctive
"diner look" decor. A second Cabo unit opened in leased space in the downtown
Houston historical district in April 1998. A third Cabo unit opened in leased
space in downtown Fort Worth's Sundance Square in the first quarter of fiscal
1999. The Company has also signed leases for its fourth and fifth Cabo
locations in Austin, Texas. One location is expected to open in the third
quarter of fiscal 1999 and the other location is expected to open in the fourth
quarter of fiscal 1999. Additional leases for Cabo locations are near
completion in Houston.

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.

Boutique Inns, Inc. owns and operates the Stockyards Hotel. 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 service catering
for corporate meetings, wedding receptions and family reunions. H3 Ranch, a
5,000 square foot steakhouse concept, located in the hotel's first floor space
opened August 1998. Included in the Stockyards Hotel real estate are two valet
parking lots totaling 1.3 acres.

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.

4
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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 264 full-time and 144
part-time employees as of September 30, 1998, 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 ten years at annual rentals of approximately $471,000.
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 100% of the facility. Annual rental for this lease
is approximately $390,000 plus real estate taxes, insurance and all repairs.

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 the first
Cabo unit in Houston, Texas leases approximately 3,000 square feet of space and
the second Cabo unit in Houston, Texas leases approximately 8,000 square feet of
space.

5
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The real estate for the Stockyards Hotel located in Fort Worth, Texas is owned
and offers 52 guestrooms and approximately 3,500 square feet of meeting space
and catering capabilities. H3 Ranch is a 5,000 square foot steakhouse concept
located in the hotel's first floor space. Included in the Stockyards Hotel real
estate are two valet parking lots totaling 1.3 acres.

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
- --------------------------

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, 1998.

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:

FISCAL 1998 HIGH LOW
---- ---
October 1 - December 31........ $4.13 $2.25
January 1 - March 31........... 3.00 2.13
April 1 - June 30.............. 2.44 1.75
July 1 - September 30.......... 2.25 1.38

FISCAL 1997 HIGH LOW
---- ---
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

The number of named stockholders of common stock as of September 30, 1998 was
approximately 1,519 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 1998 1997 1996 1995 1994
- ------------------ -------- -------- ------- -------- -------
(In thousands, except per share and ratio amounts)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $11,513 $10,518 $9,298 $ 6,946 $5,481
======= ======= ====== ======= ======

Loss from continuing operations (a)......... $(2,509) $(7,854) $ (921) $ (156) $ (450)
Income (loss) from discontinued operations.. - 14,512 2,315 (1,053) 2,358
------- ------- ------ ------- ------

Net income (loss)........................... $(2,509) $ 6,658 $1,394 $(1,209) $1,908
======= ======= ====== ======= ======

Basic and diluted earnings per share:
Continuing operations..................... $ (.47) $ (1.13) $ (.14) $ (.03) $ (.09)
Discontinued operations................... - 2.09 .36 (.19) .46
------- ------- ------ ------- ------

Net income (loss)......................... $ (.47) $ .96 $ .22 $ (.22) $ .37
======= ======= ====== ======= ======

</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 1994 and had been reported as discontinued operations.

AT YEAR END
- -----------
<TABLE>
<S> <C> <C> <C> <C> <C>

Working capital............................. $ 484 $10,797 $ 3,743 $ 2,824 $ 7,149
Current assets.............................. 6,840 16,563 6,917 5,429 11,125
Total assets................................ 22,810 28,084 23,164 17,224 25,070
Long-term debt.............................. 1,075 1,212 2,493 - 5,507
Total liabilities........................... 7,431 6,978 5,671 2,605 9,813
Stockholders' equity........................ 15,379 21,106 17,493 14,619 15,257
Current ratio............................... 1.08 2.87 2.18 2.08 2.80
Book value per share........................ 3.71 3.53 2.67 2.57 2.89
Total liabilities to equity ratio........... 48 .33 .32 .18 .64
Number of outstanding shares, net of
treasury shares............................ 4,149 5,975 6,544 5,685 5,278
</TABLE>

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

GENERAL INFORMATION

At September 30, 1998, 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, 1996, 1997 and 1998 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 June 3, 1997, the Company sold the assets of Current Technology, Inc.
(CTI) to Danaher Corporation. See Liquidity and Capital Resources 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), resolution of the Year
2000 issue 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.

9
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RESULTS OF CONTINUING OPERATIONS

1998 versus 1997

Net revenues in 1998 increased 9% compared to 1997 due to the opening of the
second Cabo unit in Houston, Texas in April 1998 and the opening of the H3 Ranch
restaurant located in the SYH in August 1998. Revenues are expected to increase
in fiscal 1999 as the third Cabo unit opened in the first quarter of fiscal 1999
and additional Cabo units are planned to open during fiscal 1999.

