<PAGE>
EXHIBIT 16(c)(4)
[LETTERHEAD OF SANDERS MORRIS HARRIS]
PERSONAL AND CONFIDENTIAL
-------------------------
August 11, 2000
Mr. John M. Edgar
Chairman of the Independent Committee of
the Board of BFX Hospitality Group, Inc.
c/o Bryan Cave
3300 One Kansas City Place
1200 Main Place
Kansas City, MO 64105-6914
Gentlemen:
You have advised Sanders Morris Harris Inc. ("SMH") that management of BFX
Hospitality Group, Inc. ("BFX" or the "Company") has proposed to acquire the
outstanding common stock of BFX at a price of $2.25 per share in a "going
private" management buyout transaction (the "Transaction").
The Transaction will be structured as a merger of the Company with and into
American Hospitality, L.L.C. ("American") pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") by and between the Company, American and
Hospitality Concepts., L.L.C., which owns all the outstanding stock of American
and which is owned by members of management proposing the Transaction.
You have requested that SMH act as financial advisor to the Independent
Committee referred to above and issue an opinion ("Opinion") as to the fairness
to the public shareholders of BFX of the consideration to be received in the
proposed Transaction.
SMH, as part of its investment banking business, is frequently engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
<PAGE>
BFX Hospitality Group, Inc.
August 11, 2000
Page 2
In arriving at our Opinion, we have, among other things:
1. Reviewed a draft of the Agreement and Plan of Merger dated August 7,
2000;
2. Reviewed BFX Proxy Statement draft dated July 28, 2000;
3. Reviewed BFX Hospitality Group, Inc. Liquidation Analysis dated May
10, 2000;
4. Reviewed June 1998 Consent Decree between the United States of America
and BFX Hospitality Group, Inc.;
5. Reviewed Record of Decision with respect to the Company's Superfund
site in Vestal, New York;
6. Reviewed BFX audited financials and annual report for the year ended
September 30, 1999;
7. Reviewed BFX unaudited financial statements for the quarter ended
March 31, 2000;
8. Reviewed BFX confidential unaudited financial statements for the
four-week period ended May 28, 2000;
9. Reviewed summary projections and assumptions for each of BFX's
operating facilities for 2000 - 2005 prepared and provided by BFX
management at SMH's request;
10. Reviewed BFX summary history provided by BFX management;
11. Reviewed letter dated June 28, 2000 from Robert H. McLean to the
Independent Committee setting forth the preliminary proposal;
12. Reviewed a July 26, 2000 proposal from John Hancock Real Estate
Finance, Inc. with respect to a $2,200,000 mortgage loan on the
Stockyards Hotel;
13. Reviewed an August 1, 2000 proposal from Amresco Commercial Finance,
Inc. with respect to a $5 million loan;
14. Reviewed a July 19, 2000 memo from Robert Korman to James Pryde
regarding the Transaction;
15. Reviewed a July 21, 2000 memo from Robert Korman to Clyde Buck
regarding the book value of BFX;
16. Reviewed Cat's Meow lease agreement dated September 30, 1989;
<PAGE>
BFX Hospitality Group, Inc.
August 11, 2000
Page 3
17. Reviewed Vestal, New York Superfund site lease agreement dated January
1, 1997; and
18. Discussed various assets, liabilities and operations of BFX involved
in the Transaction.
With your permission, we have assumed and relied upon, without assuming any
responsibility for verification, the accuracy and completeness of all of the
financial and other information provided to, discussed with, or reviewed by or
for us, or publicly available, for purposes of this Opinion, and have further
relied upon the assurances of management of the Company that it is not aware of
any facts that will make such information inaccurate or misleading in any
respect material to our analysis. We have neither made nor obtained any
independent evaluations or appraisals of the assets or liabilities of the
Company, nor have we conducted a physical inspection of the properties and
facilities of the Company. We have assumed that the financial forecasts and
projection information of each individual operating business unit provided to us
by the Company have been reasonably determined on bases reflecting the best
currently available estimates and judgments of the Company's management as to
each operating business unit's future financial performance. We have further
assumed in our analyses that, in all material respects, such forecasts and
projections will be realized in the amounts and times indicated thereby. We
express no view as to such forecasts, projections or the assumptions on which
they were based. We have also assumed, and you have informed us, that the
Transaction will be accounted for on a purchase basis and the consideration to
be received by public stockholders will be taxable. We have relied as to all
legal, accounting and tax matters with respect to the Transaction on legal
counsel and accountants to the Company. We were not authorized to negotiate the
terms of the Transaction, and we have based our opinion solely upon the Merger
Agreement as negotiated by others. We were not asked to, and we did not, solicit
third party offers to acquire all or part of the Company.
For purposes of rendering our Opinion, we have assumed, in all respects material
to our analysis, that the representations and warranties of each party contained
in the Merger Agreement are true and correct, that each party will perform all
of the covenants and agreements required to be performed by it under the Merger
Agreement and that all conditions to the consummation of the Transaction will be
satisfied without waiver thereof. We have also assumed that all material
governmental, regulatory or other consents and approvals will be obtained and
that in the course of obtaining any necessary governmental, regulatory or other
consents and approvals, or any amendments, modifications or waivers to any
documents to which either the Company or American are party, as contemplated by
the Merger Agreement, no restrictions will be imposed or amendments,
modifications or waivers made that would have any material adverse effect on the
consideration to be received by the public stockholders or the time of such
receipt.
<PAGE>
BFX Hospitality Group, Inc.
August 11, 2000
Page 4
Our Opinion is limited to the fairness, from a financial point of view, of the
Transaction to the Company's public stockholders, and we express no opinion as
to the merits of the underlying decision by the Company to engage in the
Transaction. This Opinion does not constitute a recommendation to any
stockholder of the Company as to how such stockholder should vote with respect
to the Transaction. Our Opinion necessarily is based upon market, economic and
other conditions as they exist and can be evaluated on the date hereof, and we
assume no responsibility to update or revise our Opinion based upon
circumstances or events occurring after the date hereof.
We have acted as financial advisor to the Independent Committee in connection
with the Transaction and will receive a fee for our services, including for
rendering this Opinion. In addition, the Company has agreed to indemnify us for
certain liabilities arising out of our engagement. As we have previously advised
you, in the ordinary course of business, we or our affiliates may trade in the
Company's common stock for our own accounts and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing, it is our Opinion that, as of the date
hereof, the consideration to be received in the Transaction is fair to the
public shareholders of BFX from a financial point of view.
SANDERS MORRIS HARRIS INC.
By:
-----------------------------------
G. Clyde Buck
Managing Director
<PAGE>
M E M O R A N D U M
-------------------
TO: File
FROM: G. Clyde Buck
Mark E. Burroughs, Jr.
DATE: August 11, 2000
RE: Logic Memo to Support SMH Fairness Opinion to the fairness to the public
shareholders of BFX Hospitality Group, Inc. ("BFX" or the "Company") of
management's proposal to acquire the outstanding common stock of BFX at
a price of $2.25 per share in a "going private" management buyout
transaction (the "Transaction").
TABLE OF CONTENTS
-----------------
Page
----
A. BACKGROUND OF BFX HOSPITALITY GROUP, INC. 3
B. BACKGROUND OF THE TRANSACTION 5
C. SUMMARY OF CRITICAL FACTORS TO SUPPORT
SMH'S FAIRNESS OPINION 6
1
<PAGE>
EXHIBITS
--------
I. Selected Financial Information
II. Discounted Cash Flow Models for:
(a) Cat's Meow;
(b) Lucile's, A Stateside Bistro;
(c) Stockyards Hotel and 3H Restaurant; and
(d) BFX Remaining as a Public Company.
III. Comparable Companies - Selected Data for Seven Comparable Companies
2
<PAGE>
A. Background of BFX
-----------------
BFX Hospitality Group, Inc. ("BFX") owns and operates food service, lodging
and entertainment facilities in Texas and Louisiana through three wholly-
owned subsidiaries, (a) American Food Classics, Inc. ("AFC"), (b) BFX-LA,
Inc. d/b/a Bourbon Street Hospitality ("BSH") and (c) Stockyards Hotel,
Inc.
AFC was organized in 1992 to develop, own and operate food service concepts
that, once proven, could 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"), which opened in December 1994
in Houston, Texas, and which offers fish tacos, habanero shrimp and other
Mexican food with Central and South American influences. Cabo was acquired
by AFC in January 1996. A second Cabo unit opened in downtown Houston in
April 1998. A third Cabo unit opened in downtown Fort Worth's Sundance
Square in December 1998. AFC also owns and operates Lucile's, A Stateside
Bistro ("Lucile's"), which opened in April 1993 in Fort Worth, Texas.
