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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 1, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number: 0-22786
TIMBER LODGE STEAKHOUSE, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1810126
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4021 Vernon Avenue South
St. Louis Park, Minnesota 55416
(Address of principal executive offices)
(612) 929-9353
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
/X/ Yes / / No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
State the issuer's revenues for its most recent fiscal year: $20,636,760.
As of March 15, 1997, the aggregate market value of the voting stock held
by nonaffiliates of the issuer computed by reference to the last quoted price at
which such stock sold on such date as reported by the Nasdaq Stock Market, was
approximately $11,915,809.
As of March 15, 1997, there were outstanding 3,598,583 shares of the
issuer's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement for its May 21, 1997 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance, or
achievements of the Company or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: risks associated with the commercialization of uncertainties
relating to product development; uncertainties relating to profitability;
uncertainties relating to liquidity; rapid technological change and
competition; uncertainty regarding patents; product liability claims and
insurance; manufacturing uncertainties; volatility of common share price; and
dependence on corporate relationships.
GENERAL
Timber Lodge Steakhouse (the "Company") owns and operates twelve Timber
Lodge Steakhouse-TM- restaurants. Since the Company's initial public offering
of its Common Stock in December 1993, the Company has expanded and continues to
expand its steakhouse restaurant concept.
The Company's full-service steakhouse restaurants offer dinners of generous
portions at moderate prices. Menu selections include steaks, which are
selected, aged and trimmed to the Company's customized specifications, prime
rib, barbecued ribs, fresh seafood, chicken, pasta and specialty regional
dishes and appetizers. The Company's restaurants appeal to a broad range of
patrons by emphasizing high quality food, limited menu selections to ensure
consistency in preparation and a well-trained staff for attentive service.
This appeal is enhanced by the restaurants' "north woods" atmosphere which
features log-framed interiors, hardwood floors, wood tables, chairs and booths,
and memorabilia reflecting the history of northern tier states.
Based upon the Company's current operations and experience, it believes
that its steakhouse restaurants can be expanded to markets across the northern
United States. Although competition in the restaurant industry is intense, the
Company believes its north woods steakhouse concept competes favorably. Its
growth strategy is to continue to develop a sufficient number of Company-owned
steakhouse restaurants in regional areas in order to provide economies of scale
in advertising, purchasing and management, along with greater exposure in each
region. The Company believes it has accomplished this in the Minnesota, South
Dakota and Wisconsin region (eleven restaurants).
The Company operates one steakhouse in upstate New York that the Company
continues to believe has long-term potential. The Company believes this
potential can be reached by modifying its marketing strategy in the upstate New
York area in an attempt to capture new customers traveling through the area and
also focusing marketing efforts on its established target customer base. The
Company intends to evaluate its success in refining its marketing strategy
through the 1997 peak tourist season and may make additional changes to its
strategy as a result.
THE COMPANY'S STEAKHOUSE CONCEPT
GENERAL. The Company believes that many restaurants expanded their menus
in an attempt to reach a broader market, but lost their distinctiveness as a
result. The Company's steakhouse restaurants offer a limited number of menu
selections allowing it to ensure consistent high-quality dishes and, more
importantly, to retain its focus as a steakhouse. Traditional American meals
at moderate prices and in generous portions are viewed by the Company as
attractive to a large segment of the population. In addition to offering
quality food for the money, the Company's north woods, log cabin design
promotes a casual and comfortable atmosphere. The Company trains its personnel
to provide excellent service, enhancing the distinctive dining experience.
All of the Company's restaurants' hours of operation are limited to the
service of dinner. Such limited hours tend to reduce expenses associated with
restaurant management and employees, while still serving what is usually a
restaurant's most profitable meal. The Company expects most of its future
restaurants will similarly be limited to dinner.