Costs of goods sold (which consists primarily of food and beverage costs) during
1998 increased 18% compared to 1997. As a percent of related revenue, these
costs were 23% during 1998 versus 22% a year earlier. The absolute increase is
due to increased revenues discussed above. The increase in costs as a
percentage of revenues is due to the decreased percentage of sales from SYH
which have a lower cost of goods sold than the Company's other concepts.

Selling, general and administrative expenses for 1998 decreased 17% compared to
1997. The primary reasons for the decrease are the expenses incurred in 1997
associated with the acquisition 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) and professional fees incurred as a
result of litigation with certain shareholders ($500,000). In addition,
selling, general and administrative expenses were impacted by the inclusion of
the results of operations of Cabo Travis and H3 Ranch from their respective
opening dates in fiscal 1998 and the exclusion of the results of operations of
the Main Street office building sold during fiscal 1997.

In 1997, the Company accrued environmental remediation expenses of $3,500,000
representing estimated future costs of implementing the remedy and reimbursement
of monies spent by the EPA at the site. In addition, all prior costs incurred,
approximating $867,000 through April 30, 1997, associated with the
implementation of the original Record of Decision, were expensed. See Liquidity
and Capital Resources for further details.

Depreciation and amortization expense during 1998 increased 12% compared to 1997
due to the opening of the second Cabo unit in April 1998 and capital
improvements made at SYH.

The increase in interest income to $632,000 in 1998 from $485,000 in 1997 is due
to increased cash balances as a result of the sale of CTI in June 1997. The
decrease in interest expense to $120,000 in 1998 from $193,000 is primarily due
to assumption of debt by the purchaser of a building sold by the Company in
1997.

During 1998, the Company reported a loss from continuing operations before
income taxes of $3,797,000 compared to a loss of $11,397,000 in 1997. The
decreased loss is due to decreased selling, general and administrative expenses
discussed above and expenses related to the revision of the EPA remedy in 1997.

Income tax benefit rate on the pre-tax loss from continuing operations was 34%
in 1998 compared to a benefit of 31% in 1997. 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 in April 1997.

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.

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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
acquisition 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 litigation with certain shareholders
($500,000). 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 accrued environmental remediation expenses of $3,550,000
representing estimated future costs of implementing the remedy and reimbursement
of monies spent by the EPA at the site. In addition, all prior costs incurred,
approximating $867,000 through April 30, 1997, associated with the
implementation of the original Record of Decision, were expensed. 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 inclusion of the $1,600,000 bank term note assumed in connection with the
acquisition of SYH in January 1996 for 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 in April 1997.

LIQUIDITY AND CAPITAL RESOURCES

Fiscal year ended September 30, 1998 -

The Company's cash decreased $11,014,000 from $16,356,000 at September 30, 1997
to $5,342,000 at September 30, 1998. The Company's operating activities used
cash of $2,089,000 during fiscal 1998 compared to $5,260,000 during fiscal 1997.
The cash used in operating activities during fiscal 1998 was primarily
attributable to the $2,509,000 net loss incurred during fiscal 1998.

11
<PAGE>

Cash used for investing activities of $5,456,000 related primarily to the
construction of Cabo Travis and H3 Ranch, opened during fiscal 1998, and Cabo
Sundance, opened during the first quarter of fiscal 1999.

Cash used for financing activities of $3,469,000 was primarily the result of the
Company purchasing 1,612,170 shares of its common stock at a total cost of
$3,332,000 (average cost of $2.07 per share). The shares are recorded as
treasury stock and will be available for employee stock plans and other
corporate requirements.

At September 30, 1998, the Company's only debt relates to a bank term loan
assumed in the acquisition of the Stockyards Hotel with annual commitments of
$138,000. The Company incurred approximately $600,000 during the first quarter
of fiscal 1999 to complete the construction on the Company's third Cabo unit
opened in downtown Fort Worth, Texas. In addition, construction costs are
expected to approximate $2,000,000 for the two additional Cabo units expected to
open in the last two quarters of fiscal 1999 in Austin, Texas. Management
anticipates incurring $250,000 in fiscal 1999 in the initial phase of
implementing the agreed-upon remedy for its EPA superfund site. As long as the
Company's shares continue to represent an attractive investment and a prudent
use of capital, the Company intends to periodically purchase up to an additional
200,000 shares of the Company's common stock pursuant to its stock repurchase
plan. Also, the Company will fund the cost of ensuring that the Company's
systems are Year 2000 compliant, which are not currently expected to be
significant. Management believes that cash flow from operations combined with
cash on hand will provide sufficient resources to fund the Company's fiscal 1999
operations as well as its planned fiscal 1999 capital expenditures.