Lucile's offers a variety of menu items centered around classic regional
American dishes.
Stockyards Hotel, Inc. owns and operates the Stockyards Hotel, which was
acquired in January 1996. The Stockyards Hotel is located in the historic
Northside area of Fort Worth, Texas and has 52 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 in August 1998. Included in the
Stockyards Hotel real estate are two valet parking lots totaling 1.3 acres.
BSH owns and operates Cat's Meow, an entertainment facility at 701 Bourbon
Street in New Orleans, Louisiana. Cat's Meow was opened in 1988. BSH
acquired 100% of Cat's Meow in January 1994. Cat's Meow is housed in a
3
<PAGE>
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 MCs and DJs with a variety of music.
BFX Balance Sheet
(In 000's)
<TABLE>
<CAPTION>
As of 3/31/00-Unaudited
--------------------------------------------------------------------------
<S> <C>
Current Assets $ 3,954
PP&E, Net 10,085
Goodwill 2,226
Deferred Income Taxes 1,824
Other Assets, Net 103
Total Assets $18,192
==============
Current Liabilities $ 1,819
Long Term Debt 0
Accrued EPA Costs 2,733
Shareholders' Equity 13,640
--------------
Total Liabilities and Equity $18,192
==============
--------------------------------------------------------------------------
</TABLE>
With 3,963,866 shares of common stock, the book value of BFX on 3/31/00 was
$3.44 per share ($13,640,000 / 3,963,866). The stock trades at a
substantial discount from this value. We assume that investors are (a)
more interested in earnings from operations than book values of assets and
(b) are concerned that the Company's environmental liabilities may prove to
be substantially understated. Another reason the stock trades at a
discount from its book value is probably because stock market investors are
buying a small minority interest in a public company.
4
<PAGE>
B. Background of the Transaction
-----------------------------
The Transaction involves BFX management ("Management") taking the Company
private by acquiring 100% of the outstanding common stock of BFX.
According to the August 7, 2000 Agreement and Merger Plan draft, provided
by Management, Hospitality Concepts, L.L.C. (i.e., a new company to be set
up by Management) will create American Hospitality L.L.C., which will be
merged with BFX. American Hospitality will be the surviving entity and a
100% wholly-owned by Hospitality Concepts, LLC. Management proposes to pay
$2.25 per BFX common share for all publicly-held shares. As of 7/31/00,
BFX had 3,963,866 million shares of outstanding common stock. At $2.25 per
share, the total value of 100% of BFX's equity would be $8.9 million based
on current shares outstanding.
In conjunction with the Transaction, Management plans to arrange two loans
to provide the extra funds needed to purchase the outstanding common stock
held by public shareholders.
Management plans to file with the SEC a transmittal letter and proxy
statement on the Transaction in August 2000.
5
<PAGE>
C. Summary of Critical Factors to Support SMH's Fairness Opinion
-------------------------------------------------------------
Items which follow are noted to create a record of the critical factors
considered in conjunction with (a) our overall knowledge of fairness and
business transactions from a financial point of view and (b) our business
judgment in rendering a fairness opinion to the shareholders. We define
"fair market value" as "the price agreed upon between a willing buyer and a
willing seller with each having full knowledge of all relevant facts and
neither being under any compulsion to act."
In preparing this memo, with BFX's approval, we did not perform audit work,
did not prepare appraisals of specific assets and did not verify the
accuracy or completeness of information furnished to us by BFX.
SMH's engagement to furnish a fairness opinion in connection with the
Transaction is set forth in an engagement letter agreement between SMH and
the Independent Committee of the Board of Directors of BFX dated July 5,
2000. The agreement involves a total fee of $100,000, reimbursement for
reasonable out-of-pocket expenses and indemnification of SMH.
1. Our primary logic for evaluating the fairness of the proposed Transaction
to the common shareholders of BFX was to:
(a) estimate a reasonable range for the current fair market value per
share for 100% of BFX's equity;
(b) note the value per share of cash to be received by public shareholders
for 100% of BFX;
(c) determine that the value for Item (b) was equal to or greater than the
mid-point of our range of value of Item (a).
6
<PAGE>
Estimated Fair Market Value for 100% of BFX
Common Stock (see page 10).................................. $7.5 - 11.0 mil.
Estimated Value Per Share (A).................................... $1.90 - 2.78
Approximate Mid-Point................................................. $ 2.34
Value for Cash Received Per Share
of BFX Common Stock....................................................$ 2.25
/(A)/ Based upon 3,963,866 shares of common stock. See also page 10.
Adjustment for BFX stock options (including options for 300,000 shares at
--------------------------------
$1.00 per share). All of the options are dilutive to a value of $2.25 per
share.
Add $650,750 to our value range; new range is $8.2 - 11.7 million. Add
550,000 to shares outstanding; new total of 4,513,866 shares.
Final Estimated Value Per Share....................$1.82-2.59
Final Mid-Point.........................................$2.21
Note: Actual calculations use amounts in thousands or exact, unrounded
amounts.
Since the mid-point of our value per share of 100% of BFX's common stock
--------------------------------------------------------------
was approximately $2.21 and the cash to be paid to BFX's public
---------------------------------------------------------------
shareholders was $2.25 per share, the exchange appears to be fair to BFX's
--------------------------------------------------------------------------
public shareholders.
--------------------
7
<PAGE>
2. $2.25 is a fair and attractive premium over recent market prices for BFX's
--------------------------------------------------------------------------
common stock, which represents the fair market value of small minority
----------------------------------------------------------------------
interests.
----------
BFX's common shares are publicly traded on the American Stock Exchange
under the symbol "BFX" and have traded near $0.80 - $0.90 per share
recently. (See chart which follows.) The average closing price for BFX in
the past 30, 60, 90 and 120 days (as of 7/13/00, before the proposed
Transaction was announced) has generally been between $0.80 and $1.00. The
highest trading price in the past 120 days (as of 7/13/00) was $1.19 on
5/4/00 and the lowest was $0.75 on 5/31/00.
[GRAPH APPEARS HERE]
Source: ILX as of 7/13/00.
As the table below indicates and because BFX's stock is thinly-traded (some
days not trading at all), not widely held by institutional investors and
not followed by research analysts, we consider the BFX market price to be
somewhat inefficient, but nevertheless a relevant indicator of the fair
market value of a minority interest in BFX.
8
<PAGE>
<TABLE>
<CAPTION>
Average Daily Average Daily Premium of a
Stock Price Volume (shares) $2.25 Price
-------------------- -------------------- -----------------
<S> <C> <C> <C>
07/12/00 $0.81 4,300 178%
Prior 7 days of trading 0.89 1,957 153
Prior 30 days of trading 0.88 2,970 156
-----------------
Prior 60 days of trading 0.89 2,276 153
Prior 90 days of trading 0.93 2,584 142
Prior 120 days of trading 0.98 3,118 130
----------------------------------------------------------------------------------------------------
Source: Bloomberg as of 7/13/00
</TABLE>
Based on these historical trading prices, we would expect the public
shareholders of BFX to be very pleased to be offered $2.25 per share in
cash. (See also premiums analysis on page 27.)
3. Our primary methodology was a discounted cash flow analysis (i.e., an
-----------------------------------------------------------
internal rate of return or IRR analysis), which is how we believe investors
evaluate restaurant and hotel acquisitions.
The following table shows the results from our discounted cash flow ("DCF")
analysis for each of BFX's facilities. SMH believes a buyer of part or all
of BFX would conduct a similar analysis and that these values are good
indicators of fair market values of the components of BFX.
9
<PAGE>
Fair Market Valuation of BFX
As of 7/31/00
<TABLE>
<CAPTION>
(In 000's) Page
Fair Market Value Reference:
-------------------------- ---------------
<S> <C> <C>
Cat's Meow $ 3,750 - 5,250 14
Lucile's 728 16
Stockyard & H3 3,075 17
Cabo (3 restaurants) 3,500 19
Cash and Equivalents (as of 3/31/00) (1) 2,512 Exhibit I
Income Tax Refund Due(2) 698 Exhibit I
BFX - Corporate Office Assets (3) 100 24
--------------------------
Total Assets $14,363 - 15,863
================
EPA Liability (net of possible lease or other revenues) $ 3,000 - 5,000
20
Other Liabilities (as of 3/31/00) (4) 1,819 Exhibit I
--------------------------
Total Liabilities $ 4,819 - 6,819
Fair Market Value ("FMV") of BFX Equity $ 7,544 - 11,044
Shares Outstanding 3,964
Fair Market Value Per Share $ 1.90 - 2.78
Adjustment for BFX stock options:
----------------------------------------------------------
Final FMV of BFX Equity (5) $ 8,195 - 11,695
Fully-Diluted Shares Outstanding (5) 4,514
--------------------------
Final FMV Per Share $ 1.82 - 2.59
--------------------------
Final Mid-Point $ 2.21
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) 3/31/00 book value.