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The Company selects and hires experienced general managers for its
restaurants, who are motivated to provide excellent service and efficient
management through a bonus plan based on restaurant profitability and
improvement in sales performance. Purchasing decisions are made by the
Company's home office management to ensure uniformity of food quality among all
of the steakhouse restaurants at competitive prices. Each restaurant also
provides daily reports to the home office so that changes regarding operation of
any or all the restaurants can be made immediately.
NORTH WOODS ATMOSPHERE. Each restaurant incorporates a north woods theme
with its log-framed interior, hardwood floors and wood tables, chairs and
booths, all of which help to create the cozy feeling of dining in a warm,
comfortable north woods log cabin. Hunting, fishing and other memorabilia
reflecting the history particular to northern tier states adorn the walls,
together with murals depicting regional folklore such as Paul Bunyan. Oversized
silverware, plates, and food portions are consistent with a hunting lodge
atmosphere. The casual atmosphere makes the restaurants appropriate for a
number of occasions.
MENU. The menu is intended to appeal to a broad range of tastes, although
it contains a limited number of selections. The Company's menu provides
entertaining descriptions of the selections. Steaks, the restaurants' featured
entrees, are selected, aged and trimmed to the Company's customized
specifications. The menu also offers prime rib, barbecued ribs, fresh seafood,
chicken and pasta. As part of the Company's commitment to quality, it
emphasizes fresh ingredients and uses beef that has never been frozen. The
Company offers daily specials, and regularly tests new menu selections which, if
well received, are added to the menu or replace less popular entrees.
Accompaniments such as Golden Wheat bread and specialty appetizers such as the
"Paul Bunyan Onion," as well as desserts and full liquor service, are also
offered. Menu items range from $7.95 to $18.95 in cost with the average dining
check per customer totaling approximately $16 to $18 (including beverages served
with dinner, but excluding drinks served while the customers are awaiting
seating). A children's menu with lower-priced selections is also available.
ADVERTISING. The Company advertises primarily through radio, newspapers
and billboards. In the Minneapolis/St. Paul market, the Company has increased
its use of, and focus on, radio advertising, and newspaper "inserts" and intends
to continuously evaluate this advertising strategy. The Company currently has
no billboard advertising in the Minneapolis/St. Paul market, but may again use
such style of advertising. In its other markets (Duluth, Sioux Falls and
Niagara Falls), billboards and newspapers are the Company's principal means of
advertising, but the Company does intend to utilize radio from time to time.
The Company will re-evaluate the placement of its billboards in the Niagara
Falls area to attempt to focus more closely on its target customers.
Approximately 2 to 2.5% of the Company's sales is spent on advertising. While
the Company intends to continue advertising at this level, advertising expenses,
as a percentage of sales, increase from time to time as the Company publicizes
new restaurant openings.
TARGET MARKET. The Company's target market is adults 25-54 with a primary
focus on the "early middle aged group" and moderate to moderately-high incomes..
The Company believes that its steakhouse restaurants, menu, pricing and
atmosphere appeal to this group and distinguishes them from other moderately
priced restaurants, as well as from other steakhouses. Because the restaurants'
patrons are likely to have children, the Company caters to families as well with
its children's menus, reasonable prices and casual atmosphere. While each of
the restaurants contains a bar, the Company believes that its restaurants are
generally selected for dining.
RESTAURANT SITE DEVELOPMENT. The success of the Company's steakhouse
restaurants is highly dependent on suitable locations. The Company's management
focuses substantial effort on the investigation and evaluation of potential
restaurant sites. Site selection involves the analysis of area demographics,
population density and household income levels, as well as site characteristics
including visibility, accessibility and traffic volume. The Company also
considers the competition from existing restaurants, both steakhouses and
others, in the market of each proposed site.
The Company's current and planned steakhouse restaurants range between
6,300 and 9,000 square feet, and seat an average of 230 persons, including
approximately 20 seats in the bar area. All of the Company's current restaurant
sites are leased. The Company's existing steakhouse restaurants are generally
located in suburban locations in strip centers or in free-standing buildings.