During 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. 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. Due to
concerns about the correctness of the remedy provided for in the ROD, the
Company performed additional fieldwork and, in 1995, the EPA agreed the remedy
needed to be modified. After additional discussions with the EPA, a revised ROD
was issued in July 1997. The revised ROD eliminates certain provisions of the
original ROD and primarily includes the removal and treatment of contaminated
soil. At September 30, 1997, the Company had accrued environmental remediation
expenses of $3,550,000. In June 1998, the Company signed a Consent Decree with
the EPA in regard to the implementation of the agreed-upon remedy and ongoing
monitoring of the property. In addition, the Company reimbursed the EPA
$550,000 for monies spent by the EPA at the Company's Superfund Site over a ten-
year period from October 1987 through April 1997. At September 30, 1998, the
Company has a liability accrued of $2,950,000 representing the estimated future
costs of implementing the agreed-upon remedy.

12
<PAGE>

Fiscal year ended September 30, 1997-

The Company's cash increased $14,697,000 from $1,659,000 at September 30, 1996
to $16,356,000 at September 30, 1997. The Company's operating activities used
cash of $5,260,000 during fiscal 1997 compared to providing cash of $3,653,000
during fiscal 1996.

Cash provided by investing activities of $24,655,000 related primarily to the
$25,194,000 proceeds from the sale of CTI completed June 3, 1997.

Cash used for financing activities of $4,698,000 was primarily the result of the
Company purchasing 1,839,000 shares of its common stock at a total cost of
$4,552,000 (average cost of $2.48 per share). The shares are recorded as
Treasury Stock and will be available for employee stock plans and other
corporate requirements. The shares purchased 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 12 of Notes to
Consolidated Financial Statements for additional details.

Fiscal year ended September 30, 1996-

The Company's cash increased $7,000 from $1,652,000 at September 30, 1995 to
$1,659,000 at September 30, 1996. The Company's operating activities provided
cash of $3,653,000 during fiscal 1996 compared to using cash of $171,000 during
fiscal 1995. This increase in cash flows was primarily attributable to the
$1,394,000 net income incurred during fiscal 1996.

Cash used for investing activities of $2,725,000 related primarily to $1,613,000
in purchases of equipment, furniture and fixtures, enhancements for existing
properties and $1,212,000 for the acquisitions of Cabo Tacobar One, Ltd. and the
Stockyards Hotel, both effective January 1, 1996.

Cash provided by financing activities of $724,000 was primarily the result of
the Company's borrowing of $1,200,000 from an insurance company on a commercial
office building located in Fort Worth, Texas. This borrowing was partially
offset by the Company's purchase of 183,350 shares of its common stock at a cost
of $356,000. The shares are recorded as Treasury stock and will be available
for employee stock plans and other corporate requirements.

YEAR 2000

The Company is currently assessing all systems that could potentially be
affected by the Year 2000 Issue, including facility systems, POS systems,
telephone hardware and software, out-sourced services and suppliers. Based on
information currently available, management does not anticipate significant
replacements of any of its computer systems. By spring 1999, management intends
to have obtained upgrades or replacements for all equipment that is

13
<PAGE>

determined not to be Year 2000 compliant. Management has the intent and ability
to commit the required resources to the upgrades or replacements but at the
current time cannot estimate what the total cost will be, though it is not
anticipated to be material. The Company will diligently test all upgrades or
replacements prior to summer 1999 to ensure their compliance.

In addition to the current assessment of its systems, the Company is working
with its key suppliers and other third parties with which it has a material
relationship to determine that such parties are achieving compliance with
respect to the Year 2000 Issue in those systems affecting the Company's
operations. Although the Company believes that such persons are working
diligently to properly address the Year 2000 Issue, the Company cannot guarantee
that these third parties will be compliant in a timely manner, or that a failure
to be compliant by another company would not have a material adverse effect on
the Company.

Though the Company is not able to estimate the full impact of any potential
failure of its systems as a result of the Year 2000 Issue, the Company believes
that its operations are such that a contingency plan based primarily on manual
processing of information will be adequate for the Company to continue
operations.

IMPACT OF INFLATION

From October 1995 to September 1998, inflation did not have a material impact on
the Company's operations.