(2) Cash was received by BFX for this tax refund on 6/1/00.
(3) From Management's orderly liquidation analysis.
(4) 3/31/00 book value of accounts payable ($592,000), accrued liabilities
($710,000) and income tax liabilities ($517,000).
(5) For purposes of calculating fully-diluted value per share, BFX receives
$650,750 in proceeds from the exercise of options. (See also page 7.) To
complete the calculation, shares outstanding increases by 550,000 shares
(i.e., total options outstanding). (See also page 7.)
10
<PAGE>
Management has informed SMH that since 3/31/00 there have been no changes
in the assets and liabilities of BFX that would make the three 3/31/00
balance sheet items in this analysis inappropriate or misleading in
estimating a range of value per share.
Historical financials for 1997 - 1999 are summarized below (for comparative
purposes) and also are shown in Exhibit I.
<TABLE>
<CAPTION>
Fiscal years ended 9/30:
(in 000's) 1997 1998 1999
--------------- -------------- ------------
<S> <C> <C> <C>
Revenue $ 10,518 11,513 17,212
EBITDA (1) (10,659) (3,159) 716 (2)
EBIT (1) (11,689) (4,309) (2,728)
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) From continuing operations.
(2) Before a write-down for long-lived assets (i.e., investment in Cabo) of
$1.9 million.
SMH also performed a DCF analysis on BFX assuming it remains a public
company. SMH prepared the projections of BFX (as shown on the following
page) on a consolidated basis, based on discussions with Management. This
DCF analysis took into account several cash flow items, including lease
revenue from the Vestal, New York Superfund Site (which had highly
uncertain future cash flows) as well as corporate expenses (i.e., SG&A and
costs of being public).
The data on the following page shows projected revenues and "earnings
before interest, taxes, depreciation and amortization" ("EBITDA") and EBIT
for BFX from 2000 to 2004.
11
<PAGE>
<TABLE>
<CAPTION>
Fiscal years ending 9/30:
(in 000's) 2000E (1) 2001E 2002E 2003E 2004E
-------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenue $13,548 13,359 13,584 13,809 14,034
EBITDA 1,799 1,456 1,527 1,600 1,673
EBIT 765 403 475 548 731
Pre-tax Free Cash Flow (2) 1,619 1,231 1,257 1,285 1,313
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on 9 months ended 6/30/00 and estimates for the fourth quarter.
(2) We define "Pre-tax Free Cash Flow" as EBITDA less (a) necessary capital
increases and (b) increases in working capital.
Note: The above 2000 - 2004 estimates excluded the two Houston Cabos,
-----
assumed a new lease on the Vestal property, excluded future EPA
expenditures of approximately $2.0 million to be spent in 2000 and 2001
(see also page 20) and do not reflect opening new concepts, reconcepting of
Cabo Fort Worth or River Ranch project. The estimates also excluded a
special charge that will probably occur in late 2000, of approximately
$700,000 - 800,000 for legal, financial advisory, accounting and other
related fees, which must be paid regardless of whether or not the
Transaction is approved.
The following table shows the results from our analysis based on the
preceding projected cash flows, which projects BFX remaining as a public
company on an "as-is" basis (e.g., does not reflect the opening of new
concepts).
12
<PAGE>
<TABLE>
<CAPTION>
(In 000's) Fair Market Value
----------------------
<S> <C>
BFX's Bar, Restaurants and Hotel (1) $ 6,424
Cash and Equivalents (as of 3/31/00) (2) 2,512
Income Tax Refund Due (as of 3/31/00) (3) 698
Cash From Sale of Houston Cabos 3,500
Total Assets $ 13,134
EPA Superfund Site Liability (net of possible lease revenues or possible $3,000 - 5,000
value of the building)
Other Liabilities(4) 1,819
------------------------
Total Liabilities (as of 3/31/00) $4,819 - 6,819
Fair Market Value ("FMV") of BFX Equity $6,315 - 8,315
Shares Outstanding (as of 3/31/00) 3,964
------------------------
FMV Per Share (before considering stock options) $1.59 - 2.10
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes Houston Cabos.
(2) 3/31/00 book value.
(3) Cash was received by BFX for this tax refund on 6/1/00.
(4) 3/31/00 book value of accounts payable ($592,000), accrued liabilities
($710,000) and income tax liabilities ($517,000).
This range of $1.59 - 2.10 is below the previous range of $1.82 -2.59 and,
in our opinion, is not as representative of how an actual buyer would
evaluate BFX. A buyer would, for example, consider potential savings
(e.g., $300,000 - 400,000 per year) via not being a public company.
13
<PAGE>
4. Valuation of Cat's Meow
-----------------------
Cat's Meow is a bar (not a restaurant) located on Bourbon Street in the
French Quarter of New Orleans in a leased facility. The bar was opened in
1988 and acquired by the Company in 1994. Cat's Meow has been very
successful for the Company; but, according to management, expansion of this
concept would be difficult.
According to Management, Cat's Meow revenues are 100% from sales of
alcoholic beverages, which is a negative in attracting potential buyers of
the operation. People who buy restaurants may not be interested in a bar
facility. Buyers of both restaurants and bars worry about their facility
suddenly declining in popularity. A bar facility like Cat's Meow attracts
numerous claims and lawsuits, and most buyers, we understand, are reluctant
to pay 100% cash for an acquisition. A cash buyer would, for some or all
of these reasons, insist on a low multiple of normal EBITDA (e.g., 2.5 -
3.5x).
The following table, provided by management at SMH's request, shows
historical and projected revenues, EBITDA and EBIT for Cat's Meow from 1997
to 2004. We noted that EBITDA was close to "Free Cash Flow" because
necessary capital expenditures and increases in working capital were
expected to be small amounts in 2000 - 2004.
14
<PAGE>
<TABLE>
<CAPTION>
Fiscal years ending 9/30:
(in 000's) 1997 1998 1999 2000E (1) 2001E 2002E 2003E 2004E
---------- --------- --------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,508 3,652 4,327 4,476 4,320 4,370 4,420 4,470
EBITDA 810 1,146 1,485 1,681 1,450 1,475 1,500 1,525
EBIT NA NA NA 1,634 1,410 1,435 1,460 1,485
Pre-tax Free Cash Flow 1,591 1,345 1,355 1,565 1,375
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on 9 months ended 6/30/00 and estimates for the fourth quarter.
Note: Cat's Meow will have a record year in 2000 (due partly to Sugar Bowl
----
and millennium) which, depending on weather and special events, likely will
not be duplicated in 2001.
DCF Analysis
We believe a buyer would conduct a DCF analysis to arrive at a cash price
for Cat's Meow. We began with Management's projections for this bar
facility. We felt an appropriate pre-tax discount rate was 35% because the
bar business is very risky (e.g., lawsuits, fickle customers, etc.) and
buyers would demand higher returns. We also used the present value of an
amount equal to four times 2004 EBITDA for the terminal value. Based on
these parameters, we arrived at a mid-point fair market value for Cat's
Meow of $4.5 million (see also Exhibit II for details of calculations).
This value is 3.0 times 1999 fiscal EBITDA of $1.5 million, which appears
to be a reasonable multiple.
SMH believes a buyer might also value Cat's Meow by multiplying its Normal
EBITDA (i.e., approximate average of 1999 actual and 2000 estimates) of
$1.5 million by 2.5 to 3.5x. This gives a value range of $3.8 - 5.3
million.
We believe that a buyer of Cat's Meow would consider both calculations and
----
that a reasonable overall range would be $3.8 - 5.3 million.
------------------
15
<PAGE>
SMH noted that Cat's Meow has approximately nine years left on its lease
with no renewals. Management is working diligently on an extension and
believes there is a good chance for renewal. However, if the lease is not
extended on current lease terms, Cat's Meow's market value would be less
than if the lease was extended.
5. Valuation of Lucile's
---------------------
Over the years, Lucile's has produced consistent cash flows for the
Company, but management believes there is not much room for growth or
expansion of this type of restaurant concept. SMH believes buyers might
discount the value of Lucile's because it is a single unit restaurant with
limited upside.
The following table, provided by management at SMH's request, shows
historical and projected revenues, EBITDA and EBIT for Lucile's from 1997
to 2004. We noted that EBITDA was close to "Free Cash Flow" because
necessary capital expenditures and changes in working capital were expected
to be immaterial in 2000 - 2004.