One steakhouse restaurant, located in Duluth, Minnesota, is located in a
renovated warehouse. The Company intends to develop additional steakhouses in
similar settings, with an emphasis on free-standing buildings and will consider,
when appropriate, end locations in strip centers.
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Based on past experience, the Company has generally been able to complete
preparations to open a restaurant in 14 to 18 weeks, as to existing buildings,
and in 22 to 26 weeks when located in a building built to the Company's
specifications. These times can vary significantly depending on the time
required to obtain necessary permits and licenses, including liquor licenses,
from governmental authorities. The net cost of developing three steakhouse
restaurants during fiscal 1996 (all of which were free-standing locations) was
approximately $1,300,000 per restaurant, including pre-opening expenses of
approximately $119,000 per restaurant. Such cost includes expenses related to
construction, furnishings, equipment, permits and licenses, among others. As
the Company has opened additional steakhouse restaurants and gained more
experience, the Company has concluded that the cost of developing such
restaurants can vary considerably based upon various factors including:
free-standing vs. located in strip centers, new construction vs. conversion;
and time of year during which constructed.
EXPANSION STRATEGY
The Company anticipates it will open five or six steakhouse restaurants by
the end of fiscal 1997. The Company projects these additional restaurants will
be located primarily in northern tier markets (principally in the upper
Midwest). The Company is currently negotiating on two additional sites in the
Minneapolis/St. Paul metropolitan area. If the Company successfully opens
restaurants at those two sites, or in the same general areas (which would bring
its total restaurants in the metropolitan area to nine), the Company does not
expect to open additional restaurants in the Minneapolis/St. Paul metropolitan
area in the near future, although it may do so if a currently unforeseen
opportunity were to present itself. The Company is currently converting an
existing facility in Naperville, Illinois and constructing a new Timber Lodge
Steakhouse in St. Cloud, Minnesota, both of which it anticipates will open
during the second quarter of fiscal 1997.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of each restaurant consists
of a general manager, assistant manager, kitchen manager and assistant kitchen
manager. Each general manager is generally assigned to one restaurant for a
minimum of four years, which the Company believes promotes stability and
accountability. The general managers are paid a base salary and a bonus based
on profitability and improved sales performance of the restaurant which they
manage. The Company has traditionally hired general managers who have
restaurant management experience, and plans to do so for future restaurants.
Each restaurant also employs approximately 55 hourly employees, most of
whom are employed part-time. The Company, to maintain high customer service and
customer satisfaction, limits the number of tables served by its wait staff.
SUPERVISION AND TRAINING. The restaurants are closely supervised by the
general managers with guidance from the Company's home office management.
General managers are directly responsible for each restaurant's success.
Moreover, home office management visits each restaurant on a periodic basis to
oversee operations.
The Company uses "secret diners," provided by an independent company, who
regularly visit and critique each restaurant three times per month. These
"secret diners" prepare a detailed report of their visit, including impressions
of the restaurant's service, food and cleanliness. The Company uses these
reports to monitor each restaurant's performance and to refine service policies
and procedures, food quality and preparation specifications, and the appearance
and appeal of all restaurants in general. The Company expects to continue to
use this practice in the future.
The Company conducts a significant amount of training of its employees.
Although the Company generally hires general managers with restaurant
experience, each general manager spends up to ten weeks training in an
established Company restaurant before being assigned to a new restaurant.
Kitchen managers undergo similar training. Detailed policy and procedure
manuals provide a blueprint for restaurant operations for all levels of
employees, from greeting a customer to preparing a meal.
PURCHASING. The Company's home office management negotiates directly with
suppliers for most food and beverage products on behalf of the restaurants to
ensure uniformity of product quality at competitive prices. Restaurant managers
then place orders as needed from these pre-approved suppliers. Prices charged
by other suppliers for comparable products are monitored by the home office to
verify competitive pricing. Although the Company typically uses the same
suppliers, the Company has no long-term contracts with any of its food or
beverage suppliers. It believes alternative suppliers are available, if
necessary. The Company intends to use its existing suppliers as it continues to
expand, but if this practice becomes uneconomical, the Company will engage
suitable regional suppliers in the new areas.