ACCOUNTING CHANGES

EARNINGS PER SHARE

Effective October 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. This statement requires interim and
annual presentation of basic and diluted earnings per share ("EPS") by all
entities that have issued common stock or potential common stock if those
securities are traded in a public market. The objective of basic EPS is to
measure the performance of an entity over the reporting period. The objective
of diluted EPS is to measure the performance of an entity over the reporting
period while giving effect to all potentially dilutive common shares that were
outstanding during the period. This statement also requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. EPS data for fiscal 1998 and all
prior periods have been restated to conform with the provisions of this
statement. Such adoption had no material impact on the Company's presentation
of earnings per share.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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.

14
<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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A.

15
<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 October 27, 1997 reporting acquisition of stock from
Robert H. McLean

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.

16
<PAGE>

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

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

10.3 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 incorporated
herein by reference to Form 10-K dated September 30, 1998.

21 Subsidiaries of the Company

23 Consent of Independent Accountants

27 Financial Data Schedule

17
<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 23, 1998
-------------------- -----------------
Robert H. McLean, President and
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 23, 1998
-------------------- -----------------
Robert H. McLean, President,
Chief Executive Officer and Chairman of
the Board of Directors
(Principal Executive Officer)

/s/ Robert Korman December 23, 1998
----------------- -----------------
Robert Korman, Vice President and
Chief Financial Officer

/s/ Bruno D'Agostino December 23, 1998
-------------------- -----------------
Bruno D'Agostino, Director

/s/ John M. Edgar December 23, 1998
----------------- -----------------
John M. Edgar, Director

/s/ Hampton Hodges December 23, 1998
------------------ -----------------
Hampton Hodges, Director

/s/ H.T. Hunnewell December 23, 1998
------------------ -----------------
H.T. Hunnewell, Director

/s/Walter D. Rogers, Jr. December 23, 1998
------------------------ -----------------
Walter D. Rogers, Jr., Director

/s/ Russell J. Sarno December 23, 1998
-------------------- -----------------
Russell J. Sarno, Director

18
<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-8

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

Schedule IX - Valuation and Qualifying Accounts F-19

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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, 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/ PricewaterhouseCoopers LLP

Fort Worth, Texas
November 5, 1998

F-2
<PAGE>

BFX HOSPITALITY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended September 30,
------------------------------------
1998 1997 1996
------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues....................................................... $11,513 $ 10,518 $ 9,298
------- -------- -------

Costs and expenses:
Cost of goods sold................................................ 2,698 2,277 2,139
Selling, general and administrative............................... 11,974 14,483 7,595
Expenses associated with revised EPA remedy....................... - 4,417 -
Depreciation and amortization..................................... 1,150 1,030 969
------- -------- -------

Total costs and expenses.......................................... 15,822 22,207 10,703
------- -------- -------

Net loss from continuing operations before other income (expense)
and income taxes.................................................. (4,309) (11,689) (1,405)
------- -------- -------

Other income (expense):
Interest income................................................... 632 485 89
Interest expense.................................................. (120) (193) (143)
------- -------- -------
512 292 (54)
------- -------- -------

Loss from continuing operations before income taxes................ (3,797) (11,397) (1,459)
Income tax benefit................................................. 1,288 3,543 538
------- -------- -------
Loss from continuing operations.................................... (2,509) (7,854) (921)
------- -------- -------

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

Income from discontinued operations............................... - 14,512 2,315
------- -------- -------

Net income (loss).................................................. $(2,509) $ 6,658 $ 1,394
======= ======== =======

Basic and diluted earnings per share:
Continuing operations............................................. $ (.47) $ (1.13) $ (.14)
Discontinued operation............................................ - 2.09 .36
------- -------- -------
Net income (loss)................................................. $ (.47) $ .96 $ .22
======= ======== =======

Weighted average common shares outstanding........................ 5,349 6,957 6,441
======= ======== =======

</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,
----------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 5,342 $ 16,356
Accounts receivable................................................................ 128 66
Inventories........................................................................ 148 79
Income tax receivable.............................................................. 1,102 -
Prepaid and other current assets................................................... 120 62
-------- --------
Total current assets.............................................................. 6,840 16,563
-------- --------

Property, plant and equipment, net.................................................. 11,084 6,417
-------- --------

Goodwill, net of amortization of $1,567,000 and $1,206,000, respectively............ 3,397 3,758
Deferred income taxes............................................................... 1,419 833
Other assets, net................................................................... 70 513
-------- --------