<TABLE>
<CAPTION>
Fiscal years ending 9/30:
(in 000's) 1997 1998 1999 2000E (1) 2001E 2002E 2003E 2004E
---------- --------- --------- ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,298 2,293 2,215 2,183 2,200 2,250 2,300 2,350
EBITDA 202 211 188 170 175 180 185 190
EBIT NA NA NA 110 115 120 125 130
Pre-tax Free Cash Flow 155 155 155 155 155
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on 9 months ended 6/30/00 and estimates for the fourth quarter.
DCF Analysis
We believe a buyer of Lucile's would conduct a DCF analysis to arrive at a
fair market value for Lucile's. We began with Management's projections for
the restaurant. We felt an appropriate pre-tax discount rate was 25%
(because the
16
<PAGE>
restaurant business is risky and buyers would demand higher returns) and
used the present value of an amount equal to five times 2004 EBITDA for the
terminal value. Based on these parameters, we arrived at an implied fair
market value for Lucile's of $0.7 million (see also Exhibit II for details
------------
of calculations).
This value is 4.3 times estimated 2000 EBITDA of $170,000, which appears to
be a reasonable multiple.
6. Valuation of Stockyards Hotel and H3 Ranch Restaurant
-----------------------------------------------------
BFX's Stockyards Hotel and H3 Ranch restaurant are a single profit center
and a combined operation. Revenue is over 60% food and beverage, which is
significantly higher than traditional hotels, where room revenue makes up
the majority. Management believes buyers of hotels might see this as a
negative characteristic (because they are not very interested in
restaurants). Similarly, buyers of restaurants might view the hotel as a
negative characteristic (because they are not very interested in hotels).
The hotel has 52 rooms and was originally built in 1907.
SMH noted that John Hancock Real Estate Finance, Inc. ("John Hancock")
submitted a $2.2 million mortgage loan proposal on 7/26/00 to Management
based on John Hancock's valuation for the hotel and restaurant of $3.7
million. According to Management, John Hancock does a lot of hotel
financing and told BFX that they ascribed a lower than normal value to the
Stockyards Hotel because of its unusually high food and beverage revenue as
a percentage of total revenue.
17
<PAGE>
The following table, provided by Management at SMH's request, shows
historical and projected revenues, EBITDA and EBIT for Stockyards Hotel and
H3 Ranch Restaurant from 1997 to 2004.
<TABLE>
<CAPTION>
Fiscal years ending 9/30:
(in 000's) 1997 1998 1999 2000E (1) 2001E 2002E 2003E 2004E
---------- --------- --------- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,054 1,810 4,346 4,600 4,650 4,700 4,750 4,800
EBITDA(1) 16 27 509 738 756 772 790 808
EBIT NA NA 29 258 275 292 310 328
Pre-tax Free Cash Flow 663 656 647 640 633
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on 9 months ended 6/30/00 and estimates for the fourth quarter.
(2) The hotel had limited restaurant operations for 10 months of 1997, and no
restaurant operations for 11 months of 1998. Many of the improvements and
extraordinary repairs made to the hotel were expensed in 1997 and 1998 and
--------
are estimated by management to have been approximately $200,000 - $250,000
each year in 1997 and 1998. 1998 expenses also included pre-opening costs
for H3 Ranch of approximately $650,000.
DCF Analysis
We believe a buyer of the Stockyard Hotel and H3 Restaurant would conduct a
DCF analysis to arrive at a fair market value for the hotel and restaurant.
We began with Management's income statement projections to conduct the
analysis. We felt an appropriate pre-tax discount rate was 25% (because
the restaurant business is risky and buyers would demand higher returns
than they would for a normal hotel) and used an amount equal to the present
value of five times 2004 EBITDA for the terminal value. Based on these
parameters, we arrived at an implied fair market value for the Stockyards
Hotel and H3 Restaurant of $3.1 million (see also Exhibit II for details of
------------
calculations).
This value is 4.2 times estimated fiscal 2000 EBITDA of $738,000, which
appears to be a reasonable multiple.
18
<PAGE>
7. Valuation of Cabo Facilities
----------------------------
BFX currently owns two Cabo facilities in Houston, Texas and one in Fort
Worth, Texas. On 8/4/00, BFX announced that after months of negotiations,
the Company has reached agreement to sell its Cabo concept, including the
two Houston Cabo restaurants for $3.5 million in cash to an investor group
------------
headed by Enron Corporation. This represents 5.0 times estimated EBITDA
for 2000 of $697,000. The sale is expected to close the third week in
August, 2000, and Management considers the probability of closing to be 90
- 95%.
BFX has also made limited efforts to sell the Fort Worth facility.
Currently, the Fort Worth location is losing money (i.e., has negative free
cash flow and close to a breakeven level of cash flow from operations), and
Management expects this lack of profitability to continue in the future.
Thus far, there have not been any offers to buy this facility, and
Management believes that its fair market value is approximately zero. To
become viable, the Fort Worth facility would have to be substantially
refurbished, and its value would then probably be no more than equal to the
additional capital invested. Management believes a refurbishment could
cost approximately $600,000 - 700,000.
Based on the factors cited above, we estimated the fair market value for
the Cabo operations at $3.5 million, the pending price in cash for the
Houston Cabo restaurants.
19
<PAGE>
8. Valuation of EPA Liability
--------------------------
Background
In 1992, the United States 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
that 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. In June 1998, the Company signed a
Consent Decree with the EPA in regard to the implementation of the agreed-
upon remedy and on-going 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. The Company has spent approximately $3.0 million from 1987 to
present on consulting fees, testing and other expenses relating to the
Superfund site.
Current Status
As of 3/31/00, BFX had total accrued liabilities of $2.7 million on its
balance sheet for remediation costs of the Superfund site. BFX will spend
approximately $2.0 million during fiscal year 2000 and 2001, and this $2.0
million clean-up will begin in September 2000. The EPA estimates that
--------------
ongoing operating and maintenance will take 15 - 30 years. Depending on
the results of testing during clean-up, it is possible that the liability
could be significantly greater than the accrued amount of $2.7 million.
Management believes that BFX's out-of-pocket expenditures for the Superfund
site from 3/31/00 through the next 10 - 30 years may be approximately $2.7
- 5.4 million.
20
<PAGE>
The Company is currently leasing this property and receives approximately
$410,000 a year in net revenue. The lease expires on 2/28/01, and the
current tenant has notified BFX that they do not plan to renew the lease,
but may be interested in buying the building on the property. However,
there have not been any negotiations thus far. The current tenant would
not, however, assume the EPA liability in buying the building on the
property.
If the current tenant does not renew the lease or purchase the building,
BFX will have to pay approximately $150,000 a year to cover taxes,
insurance and maintenance, unless the Company is able to secure a new
tenant. Additionally, management estimates that BFX needs to spend
$250,000 - 500,000 for renovations before bringing in a new tenant.
SMH believes that insurance could be purchased for a portion of this EPA
liability, but Management has not investigated such a transaction. SMH
understands that such insurance would only cover a specific, limited amount
of risk above the expected total costs of the site clean-up, testing and
remediation (e.g., $6 - 10 million of coverage above expected total costs
of $3 - 4 million, or 2.0 - 2.5 times known clean-up costs). The cost of
the premium would be approximately 5 - 15% of the coverage (e.g., $300,000
- $1.5 million). SMH did not ascribe any fair market value to this
possibility because reliable information on the cost and availability of
such insurance would depend on an engineering study by an insurance
underwriter of the expected total costs of the clean-up and no such study
could be completed quickly.
A buyer of BFX would, among other things, review information such as the
following press release dated July 26, 2000.
"July 26, 2000 - Robert H. McLean, Chief Executive Officer of BFX
Hospitality Group, Inc. (AMEX: BFX - news), announced today that the
Company has contracted with Midwest Soil Remediation, Inc. and Ground/Water
Treatment & Technology, Inc. to perform the necessary work to clean the
contaminated soil and repair the water well system at its Vestal, New York
Superfund Site. The soil will be removed and treated on-site and the water
well system repaired in order to become fully functional.
21
<PAGE>
In making the announcement, Mr. McLean stated, "The work is scheduled to
begin in early September and should take approximately six months to
complete pending weather and other factors. This liability of the Company
for the clean up is based upon a June 1998 Consent Decree and related
Record of Decision the Company signed with the United States Government."
Mr. McLean continued, "In June 1997 the Company accrued $3,000,000
representing the estimated cost of the clean up of the contaminated soil
and the ongoing operating and maintenance of the water well system. This
estimate is based upon the Record of Decision and related to Scope of Work.