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Meat is currently supplied primarily by one vendor, which delivers fresh
supplies several times per week to the restaurants. The Company has provided
its meat supplier with customized specifications as to cut, selection, trimming
and aging in order to maintain the high quality and consistency of its meat
entrees. The Company believes alternative meat suppliers are available which
would be able to provide comparable cuts of meat at competitive prices if the
need arises. Timber Lodge Steakhouse, with the support of its supplier
(Westlund's), was awarded the 1996 Beef Backer Award from the Minnesota Beef
Council. The Beef Backer award, established by the National Cattleman's Beef
Association, honors food service operations on a regional and national level
that enthusiastically promote beef.
RESTAURANT REPORTING. Each restaurant has a point-of-sale system that is
monitored by its restaurant managers. This allows daily cash and other reports
to be prepared regarding the total amount and comparison of sales. Weekly and
monthly profit and loss reports are also compiled by each restaurant for review
and analysis by the home office management, which compares such reports with its
own internally generated profit and loss analysis so as to respond to
inefficiencies and make necessary adjustments at each restaurant on a weekly
basis.
REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing and
regulation by a number of government authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining, or
failures to obtain, the required licenses or approvals could delay or prevent
the development of a new restaurant in a particular area.
Approximately 15% of the Company's steakhouse revenues are attributable to
the sale of alcoholic beverages (including alcoholic beverages sold while
customers are awaiting seating). Alcoholic beverage control regulations require
each of the Company's restaurants to apply to a state authority and, in certain
locations, county or municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the daily operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. Failure of a restaurant to obtain or retain liquor or food
service licenses would adversely affect its operations.
In certain states, including Minnesota, the Company may be subject to
"dram-shop" statutes, which generally provide that a person injured by an
intoxicated person has the right to recover damages from an establishment which
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries liquor liability coverage as part of its existing comprehensive general
liability insurance and never has been named in a lawsuit involving a
"dram-shop" statute.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of the Company's personnel are paid at rates
related to the federal minimum wage and, accordingly, further increases in the
minimum wage could increase the Company's labor costs. Legislation is
introduced from time to time in Congress to raise the federal minimum wage.
Minnesota is still considering legislation that could change tip credit laws and
raise the minimum wage for tipped employees. If such an increase is enacted in
the future, it would likely adversely affect the Company because most of the
Company's wait staff are paid at the minimum wage.
The Americans with Disabilities Act (the "ADA") prohibits discrimination in
employment and public accommodations, such as restaurants, on the basis of
disability. Under the ADA, the Company is required to provide service to, or
make reasonable accommodations, for the employment and service of, disabled
persons. The Company believes its restaurants are in substantial compliance
with the ADA.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. There are many well-established competitors
with substantially greater financial and other resources than the Company. In
the Company's view, its principal competitors are not only other steakhouses but
also any other restaurants which offer a casual atmosphere and moderately-priced
meals.
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Expansion of the steakhouse concept has increased in recent years. In
addition to traditional steakhouse restaurants, the Company expects to face
competition from new entries into the steakhouse market, such as national
steakhouse chains which have greater name recognition, are more well-established
and have significantly greater resources than the Company. Other competitors
include a large number of national and regional restaurant chains, many of which
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 are or
may be located.
The 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. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly employees may adversely affect
the restaurant industry in general and the Company's restaurants in particular.
TRADEMARKS
The Company holds federal registrations from the United States Patent and
Trademark Office for "Timber Lodge Steakhouse-TM-" and "The Lodge in the Heart
of the City."
EMPLOYEES
The Company employs approximately 195 full-time and 400 part-time persons,
10 of whom are corporate personnel, 51 of whom are restaurant management
personnel and the remainder of whom are hourly restaurant personnel. None of
the Company's employees are covered by a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTIES.