$ 22,810 $ 28,084
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................................. $ 138 $ 138
Accounts payable................................................................... 578 300
Accrued liabilities................................................................ 4,793 5,014
Income taxes....................................................................... 847 314
-------- --------
Total current liabilities........................................................ 6,356 5,766

Long-term debt...................................................................... 1,075 1,212
-------- --------
7,431 6,978
-------- --------
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;
7,786,878 shares outstanding..................................................... 389 389
Additional paid-in capital......................................................... 16,583 16,578
Retained earnings.................................................................. 7,307 9,816
Treasury stock, at cost, 3,637,850 and 1,812,350
shares, respectively............................................................. (8,777) (4,487)
Employee notes for stock purchases (123) (1,190)
-------- --------
15,379 21,106
Commitments and contingencies (Note 11).............................................
-------- --------

$ 22,810 $ 28,084
======== ========
</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,
------------------------------------
1998 1997 1996
----------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ (2,509) $ 6,658 $ 1,394
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation............................................................ 789 764 704
Amortization............................................................ 361 475 577
Deferred income taxes................................................... (586) (837) 594
Bad debt provision...................................................... - (35) 40
Net gain on sale of assets.............................................. - (20,301) -
Accrued expenses associated with revised EPA remedy..................... - 4,417 -
Issuance of common stock in payment for services........................ 114 412 139
Expenses associated with acquisition.................................... - 824 -
Change in components of current assets and liabilities
(exclusive of acquisitions and dispositions):
Accounts receivable.................................................... (62) 1,392 (662)
Inventories............................................................ (69) 143 639
Prepaid and other...................................................... 385 256 -
Accounts payable....................................................... 278 (36) 34
Accrued liabilities.................................................... (221) 349 119
Income taxes payable................................................... (569) 259 75
-------- -------- -------
Net cash provided by (used for) operating activities....................... (2,089) (5,260) 3,653
-------- -------- -------

Cash flows from investing activities:
Net additions to property, plant and equipment............................ (5,456) (450) (1,613)
Proceeds from sale of operating assets.................................... - 25,194 100
Acquisitions.............................................................. - - (1,212)
Additions to other assets................................................. - (89) -
-------- -------- -------
Net cash provided by (used for) investing activities....................... (5,456) 24,655 (2,725)
-------- -------- -------

Cash flows from financing activities:
Additions to debt......................................................... - - 1,200
Repayments of debt........................................................ (137) (161) (120)
Exercise of stock options................................................. - 15 -
Treasury stock purchases.................................................. (3,332) (4,552) (356)
-------- -------- -------
Net cash provided by (used for) financing activities....................... (3,469) (4,698) 724
-------- -------- -------

Net increase (decrease) in cash............................................ (11,014) 14,697 1,652

Cash at beginning of year.................................................. 16,356 1,659 7
-------- -------- -------

Cash at end of year........................................................ $ 5,342 $ 16,356 $ 1,659
======== ======== =======
</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, 1998, 1997, and 1996

<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, 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>

F-6
<PAGE>

<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>
Issuance of 45,000 shares of $.05
par value common stock from treasury
for services..................................... - 5 109 - - 114

Reacquisition of 258,330 shares of $.05
par value common stock for repayment
of employee notes................................ - - (1,067) - 1,067 -

Purchase of 1,612,170 shares of $.05
par value common stock........................... - - (3,332) - - (3,332)

Net loss - - - (2,509) - (2,509)
------ ---------- -------- -------- --------- -------

Balance at September 30, 1998...................... $ 389 $ 16,583 $ (8,777) $ 7,307 $ (123) $15,379
====== ========== ======== ======== ========= =======
</TABLE>

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

F-7
<PAGE>

BFX HOSPITALITY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996

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 5.39% at September 30, 1998 for cash
equivalents totaling $5,234,000.

INVENTORIES

Inventories are stated at the lower of cost (first in, first out) or market and,
at September 30, 1998, 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

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

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews 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. An impairment loss is recognized if the sum
of the expected future cash flows (undiscounted and without interest charges)
from the use of the asset is less than the net book value of the asset.
Generally, the amount of the impairment loss is measured as the difference
between the net book value of the assets and the estimated fair value.

F-8
<PAGE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

Effective October 1, 1996, the Company adopted the disclosure only provisions of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation". The Company continues 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".

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, 1998, 1997 and 1996 approximated $74,000, $85,000 and $77,000, respectively.