Since that date $447,000 has been spent thus leaving $2,543,000 accrued at
June 30, 2000. The Company estimates that over the next 12 months it will
spend between $1,600,000 and $2,000,000 in completing the clean up of the
contaminated soil and repairing the water well system as well as payment to
the EPA for its expenses."
Mr. McLean continued, "The Company is hopeful that additional contaminated
soil is not discovered in which case it would be liable for the additional
cleanup costs. After this work the Company is obligated to operate and
maintain the water well system and perform testing until the level of
contaminants in the groundwater has reached levels as prescribed by the
EPA. While the EPA estimated it will take 15 - 30 years for the
contaminants in the groundwater to reach prescribed levels, the Company is
hopeful it will take a shorter period."
Mr. McLean continued, "In June 2000 the Company was notified that its
environmental consulting firm, McLaren/Hart, had filed for Chapter 11
bankruptcy protection. In response to this situation the Company has
retained Vertex Engineering Services, Inc. as its environmental consulting
firm."
Mr. McLean concluded, "Although the Company did not cause the contamination
at the Vestal, New York site, it was responsible for the clean up due to
its 1982 purchase of the property. The property has been under EPA
investigation since 1986 and was designated a Superfund Site in 1987."
BFX's EPA Superfund site liability has an uncertain total and no legal
limit because the total amount of soil to be remediated has not been
determined. A buyer of BFX would be very concerned about this liability
and would be conservative in estimating its value. A buyer would realize
that $1.2 - 1.6 million will probably be spent by BFX from 3/31/00 through
12/31/00 plus another $0.4 - 0.6 million during 2001. Thereafter, BFX will
be obligated to operate and maintain the water well system and perform
necessary testing to the water as prescribed by the EPA until the
contaminants in the water reach levels as prescribed by the EPA, which the
EPA estimates will take 15 - 30 years. BFX hopes it will take a shorter
period. The annual cost of the ongoing operating and maintenance and
testing of the water well system is estimated by the EPA to be $114,000
annually with gradual reductions in this cost over a period of time. The
accrual of $3.0 million made in 1997 assumed approximately 10 years.
Should the period of time extend to 20 years, approximately $1.0 million
more will be
22
<PAGE>
required to fund the Superfund site (a total of $4 million). Should the
period of time extend to 30 years, approximately $1.0 million more will be
required to fund the Superfund site (a total of $5 million).
Due to the uncertainty of (a) future cash flows from leasing the facility,
(b) possible insurance coverage and (c) future liabilities attributed to
remediation of the Superfund site, SMH believes the fair market value of
the liability (net of possible lease or other revenues related to the
property) is approximately $3 - 5 million.
--------------
9. On July 27, 2000, BFX announced plans for the Transaction in a press
release. Thus far, no potential buyers have responded to this public
disclosure with any calls to BFX expressing any potential interest in
making a better offer than the $2.25 per share being offered.
10. BFX will no longer be a public company.
--------------------------------------
The Transaction proposes to take BFX private by acquiring all of its
outstanding common shares. BFX's Management believes that BFX spends
approximately $300,000 - 400,000 a year operating as a public company. The
Transaction would eliminate a public market for the common shares and BFX's
requirement to file information with the Securities and Exchange Commission
on a regular basis.
Because BFX's stock price is thinly-traded and the Company has a small
market capitalization, there appear to be few, if any, advantages of
remaining a public company. One potential advantage of being a public
company is the accessibility to public capital. However, since BFX is very
small and has an uncertain Superfund liability, raising capital has been
very difficult and its public company status has not helped in raising
capital.
23
<PAGE>
11. Plans to Finance the "Going Private" Transaction
------------------------------------------------
Management is currently talking to (1) a New Orleans bank, (2) Amresco,
Inc. and (3) John Hancock Real Estate Finance, Inc. about potential loans.
Management plans to raise approximately $7.2 million and use cash from the
------------
Company (including existing cash in BFX plus $3.5 million from the pending
sale of the downtown Houston Cabo restaurant) to fund the remaining $1.8
million.
12. Management's Liquidation Analysis
---------------------------------
The following table shows orderly liquidation values assigned to each
facility, prepared and provided by Management to SMH in July 2000.
Management assumed that the time to sell the various businesses would take
one year. The amounts used to estimate the proceeds from the sale of the
various subsidiaries were based upon cash purchase prices, reasonable
multiples of cash flow based upon the types of businesses being sold and
information furnished to BFX by outside disinterested parties.
<TABLE>
<CAPTION>
(In 000s) Estimated
Business Cash Proceeds
------------------------------------------------------------- --------------------
<S> <C>
Cat's Meow $ 3,430
Lucile's 500
Stockyard and H3 Restaurant 3,500
Cabo - Shepherd, Houston (2) 0
Cabo - Fort Worth 0
Cabo - Downtown Houston (1) 3,500
BFX - corporate office assets 100
----------------------
$11,030
-----------------------------------------------------------------------------------
</TABLE>
(1) In process of sale for $3.5 million.
(2) Included in the sale of the downtown Houston facility.
24
<PAGE>
SMH notes that Management's value for Cat's Meow is significantly different
than ours. Management believes that a buyer might pay approximately 2.0 -
2.5 times normal EBITDA for the facility, based on talks with bar owners.
This is due, in part to the fact that bar concepts do not traditionally
have the longevity generally found in other types of businesses. SMH's
valuation was based on a DCF analysis and 2.5 - 3.5 times normal EBITDA
(see pages 14 - 15). If the fair market value is actually lower than SMH's
estimate, the Transaction is more fair to the public shareholders.
We believe that liquidating BFX or selling each BFX facility could involve
a serious risk that some key employees would be unhappy about having a new
owner and would leave before a sale was completed, thus potentially hurting
the value of the facilities in which they worked.
In addition, if the BFX Board viewed a liquidation as a "change of
control," payments of approximately $1.0 million would be triggered under
various employment agreements with BFX employees. We are advised these
payments are not due in the Transaction.
We also noted that any liquidation would involve substantial risks and
uncertainties. Among other things, SMH understands that a liquidating
trust would have to be established for the EPA liability and would be in
existence for at least 5 - 10 years.
13. We have been told that the Transaction will be legally approved if owners
of more than 50% of the total outstanding shares vote in favor of the going
private Transaction. Management and the Board represent owners of
approximately 26% of the total shares.
25
<PAGE>
14. Comparable Company Analysis
---------------------------
We did not consider ratios of somewhat comparable public companies to be
------------------------------------------------------------------------
important and would not have expected real cash buyers of bars, restaurants
---------
or BFX to have given any significant weight to such valuation methodology.
Nevertheless, we reviewed the following data.
Based on publicly available information, we compared multiples of certain
financial criteria (based on 7/28/00 market prices) for somewhat comparable
companies to BFX, as shown in Exhibit III. We reviewed seven somewhat
comparable public companies and noted three key ratios. The three key
valuation multiples used in this analysis were: (1) Enterprise Value (i.e.,
market value of equity plus total debt) to Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), (2) Enterprise Value to Earnings
Before Interest and Taxes ("EBIT") and (3) Enterprise Value to Revenues.
In addition to individual company multiples, we calculated the mean (i.e.,
average), adjusted mean (i.e., average excluding highest and lowest
multiples) and median of each ratio. We did not consider multiples based
on earnings per share ("EPS") because most of the seven comparable
companies had negative EPS, and therefore the valuation would not have been
meaningful.
Key Comparable Company Multiples
--------------------------------
<TABLE>
<CAPTION>
High Low Adjusted Mean
------------ ----------- --------------------
<S> <C> <C> <C>
Enterprise Value to:
EBITDA 206.1x 4.5x 7.5x
EBIT 62.8x 7.0x 15.8x
Revenues 0.9x 0.2x 0.5x
-----------------------------------------------------------------------------------------------------
</TABLE>
EBITDA multiples for the seven guideline companies ranged from 4.5x to
206.1x on 7/28/00. The adjusted mean multiple for the guideline companies
was 7.5x. We multiplied 7.5 times BFX's fiscal 1999 EBITDA of $716,000,
which resulted in an implied enterprise value of $5,370,000. (Note: Our
----------
conclusion on page 7 is that 100% of BFX is worth $7.5 - 11.0 million.)
-------------------
26
<PAGE>
The next multiple was Enterprise Value/EBIT. As shown in Exhibit III, EBIT
multiples for the seven public comparables ranged from 7.0x to 62.8x. The
adjusted mean multiple for the guideline companies was 15.8x. We excluded
this calculation because the Company's negative fiscal 1999 EBIT would
produce a negative enterprise value.