PROPERTIES/RESTAURANT LOCATIONS
The Company's twelve Timber Lodge Steakhouse restaurants are located in
Burnsville, Roseville, Eden Prairie, Duluth, West St. Paul, St. Louis Park,
Spring Lake Park, and Woodbury, Minnesota, as well as Sioux Falls, South Dakota,
Niagara Falls, New York, and Green Bay and Madison, Wisconsin. All of these
locations are occupied under leases which will expire between the years 2001 and
2016, with renewal options of between three and ten years. The leases for the
Company's current restaurants provide for an average rent, as measured over the
term of each lease, of between $9 and $20 per square foot, plus charges for real
estate taxes and common area expenses based on the number of square feet leased.
These long-term leases are non-cancelable. Accordingly, if an existing or
future restaurant is not profitable and the decision is made to close the
restaurant, the Company could be required to perform its obligations under the
lease. Such an event would likely have a significant adverse impact on the
Company's operations.
The Company's corporate offices in St. Louis Park, Minnesota are leased
from a related party.
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business. Restaurant operators, such as the Company, are from time to time
involved in suits incidental to their business, which are generally covered by
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters which were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended January 1, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of the Company trades on the Nasdaq Small-Cap MarketSM
under the symbol "TBRL." The following table sets forth, for the calendar
quarters indicated, the high and low closing bid prices for the Company's Common
Stock as quoted by Nasdaq. These quotations reflect inter-dealer prices,
without retail markup, markdown or commissions, and may not reflect actual
transactions.
Bid Price
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Low High
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FISCAL YEAR ENDED JANUARY 3, 1996
First quarter........................... $ 4 1/4 $ 5 1/4
Second quarter.......................... $ 3 3/4 $ 4 7/8
Third quarter........................... $ 3 $ 4 3/8
Fourth quarter.......................... $ 2 5/8 $ 3 1/4
FISCAL YEAR ENDED JANUARY 1, 1997
First quarter........................... $ 3 $ 4 1/4
Second quarter.......................... $ 3 3/8 $ 4 3/8
Third quarter........................... $ 3 1/2 $ 4 5/8
Fourth quarter.......................... $ 3 3/8 $ 4 1/2
As of March 21, 1997, the Company had 118 shareholders of record of its
Common Stock.
In connection with the Company's 401(k) program, participants have the
option to purchase Timber Lodge common stock as an investment option. In 1996,
1029 shares of Timber Lodge stock were allocated to the accounts of 27
participants.
The Company has never paid or declared cash dividends on its Common Stock
and does not intend to pay cash dividends on its Common Stock in the foreseeable
future. The Company expects to retain its earnings to finance the development
and expansion of its business. The payment by the Company of cash dividends, if
any, on its Common Stock in the future is subject to the discretion of the Board
of Directors and will depend on the Company's earnings, financial condition,
capital requirements and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance, or
achievements of the Company or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
risks associated with the commercialization of uncertainties relating to product
development; uncertainties relating to profitability; uncertainties relating to
liquidity; rapid technological change and competition; uncertainty regarding
patents; product liability claims and insurance; manufacturing uncertainties;
volatility of common share price; and dependence on corporate relationships.
GENERAL
As of January 1, 1997, the ending date of fiscal 1996, the Company operated
twelve steakhouse restaurants, seven of which were located in the
Minneapolis-St. Paul metropolitan area, and one of which was located in each of
Niagara Falls, New York, Duluth, Minnesota, Sioux Falls, South Dakota, and Green
Bay and Madison, Wisconsin. During fiscal 1996, the Company opened three
restaurants, one in Woodbury, Minnesota, one in Green Bay, Wisconsin and one in
Madison, Wisconsin. The Company uses a 52/53 week fiscal year ending on the
Wednesday nearest the end of the calendar year. In fiscal 1996, the Company's
52/53 week fiscal year ended on January 1, 1997. Fiscal 1996 consisted of 52
weeks whereas fiscal 1995 consisted of 53 weeks.