EARNINGS PER SHARE

Effective October 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. This statement requires interim and
annual presentation of basic and diluted earnings per share ("EPS") by all
entities that have issued common stock or potential common stock if those
securities are traded in a public market. The objective of basic EPS is to
measure the performance of an entity over the reporting period. The objective
of diluted EPS is to measure the performance of an entity over the reporting
period while giving effect to all potentially dilutive common shares that were
outstanding during the period. This statement also requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. EPS data for the year ended
September 30, 1998 and all prior periods have been restated to conform with the
provisions of this statement.

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.

NOTE 2 - DISCONTINUED OPERATIONS

1997.................................. $10,891
1996.................................. 15,788

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. 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 the year ended September 30, 1996, are as
follows:

Revenues............................................... $10,096
Net loss from continuing operations.................... (878)
Basic and fully diluted earnings per share............. (.13)

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 terminated upon
termination of employment by Mr. Tremain and Mr. Mathot as described below.

In June 1998, Mr. Tremain tendered his resignation as Chairman of the Board of
the Company effective June 26, 1998. In September 1998, Mr. Mathot tendered his
resignation as President and Director of the Company effective September 30,
1998. In accordance with their employment agreements, Mr. Tremain and Mr. Mathot
received $100,000 and $175,000, respectively, in severance compensation. Also
pursuant to their employment agreements, which required the Company to purchase
any common stock held by Mr. Tremain and Mr. Mathot at the greater of fair
market value or his cost, the Company purchased 280,000 shares of the Company's
common stock from Mr. Tremain for $700,000 and 260,000 shares of the Company's
common stock from Mr. Mathot for $656,000. As a result of these transactions,
the Company recorded an expense of $744,000 during fiscal 1998.

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.

F-10
<PAGE>

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment consist of the following:

September 30,
-----------------
1998 1997
-------- -------
(In thousands)
Building and improvements............. $ 10,554 $ 7,583
Equipment............................. 1,592 405
Furniture and fixtures................ 1,365 1,124
-------- -------

13,511 9,112
Less accumulated depreciation
and amortization..................... (3,702) (2,970)
-------- -------
9,809 6,142
Land.................................. 406 275
Construction in progress.............. 869 -
-------- -------

Net property, plant and equipment.. $ 11,084 $ 6,417
======== =======

NOTE 5 - LONG-TERM DEBT

In January 1997, the Company refinanced a bank term loan assumed in the
acquisition of the Stockyards Hotel, which is secured by a deed of trust on the
hotel property. 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, 1998 and 1997, the balance owed on this debt was $1,213,000 and
$1,350,000, respectively.

The prime rate at September 30, 1998 was 8.25%.

At September 30, 1998, future principal payments on long-term debt are due as
follows:

1999................................... $ 138
2000................................... 138
2001................................... 138
2002................................... 138
2003 and thereafter.................... 661
-------
$ 1,213
=======

NOTE 6 - ACCRUED LIABILITIES

Accrued liabilities consist of the following:
September 30
------------------
1998 1997
------- --------
(In thousands)

Accrued EPA costs................................ $ 2,950 $ 3,550
Accrued stock purchase........................... 656 -
Accrued sales tax................................ 149 112
Accrued payroll.................................. 122 43
Accrued bonus.................................... 146 813
Accrued severance................................ 175 -
Other............................................ 595 496
------- -------
$ 4,793 $ 5,014
======= =======

F-11
<PAGE>

NOTE 7 - INCOME TAXES

The provision (benefit) for income taxes includes the following:
Years Ended September 30,
---------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Current:
Federal........................................ $(1,102) $ 5,049 $ 47
State.......................................... 54 430 170
Deferred federal.................................. (240) (837) 594
------- ------- -------
$(1,288) $ 4,642 $ 811
======= ======= =======

The income tax provision (benefit) is categorized as follows:
Years Ended September 30,
---------------------------
1998 1997 1996
------- ------- -------
(In thousands)

Continuing operations............................ $(1,288) $(3,543) $ (538)
Discontinued operations.......................... - 8,185 1,349
------- ------- -------
$(1,288) $ 4,642 $ 811
======= ======= =======

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:

September 30,
--------------------
1998 1997
------ ------
Gross deferred tax liabilities (In thousands)
------------------------------
Depreciation $ 204 $ 276
------ ------

Gross deferred tax assets
---------------------------
EPA liability 1,190 1,003
Pre-opening expenses 252 -
Other 181 106
------ ------
1,623 1,109
Valuation allowance - -
------ ------
1,623 1,109
------ ------
Net deferred tax asset $1,419 $ 833
====== ======

F-12
<PAGE>

The Company's consolidated income tax benefit from continuing operations differs
from that amount calculated by applying the federal statutory rate for the
following reasons (in thousands):

Years Ended September 30,
--------------------------
1998 1997 1996
------- ------- ------

Tax benefit at 34% federal statutory rate..... $(1,291) $(3,875) $ (554)
Loss of deduction from HOD stock received in
tax-free exchange............................ - 298 -
Other, net.................................... 3 34 16
------- ------- ------
$(1,288) $(3,543) $ (538)
======= ======= ======

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 could 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 were exercised during 1997.
At September 30, 1998 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 non-
qualified 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 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, 1998 there were no shares available for grant.