The next multiple was the ratio of Enterprise Value to 1999 Revenues. As
in the case of EBITDA and EBIT multiples, we calculated an adjusted mean
multiple for the guideline companies.
The guideline public companies had a range of enterprise value/revenue
ratios from 0.2x to 0.9x. The adjusted mean revenue multiple for the seven
guideline public companies was 0.5x. We then multiplied 0.5x by BFX's
fiscal 1999 Revenue of $17,212,000, which resulted in an implied enterprise
value of $8,606,000.
----------
We then averaged the two enterprise values cited above for BFX to arrive at
an average enterprise value of $6,988,000. In order to arrive at an equity
value, we must subtract debt and add excess cash. As of 3/31/00, BFX had
$3,210,000 in cash (including $689,000 of an income tax refund received
6/1/00) and $4,552,000 in total debt. This gives BFX an implied equity
value of $5,646,000 (i.e., $6,988,000 minus $4,552,000 plus $3,210,000) or
$1.42 per share as of 7/28/00.
-----------------------------
15. Comparable Transactions and Premiums
-------------------------------------
We considered several transactions in the restaurant industry, but none
were comparable enough to the Transaction to make our analysis of such
transactions more important than our DCF analyses in this logic memo. The
following table summarizes our research on somewhat comparable transactions
and premiums offered. Based on the average premium offered in these
---------------------------------------------
transactions of 33.9%,
----------------------
27
<PAGE>
the premium BFX common shareholders will receive over the recent stock
----------------------------------------------------------------------
price appears to be fair. SHM also noted that the average total
-------------------------
consideration to EBITDA multiple (as shown below) for these companies was
5.8x and Management is proposing to pay approximately 7.8 times 3/31/00
trailing twelve month EBITDA ($10.2 million divided by $1.3 million) for
BFX. SMH noted that the $1.3 million excluded a $1.9 million asset write-
down in 1999.
<TABLE>
<CAPTION>
Target Acquirer Announced Premium (1) Total Consideration
------------------------------ ------------------------- ------------- -------------- / EBITDA (2)
-----------------------
<S> <C> <C> <C> <C>
Cucos, Inc. Jacksonville Restaurant 7/14/00 2.7% NA
Roadhouse Grill, Inc. Management Group 5/3/00 50.4 7.7x
Quality Dining, Inc. Investor Group 2/23/00 125.5 2.4
TCBY Enterprises Capricorn Investors Iii 2/10/00 63.8 9.5
Rainforest Cafe, Inc. Landry's Seafood 2/9/00 27.9 5.6
O'Charley, Inc. Management Group 1/26/00 NA NA
Rainforest Cafe, Inc. Lakes Gaming, Inc. 12/22/99 15.1 4.8
Avado Brands, Inc. Management Group 11/10/99 36.0 1.8
Quiznos Corp. Schaden Acquisition 6/23/99 15.2 7.4
Rock Bottom Restaurants RB Capital, Inc. 3/19/99 18.3 3.9
Rallys, Inc. Checkers Drive-In 1/29/99 16.2 4.7
Logan's Roadhouse, Inc. CBRL Group, Inc. 12/11/98 17.6 10.8
Back Bay Restaurant Group SRC Holdings 12/3/98 17.9 5.1
----- ----
Average 33.9% 5.8x
----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount by which the offer price is above the 20-day (preceding
announcement) average stock price of the target.
(2) SMH used total consideration paid divided by EBITDA from the trailing
twelve months prior to announcement.
28
<PAGE>
Description of Transactions
---------------------------
Cucos, Inc.
On July 14, 2000, Jacksonville Restaurant Acquisition Corp. announced that
it has commenced a cash tender offer to acquire up to 1.2 million of the
outstanding shares of common stock of Cucos, Inc. (OTC: CUCO) for $1 per
share. If the tender offer is closed, the Jacksonville group will
beneficially own approximately 52% of the voting power of Cucos.
Roadhouse Grill, Inc.
On May 3, 2000, Roadhouse Grill Inc., the owner and operator of Roadhouse
Restaurants in the southeastern U.S., said its management offered to buy
the company for about $100 million in cash and assumed debt. Management is
proposing to pay $7 a share and assume about $30 million in debt. The
proposal formalizes plans reported three months before under which the
Pompano Beach, Florida-based company would buy back all of its outstanding
shares and become private.
Quality Dining, Inc.
On February 23, 2000, a major shareholder at Quality Dining, Inc. offered
to acquire the company for $5 per share in cash. The offer, extended by
David Schostack and NBO LLC in a filing with the SEC, values the company at
$62.3 million. The bid is more than double the closing price of 2 1/8 of
the previous day.
TCBY Enterprises, Inc.
On February 10, 2000, TCBY Enterprises, Inc., owner of the TCBY chain of
frozen-yogurt shops, announced that it has agreed to be acquired by
Capricorn Investors III LP for approximately $138 million. TCBY
shareholders received $6.00 a share in cash. Capricorn Investors III LP
acquired 22.8 million shares and assumed $1.3 million in debt.
29
<PAGE>
Rainforest Cafe, Inc.
On February 9, 2000, Landry's Seafood Restaurants, Inc. announced it agreed
to acquire Rainforest Cafe, Inc. for $125 million in stock and cash to add
Rainforest's chain of theme restaurants. Under the agreement, 65% of the
purchase price will be in Landry's stock and 35% will be in cash. The
price values Rainforest shares at $5.54 each, Landry's said, 27% above
Rainforest's closing price that day.
O'Charley, Inc.
On January 26, 2000, O'Charley's Inc. rejected a proposal to take the
company private through a management-led leveraged buyout. O'Charley's
board believes that the execution of its business plan by its current
management team as a public company is in the best long-term interests of
the shareholders.
Rainforest Cafe, Inc.
On December 22, 1999, Lakes Gaming Inc. said it would acquire Rainforest
Cafe Inc. for $108 million in stock and run it as a subsidiary. Rainforest
Cafe shareholders would receive 0.55 shares of Lakes Gaming common stock
for every share they own, which values Rainforest stock at $4.54 a share, a
21% premium over that day's closing price. In January of 2000, Rainforest
Cafe canceled plans to be bought by Lakes Gaming Inc. after it received an
unsolicited takeover bid for $125 million from Landry's Seafood
Restaurants, Inc. Rainforest would have to pay Lakes Gaming a $2 million
termination fee if the acquisition by Landry's is completed.
Avado Brands, Inc.
On November 10, 1999, an investment group led by Avado Brands, Inc.
Chairman Tom DuPree proposed buying the operator of Don Pablo's Mexican
Kitchen and other restaurants in a transaction that would pay shareholders
$7.25 in cash for each share. The $151 million offer would value Avado
shares at a 76% premium to their close on the previous day. Under the
management-led
30
<PAGE>
buyout, Avado would redeem the shares not held by DuPree and other members
of the group. Avado would then merge with a corporation formed by the
investors and buy back debt.
Quiznos Corp.
On June 23, 1999, The Quizno's Corporation (Nasdaq:QUIZ) announced that it
received a revised proposal from The Schaden Acquisition Company for the
acquisition of all of Quizno's outstanding shares. The revised price was
$8.00 per share, and would be payable in cash. On August 10, 1999,
Quizno's Corp. said the offer was withdrawn after an agreement couldn't be
reached with the company's board.
Rock Bottom Restaurants, Inc.
On August 11, 1999, Rock Bottom Restaurants, Inc. announced that its $80.6
million sale was completed to a closely-held group led by its top
executive, taking the company private. RB Capital, Inc., which is led by
Rock Bottom Chairman and Chief Executive Frank Day, paid $10 a share in
cash for each Rock Bottom common share. RB Capital owned about 28% of the
8.06 million shares outstanding as of December 27, 1998.
Rallys, Inc.
On January 29, 1999, Checkers Drive-In Restaurants Inc. agreed to buy
Rally's Hamburgers Inc. for about $25.5 million in stock. Checkers will
exchange 1.99 shares for each share of Rally's, which has 29.3 million
shares outstanding. After the acquisition, Checkers plans a 1-for-12
reverse stock split to reduce the number of its shares outstanding.
Logan's Roadhouse, Inc.
On December 11, 1998, CBRL Group Inc. agreed to acquire restaurant chain
Logan's Roadhouse, Inc. for $179 million in cash to expand in a different
demographic market. The $24.00 a-share offer is a 14% premium to Logan's
31
<PAGE>
closing price of 21 1/16 on the previous day. CBRL Group will become
Cracker Barrel's parent when it reorganizes into a holding company December
31, 1998. The purchase was be funded by a combination of cash and an
increase in CBRL's bank credit. Cash on hand funded about $30 million of
the price.