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The Company capitalizes pre-opening costs and amortizes them over a
twelve-month period commencing with the restaurant opening. Pre-opening costs
consist of direct costs of hiring and training the initial work force and other
direct costs associated with opening a new restaurant. The Company's revenues
and expenses can be significantly affected by the number and timing of the
opening of additional restaurants. The timing of restaurant openings can also
affect net sales and other period-to-period comparisons.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of items in the Company's statements of operations.
Fiscal Year Ended
-----------------
Jan. 1, Jan. 3,
1997 1996
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Net sales......................................... 100.0% 100.0%
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Restaurant costs and expenses:
Food and beverage costs...................... 37.6 38.8
Labor and related benefit costs.............. 28.5 28.9
Restaurant operating expenses................ 8.7 8.6
Occupancy costs.............................. 10.9 11.5
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Restaurant costs and expenses............. 85.7 87.8
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Restaurant operating income....................... 14.3 12.2
Operating expenses (income):
General and administrative................... 7.0 9.1
Amortization of pre-opening costs............ 1.5 2.8
Loss on sale and abandonment of
restaurants, net.......................... -- 1.9
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Operating income (loss)........................... 5.8 (1.6)
Interest (expense)................................ (0.2) (0.1)
Interest and other income......................... 0.5 1.1
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Income (loss) before income taxes................. 6.1 (.6)
Income taxes (benefit)............................ 1.3 (.1)
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Net income (loss)................................. 4.8% (.5%)
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FISCAL YEAR ENDED JANUARY 1, 1997 ("FISCAL 1996") COMPARED TO THE FISCAL YEAR
ENDED JANUARY 3, 1996 ("FISCAL 1995")
NET SALES. The Company achieved an increase in net sales of 21% to
$20,636,760 for fiscal 1996 compared with $17,040,506 for fiscal 1995. The
sales increase is attributable in part to the full year impact of two new
steakhouses which opened in 1995 and to the opening of three new restaurants
in 1996. Fiscal 1995 contained 53 fiscal weeks ending January 3, 1996. After
adjusting for the additional week in fiscal 1995, net sales grew 24% in 1996
on a comparable basis. Same store sales for stores open at least 18 months
were down 2.4%. The Company believes that a reduction in sales is typical
after an initial period of high sales from a newly-opened restaurant. Two
restaurants which opened toward the end of 1994 experienced very high initial
sales in 1995 and the Company may report, in future periods, similar
reductions in same store sales as long as it continues to open new
restaurants and stable sales patterns are established.. The Company
increased menu prices less than 1% in 1996.
COSTS AND EXPENSES. Cost of restaurant sales, consisting of food and
beverage costs, decreased to 37.6% of net sales for fiscal 1996 compared to
38.8% for the same period last year. This decrease is due in part to favorable
prices of produce along with the addition of temporary menu items that had a
lower than average food cost. These decreases more than offset the rise in meat
and seafood prices during the year.
Labor and related benefit costs decreased as a percentage of sales by .4%
to 28.5% for 1996 compared to 28.9% for the same period last year. The decrease
is due primarily to the Company achieving improved hourly store productivity as
new restaurants mature and stabilize along with the benefit of a higher tip
credit from the two new restaurants that opened outside Minnesota. These
savings offset the increased cost of more employees entering the Company's
health insurance programs as eligibility requirements were met.