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. In 1997, 40,000 options were cancelled after certain employees
terminated their employment. At September 30, 1998, there were no shares
available for grant.

F-13
<PAGE>

A summary of outstanding options issued under the above option plans is as
follows:

<TABLE>
<CAPTION>
Weighted Weighted Weighted
1989 Average 1996 Average Employee Average
Plan Exercise Plan Exercise Plan Exercise
Options Price Options Price Options Price
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
September 30, 1995......................... 500 $1.50 - $ - 80 $1.50

Issued..................................... - - 300 1.73 20 1.50
---- ----- ---- ----- --- -----

Options outstanding
September 30, 1996......................... 500 1.50 300 1.73 100 1.50
Exercised.................................. 500 1.50 260 1.69 10 1.50
Cancelled.................................. - - - - 40 1.50
---- ----- ---- ----- --- -----

Options outstanding
September 30, 1998 and 1997................ - $ - 40 $1.94 50 $1.50
==== ===== ==== ===== === =====

Options currently exercisable
September 30, 1998......................... - $ - 16 $1.94 27 $1.50
==== ===== ==== ===== === =====
</TABLE>

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.

On July 1, 1997, the Company's Board of Directors approved a non-qualified stock
option agreement with Robert H. McLean, Chairman of the Board and 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.

In December 1997, the Board of Directors adopted the BFX Hospitality Group, Inc.
1997 Employee Stock Option Plan (the "1997 Plan") which was approved by the
stockholders of the Company in February 1998. The total number of options to
purchase shares that may be granted is 200,000 shares. The maximum number of
options that may be granted to an employee in a year is 25,000. At the date of
grant, the Board of Directors will determine if the option is an incentive
option or a non-qualified option. On July 2, 1998, the Company's Board of
Directors approved an incentive stock option agreement pursuant to the terms of
the 1997 Plan with Robert Korman, Chief Financial Officer of the Company. Under
the agreement, 25,000 options were issued to purchase shares of the Company's
stock at an exercise price of $3.00 (approximately $0.87 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. Korman's employment and may be transferred
by will or by the laws of descent and distribution. At September 30, 1998,
there were 175,000 shares available to grant under the 1997 Plan.

F-14
<PAGE>

A summary of outstanding options issued under the above agreements is as
follows:

Weighted
Other Non- Average
Qualified Exercise
Options Price
---------- --------

Options outstanding
September 30, 1995............................. - $ -

Issued......................................... 150 2.00
---------- --------

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

Issued......................................... 950 2.88
Exercised...................................... -
Cancelled...................................... 150 2.00
---------- --------

Options outstanding
September 30, 1997............................. 950 2.88

Issued........................................... 25 3.00

Cancelled........................................ 500 3.00
---------- --------

Options outstanding
September 30, 1998............................. 475 $ 2.84
========== ========

Options currently exercisable
September 30, 1998............................. 475 $ 2.84
========== ========

F-15
<PAGE>

The following table summarizes all stock options outstanding and exercisable at
September 30,1998:

Outstanding Exercisable
---------------------------------------- -----------------------
Exercise Weighted Weighted Weighted
Price Average Average Average
Range Shares Remaining Life Exercise Price Shares Exercise Price
----- ------ -------------- -------------- ------ --------------

$1.50-1.94 90,000 5.6 $ 1.70 43,000 $1.66
2.50 150,000 0.3 2.50 150,000 2.50
3.00 325,000 3.5 3.00 325,000 3.00
------- -------
565,000 3.2 2.66 518,000 2.74
======= =======

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 1998, 1997 and 1996 in accordance with the provisions of FAS
123, "Accounting for Stock-Based Compensation", the Company's net income (loss)
and diluted earnings per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share amount):

Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
Net income (loss), as reported $(2,509) $6,658 $1,394
Net income (loss), pro forma (2,533) 5,716 1,293
Diluted earnings per share, as reported (0.47) 0.96 .22
Diluted earnings per share, pro forma (0.47) 0.82 .20

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 60%; risk-free interest rate of 6.0%; expected life of 5
years and no expected dividend payments. The weighted average fair value of
options granted during fiscal 1998 and fiscal 1997 was $1.03 and $1.00,
respectively.