Back Bay Restaurant Group
On December 3, 1998, Back Bay Inc. (Nasdaq: PAPA) and its Chairman,
President and CEO, Charles F. Sarkis, announced that they entered into an
Agreement and Plan of Merger, pursuant to which SRC Holdings, Inc., a new
corporation formed by Mr. Sarkis, to acquire Back Bay. Under the terms of
the merger agreement, SRC Holdings would be merged with and into Back Bay
and each outstanding public share of Back Bay common stock would be
converted into the right to receive $10.25 per share in cash. Back Bay's
existing indebtedness of approximately $4 million would be refinanced as
part of the merger.
16. Hospitality and Restaurant Industry Conditions
----------------------------------------------
As BFX has noted in its public documents, the hospitality and restaurant
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 BFX. 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 and restaurant 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
32
<PAGE>
also adversely affect the hospitality industry in general and the Company
in particular.
17. General Economic Conditions
---------------------------
We noted the following quote from a July 25, 2000 article titled "Fed's
Greenspan Says Evidence Shows Economy Slowing," taken from the Bloomberg
database.
"In the Fed's latest economic forecast, submitted by Greenspan
last week, central bankers predicted the economy would grow by 4
percent to 4.5 percent this year. The Fed also expects the rate of
inflation for personal consumption expenditures - an inflation measure
favored by Greenspan - will rise between 2.5 percent and 2.75 percent,
mainly from higher oil prices.
Unemployment will stay close to its current level of 4 percent,
the Fed said.
In 2001, growth is expected to "moderate" to 3.25 percent to 3.75
percent, with unemployment likely to remain near its current level.
The inflation rate will be 2 percent to 2.5 percent, the Fed said."
On 8/1/00, the Dow Jones Industrial Average closed at 10,607, Standard and
Poors 500 closed at 1,438 and the Nasdaq closed at 3,686.
18. Our review included audited financial statements of BFX for the fiscal year
ended 9/30/99, audited by Price Waterhouse Coopers LLP. The financial
statements were found by the auditor to present fairly, in all material
aspects, the results of operations and cash flows for the Company.
As noted at the outset of this memo, we have assumed the accuracy and
completeness of all financial and other information provided to us.
33
<PAGE>
BFX Hospitality Group, Inc.
================================================================================
Balance Sheets
As of
March 31, September 30,
2000 1999
------------ -------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 791,000 $ 3,036,000
Short-term investments 1,721,000 -
Accounts receivable 277,000 286,000
Note receivable 43,000 -
Inventories 214,000 208,000
Income tax receivable 698,000 698,000
Prepaid and other current assets 210,000 98,000
----------- -----------
Total current assets 3,954,000 4,326,000
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT (at cost):
Land, building, and improvements 15,510,000 15,337,000
Less: Accumulated depreciation and amortization (5,425,000) (4,930,000)
----------- -----------
Net property, plant, and equipment 10,085,000 10,407,000
GOODWILL (net of amortization of $2,059,000 and
$1,929,000 respectively) 2,226,000 2,355,000
DEFERRED INCOME TAXES 1,824,000 1,824,000
OTHER ASSETS 103,000 81,000
----------- -----------
Total assets $18,192,000 $18,993,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 138,000
Accounts payable 592,000 418,000
Accrued liabilities 710,000 1,012,000
Accrued EPA costs 1,200,000 1,200,000
Income taxes 517,000 334,000
----------- -----------
Total current liabilities 3,019,000 3,102,000
LONG-TERM DEBT - 937,000
ACCRUED EPA COSTS 1,533,000 1,570,000
STOCKHOLDERS EQUITY: 13,640,000 13,384,000
----------- -----------
Total liabilities and shareholders' equity $18,192,000 $18,993,000
=========== ===========
<PAGE>
BFX Hospitality Group, Inc.
================================================================================
Statements of Operations
For the Six Months Ended March 31,
2000 1999
----------------- ---------------
NET REVENUES $ 8,585,000 $ 8,498,000
COSTS AND EXPENSES:
Cost of goods sold (exclusive of depreciation) 1,995,000 2,093,000
Selling, general, and administrative 5,466,000 5,866,000
Depreciation and amortization 623,000 779,000
----------- -----------
Total costs and expenses 8,084,000 8,738,000
----------- -----------
Net (loss) before other income
and income taxes 501,000 (240,000)
----------- -----------
OTHER INCOME (EXPENSE:)
Interest income 54,000 70,000
Interest expense (21,000) (48,000)
----------- -----------
33,000 22,000
----------- -----------
Income (loss) before income taxes 534,000 (218,000)
Income tax expense (benefit) 233,000 (38,000)
----------- -----------
NET (LOSS) $301,000 ($180,000)
=========== ===========
<PAGE>
BFX Hospitality Group, Inc.
--------------------------------------------------------------------------------
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
NET REVENUES $17,212,000 $11,513,000 $10,518,000
COSTS AND EXPENSES:
Costs of goods sold (exclusive of depreciation) 4,185,000 2,698,000 2,277,000
Selling, general, and administrative 12,311,000 11,974,000 14,483,000
Write-down of long-lived assets 1,854,000 - -
Expenses associated with revised EPA remedy - - 4,417,000
Depreciation and amortization 1,590,000 1,150,000 1,030,000
-------------- -------------- -------------
Total costs and expenses 19,940,000 15,822,000 22,207,000
-------------- -------------- -------------
Net (loss) before other income
and income taxes (2,728,000) (4,309,000) (11,689,000)
-------------- -------------- -------------
OTHER INCOME (EXPENSE):
Interest income 138,000 632,000 485,000
Interest expense (92,000) (120,000) (193,000)
-------------- -------------- -------------
46,000 512,000 292,000
-------------- -------------- -------------
Income (loss) before income taxes (2,682,000) (3,797,000) (11,397,000)
Income tax expense (benefit) 897,000 1,288,000 3,543,000
-------------- -------------- -------------
Net income (loss) from continuing operations (1,785,000) (2,509,000) (7,854,000)
Income from discontinued operations - - 14,512,000
-------------- -------------- -------------
NET (LOSS) ($1,785,000) ($2,509,000) $6,658,000
-------------- -------------- -------------
</TABLE>
<PAGE>
Cat's Meow
================================================================================
Discounted Cash Flow Analysis
(in thousands)
EBITDA Projections
================================================================================
Year Ending December 31,
---------------------------------------------
2000E 2001E 2002E 2003E 2004E
------- ------- ------- ------- -------
EDITDA $ 1,681 1,450 1,475 1,500 1,525
EBIT 1,634 1,410 1,435 1,460 1,485
Add: Depr. & Amort. 47 40 40 40 40
Less: Necessary CapEx 90 105 120 135 150
------- ------- ------- ------- -------
Pre-Tax Free Cash Flow (A) $ 1,591 1,345 1,355 1,365 1,375
======= ======= ======= ======= =======
(A) Changes in working capital were estimated to be immaterial and were excluded
from the calculation.
--------------------------------------------------------------------------------
Discounted Cash Flow
================================================================================
Terminal Present Value of: Present
----------------
Discount EBITDA Cash Terminal Enterprise Less: Plus Value of
Rate Multiple Flows Value Value Debt: Excess Cash Equity
-------- -------- ----- -------- ---------- ----- ----------- --------
25.0% 4.0 x 3,837 1,999 5,836 0 0 5,836
30.0% 4.0 x 3,485 1,643 5,128 0 0 5,128
--------
35.0% 4.0 x 3,185 1,325 4,510 0 0 $4,510
--------------------------------------------------------------------------------
<PAGE>
Lucile's
--------------------------------------------------------------------------------
Discounted Cash Flow Analysis
(in thousands)
EBITDA Projections
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
2000E 2001E 2002E 2003E 2004E
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
EBITDA $170 175 180 185 190
EBIT 110 115 120 125 130
Add: Depr. & Amort. 60 60 60 60 60
Less: Necessary CapEx 15 20 25 30 35
-------------- ------------- ------------- ------------- -------------
Pre-Tax Free Cash Flow (A) $155 155 155 155 155
============== ============= ============= ============= =============
(A) Same as previous page.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Discounted Cash Flow
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Terminal Present Value of: Present
-------------------------
Discount EBITDA Cash Terminal Enterprise Less: Plus: Value of
Rate Multiple Flows Value Value Debt Excess Cash Equity
----------- ---------- ----------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
20.0% 5.0x $464 382 845 0 0 845
--------
25.0% 5.0x 417 311 728 0 0 $728
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Stockyard and H3
--------------------------------------------------------------------------------
Discounted Cash Flow Analysis
(in thousands)
<TABLE>
<CAPTION>
EBITDA Projections
----------------------------------------------------------------------------------------------------------
Year Ending December 31,
------------------------------------------
2000E 2001E 2002E 2003E 2004E
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
EBITDA $ 738 756 772 790 808
EBIT 258 275 292 310 328
Add: Depr. & Amort. 480 481 480 480 480
Less: Necessary CapEx 75 100 125 150 175
----- ----- ----- ----- -----
Pre-Tax Free Cash Flow (A) $ 663 656 647 640 633
===== ===== ===== ===== =====
(A) Same as previous page.
----------------------------------------------------------------------------------------------------------
<CAPTION>
Discounted Cash Flow
-----------------------------------------------------------------------------------------------------------------------
Present Value of:
Terminal ------------------------ Present
Discount EBITDA Cash Terminal Enterprise Less: Plus: Value of
Rate Multiple Flows Value Value Debt Excess Cash Equity
-------------- ---------- ------- --------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
20.0% 5.0x 1,946 1,624 3,569 0 0 3,569
-----------
25.0% 5.0x 1,751 1,324 3,075 0 0 $3,075
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BFX remaining as a public company
--------------------------------------------------------------------------------
Discounted Cash Flow Analysis
(in thousands)
EBITDA Projections
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ending December 31,
-----------------------------------------------
2000E 2001E 2002E 2003E 2004E
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EBITDA/(A)/ $1,799 1,456 1,527 1,600 1,673
EBIT/(A)/ 765 403 475 548 731
Add: Depr. & Amort. 1,034 1,053 1,052 1,052 942
Less: Necessary CapEx 180 225 270 315 360
-------- ------- ------- ------- -------
Pre-Tax Free Cash Flow/(B)/ $1,619 1,231 1,257 1,285 1,313
======== ======= ======= ======= =======
/(A)/ Excludes Houston Cabo restaurants.
/(B)/ Same as previous page.
-----------------------------------------------------------------------------------------------
</TABLE>
Discounted Cash Flow
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Present Value of:
Terminal ------------------- Present
Discount EBITDA Cash Terminal Enterprise Less: Plus: Value of
Rate Multiple Flows Value Value Debt Excess Cash Equity
---------- ---------- -------- ---------- ------------ ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
20.0% 5.0x 4,079 3,362 7,441 0 0 7,441
----------
25.0% 5.0x 3,683 2,741 6,424 0 0 $6,424
---------------------------------------------------------------------------------------------------
</TABLE>
Note: The above 2000 - 2004 estimates excluded the two Houston Cabos, assumed a
new lease on the Vestal property, excluded future EPA expenditures of
approximately $2.0 million to be spent in 2000 and 2001 and do not reflect
opening new concepts, reconcepting of Cabo Fort Worth or river Ranch project.
The estimates also excluded a special charge that will probably occur in late
2000, of approximately $700,000 - 800,000 for legal, financial advisory,
accounting and other related fees, which must be paid regardless of whether the
Transaction is approved.
<PAGE>
BFX Hospitality Group, Inc.
--------------------------------------------------------------------------------
Comparables Analysis
$ in millions except per share data
<TABLE>
<CAPTION>
Cooker Grill Mexican Meritage Silver Total Ent.
Morgan Foods Restaurant Concepts Restaurants Hospitality Diner Restaurant
Company name Inc. Corp. Inc. Inc. Group Inc. Corp.
<S> <C> <C> <C> <C> <C> <C> <C>
Ticker MR CGR GRIL CASA MHG SLVR TENT
Stock price at 7/28/00 $2.38 $2.50 $1.50 $3.88 $2.06 $0.91 $2.19
Fully-diluted shares outstanding 2.9 6.0 4.0 3.6 5.8 11.4 9.7
Market capitalization $7 $15 $6 $14 $12 $10 $21
Fiscal year end February December December December November December December
LTM LTM LTM LTM LTM LTM LTM
Period ended May00 Mar00 Mar00 Mar00 Mar00 Mar00 Mar00
------- ------- ------- ------- ------ ------ -------
Selected operating data
Net sales $75.5 $149.6 $39.5 $61.1 $31.1 $29.3 $55.2
Gross margins 16.6% 17.0% 11.9% 17.4% 13.8% 11.2% 21.4%
EBITDA 7.6 14.2 1.3 5.1 2.2 0.0 6.8
EBITDA margin 10.1% 9.5% 3.4% 8.3% 7.2% 0.1% 12.3%
Operating income 4.3 7.2 0.1 3.2 0.9 (1.5) 2.8
Operating margin 5.7% 4.8% 0.4% 5.3% 2.7% -5.0% 5.0%
Interest expense 4.4 7.0 - 0.6 1.3 0.0 1.2
Net income (before extr.) ($0.3) ($4.5) ($0.4) $0.8 ($0.2) ($1.4) $0.9
Net margin -0.3% -3.0% -1.0% 1.3% -0.5% -4.8% 1.7%
EPS before extra. (LTM) ($0.08) ($0.75) ($0.13) $0.23 ($0.04) ($0.11) $0.10
EPS (CFY) NA ($0.15) NA NA NA NA NA
EPS (NFY) NA NA NA NA NA NA NA
Selected balance sheet data
Total cash $4.0 $2.3 $0.7 $0.4 $1.2 $1.8 $2.5
Total assets $61.8 $145.8 $12.4 $30.9 $25.8 $20.3 $40.5
Total debt $53.6 $87.8 $3.6 $9.1 $16.2 $0.3 $13.3
Total preferred $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0
Book value $0.5 $44.6 $3.7 $14.8 $5.6 $16.5 $22.8
Net Debt/Total capital (book) 91.7% 64.6% 39.5% 36.4% 68.7% 0.0% 30.0%
Net Debt/Total capital (market) 81.9% 83.2% 30.2% 37.8% 53.3% 0.0% 31.4%
Selected valuation multiples
Enterprise value/Sales 0.7x 0.7x 0.2x 0.4x 0.9x 0.3x 0.6x
Enterprise value/EBITDA 7.4x 7.1x 6.7x 4.5x 11.9x 206.1x 4.7x
Enterprise value/Operating inc. 13.2x 13.9x 62.8x 7.0x 31.4x NM 11.5x
Enterprise value/Total assets 0.9x 0.7x 0.7x 0.7x 1.0x 0.4x 0.8x
Price/Book value 14.2x 0.3x 1.6x 0.9x 2.1x 0.6x 0.9x
Price/Earnings (LTM) NM NM NM 16.8x NM NM 21.9x
Price/Earnings (CFY) NM NM NM NM NM NM NM
Price/Earnings (NFY) NM NM NM NM NM NM NM
----------------------------------------------------------------
High Low Mean Median Adj. Mean
----------------------------------------------------------------
Selected operating data
Net sales $149.6 $29.3 $63.1 $55.2 $52.5
Gross margins 21.4% 11.2% 15.6% 16.6% 15.3%
EBITDA 14.2 0.0 5.3 5.1 4.6
EBITDA margin 12.3% 0.1% 7.3% 8.3% 7.7%
Operating income 7.2 (1.5) 2.4 2.8 2.3
Operating margin 5.7% -5.0% 2.7% 4.8% 3.6%
Interest expense 7.0 0.0 2.4 1.2 1.9
Net income (before extr.) $0.9 ($4.5) ($0.7) ($0.3) ($0.3)
Net margin 1.7% -4.8% -0.9% -0.5% -0.7%
Net Debt/Total capital (book) 91.7% 0.0% 47.3% 39.5% 47.8%
Net Debt/Total capital (market) 83.2% 0.0% 45.4% 37.8% 46.9%
----------------------------------------------------------------
High Low Mean Median Adj. Mean
----------------------------------------------------------------
Selected valuation multiples
Enterprise value/Sales 0.9x 0.2x 0.5x 0.6x 0.5x
Enterprise value/EBITDA 206.1x 4.5x 35.5x 7.1x 7.6x
Enterprise value/Operating inc. 62.8x 7.0x 23.3x 13.6x 17.5x
Enterprise value/Total assets 1.0x 0.4x 0.8x 0.7x 0.8x
Price/Book value 14.2x 0.3x 3.0x 0.9x 1.2x
Price/Earnings (LTM) 21.9x 16.8x 19.4x 19.4x NM
Price/Earnings (CFY) 0.0x 0.0x NM NM 0.0x
Price/Earnings (NFY) 0.0x 0.0x NM NM 0.0x
</TABLE>
------------------------------------------
Note: Adjusted mean excludes high and low data.