On March 21, 1997, Robert H. McLean, Robert Korman 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 received
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 187,409 and 41,017 shares,
respectively, of the Company's stock to repay their loans. 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 29,904 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. 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>

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, 1998, 1997 and 1996 were $40,000, $30,000 and $19,000,
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, 1998
because of their short-term nature and/or variable interest rates.

NOTE 11 - 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, 1998, 1997 and 1996 was
$439,000, $467,000 and $795,000, respectively.

At September 30, 1998, future minimum payments for non-cancelable operating
leases for facilities and equipment with terms in excess of one year were as
follows (in thousands):

1999......................................... $ 421
2000......................................... 367
2001......................................... 357
2002......................................... 357
2003 and beyond.............................. 1,910
------
$3,412
======

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.

F-17
<PAGE>

NOTE 12 - SETTLEMENT OF SHAREHOLDER LITIGATION

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.

NOTE 13 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Supplemental schedule of cash payments:
Years Ended September 30,
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Cash paid for:
Interest.......................... $ 120 $ 193 $ 231
Income taxes...................... 112 5,218 44

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During the years ended September 30, 1998, 1997 and 1996, the Company issued
45,000 (all from treasury), 500,000 (including 200,000 shares from treasury) and
90,000 shares, respectively, of common stock to key employees and certain
officers and directors as payment for services and bonuses. The Company
recognized $114,000, $1,237,000 and $139,000, 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
(in thousands):

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
=======

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.

In October 1997, Mr. McLean, Mr. Korman and Mr. Rogers tendered to the Company
187,409, 41,017 and 29,904 shares, respectively, of the Company's stock to repay
their loans of $774,000, $169,400 and $123,500, respectively.

F-18
<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)/(a)/ $ - -
September 30, 1996 75 (25) - (15) 35

Reserve for estimated losses
on notes receivable:

September 30, 1997 - 635 - (635) -
</TABLE>

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

F-19
<PAGE>

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

1998 FORM 10-K

EXHIBIT INDEX

EXHIBITS
- --------

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.
<PAGE>

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

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

10.3 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 incorporated herein by reference to
Form 10-K dated September 30, 1998.

21 Subsidiaries of the Company

23 Consent of Independent Accountants

27 Financial Data Schedule

<PAGE>

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

EXHIBIT 21

The following schedule lists the active subsidiaries of BFX Hospitality Group,
Inc. as of September 30, 1998:

Corporate Name Organization Ownership Percent
- -------------- ------------ -----------------

BFX Hospitality Group, Inc. Delaware Parent
BFX Holdings, Inc. Nevada 100
American Food Classics, Inc. Nevada 100
Lucile's Stateside Bistro-Texas, Inc. Texas 100
Cabo Restaurant Company Nevada 100
Cabo-Shepherd, Inc. Texas 100
Cabo-Travis, Inc. Texas 100
Cabo-Fort Worth #1, Inc. Texas 100
BFX-LA, Inc. Louisiana 100
Cat's Meow, Inc. Louisiana 100
Boutique Inns, Inc. Nevada 100
Stockyards Hotel, Inc. Texas 100

<PAGE>

Exhibit 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-59585, 33-
62993, 333-01295, 333-00803 and 333-00247) of our report dated November 5, 1998
appearing on page F-2 of BFX Hospitality Group, Inc's Form 10-K for the year
ended September 30, 1998. We also consent to the reference to us under the
heading "Experts" in such Prospectus.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Fort Worth, Texas
December 23, 1998

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 5,342
<SECURITIES> 0
<RECEIVABLES> 128
<ALLOWANCES> 0
<INVENTORY> 148
<CURRENT-ASSETS> 6,840
<PP&E> 11,084
<DEPRECIATION> 3,702
<TOTAL-ASSETS> 22,810
<CURRENT-LIABILITIES> 6,356
<BONDS> 0
0
0
<COMMON> 389
<OTHER-SE> 14,990
<TOTAL-LIABILITY-AND-EQUITY> 15,379
<SALES> 11,513
<TOTAL-REVENUES> 11,513
<CGS> 2,698
<TOTAL-COSTS> 15,822
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> (3,797)
<INCOME-TAX> (1,288)
<INCOME-CONTINUING> (2,509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,509)
<EPS-PRIMARY> .47
<EPS-DILUTED> .47

</TABLE>