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Restaurant operating expenses and occupancy costs include rents, real
estate taxes, utilities, store supplies, smallwares, and other occupancy
related costs. Restaurant operating costs are semi-variable while most of
the occupancy expenses are fixed. In the aggregate for 1996, restaurant
operating expenses and occupancy costs decreased to 19.6% of net sales
compared to 20.1% for the same period last year. The decrease is attributed
to lower liability and building insurance premiums compared to last year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to 7.0% of net sales in 1996 compared to 9.1% for the same period last
year. The decrease is due, in part, to the Company changing the name of its
restaurants to "Timber Lodge Steakhouse" during 1995, resulting in one-time
costs to execute the change, including new signage, printing expenses, and
advertising costs to communicate the new identity. The Company increased its
advertising in 1996 as a result of adding two new markets to its store base.
AMORTIZATION OF PRE-OPENING COSTS. Amortization of pre-opening costs
decreased to 1.5% of net sales compared to 2.8% for the same period last year.
The decrease is due to fewer steakhouses opened during the period compared to
the same period last year. The Company amortizes pre-opening costs associated
with new restaurants over a twelve-month period commencing with the first full
period after the restaurant's opening.
LOSS ON SALE AND ABANDONMENT OF RESTAURANTS. In June 1995, the Company
sold Q. Cumbers, an upscale salad bar restaurant that resulted in a pre-tax gain
of $278,120. In July 1995, the Company closed its Williamsville, New York steak
house which resulted in a loss of $607,164. No similar activity occurred in
1996.
INTEREST AND OTHER INCOME. Interest was earned on marketable securities
consisting of short-term government securities and a promissory note related to
the Q. Cumbers sale. Interest was paid on short term borrowing via a Line of
Credit the Company has with a local bank. Net interest income and other income
was $98,513 for fiscal 1996 compared with $179,902 for the same period last
year. This decrease is due to a reduction of marketable securities used to
finance new restaurant construction.
PROVISION FOR INCOME TAXES. The provision for income taxes for 1996
reflects the expected taxes due subject to statutory and AMT regulations and
applied against taxable income adjusted for net operating loss carry forward.
The net result is an income tax expense of $278,240.
NET INCOME (LOSS). The Company's net income for the year was $982,981
compared to net loss of ($88,231) for the same period last year. Earnings per
share were $.27 compared to ($.02) per share loss last year. The net loss for
1995 is attributable primarily to the one-time costs associated with the name
change conversion and the costs related to closing the Williamsville, New York
store.
FISCAL YEAR ENDED JANUARY 3, 1996 ("FISCAL 1995") COMPARED TO THE FISCAL YEAR
ENDED DECEMBER 28, 1994 ("FISCAL 1994")
NET SALES. The Company achieved an increase in net sales of 36% to
$17,040,506 for fiscal year 1995 compared with $12,544,910 for 1994. The sales
increase is attributable to the fact that steakhouses which had opened in 1994
were open during all of 1995, and to the opening of two new steakhouses in 1995,
but is offset by the sale of the Q. Cumbers restaurant in June 1995 and the
closing of the Williamsville, New York steakhouse in July 1995. Same store
sales for stores open at least 18 months were down 1.4%. The Company believes
that a reduction in sales is typical after an initial period of high sales from
a newly-opened restaurant. Two restaurants which were open during all of 1995,
but which are not included in this comparison (because they were not open for at
least eighteen months), experienced very high initial sales and the Company may
report, in future periods, similar reductions in same store sales as long as it
continues to open new restaurants. The Company increased menu prices less than
1% in 1995.
COSTS AND EXPENSES. Cost of restaurant sales, consisting of food and
beverage costs, increased to 38.8% of net sales for fiscal 1995 compared to
37.6% for the same period last year. This increase is due to the rise in meat
and seafood prices during the year.
Labor and related benefit costs increased as a percentage of sales by .4%
to 28.9% for 1995 compared to 28.5% for the same period last year. The increase
is due primarily to costs associated with more employees entering the Company's
health insurance programs as eligibility requirements were met.
9
<PAGE>
Restaurant operating expenses include rents, real estate taxes, utilities,
store supplies, smallwares, and other occupancy related costs. Restaurant
operating costs are semi-variable while most of the occupancy expenses are
fixed. In the aggregate for 1995, restaurant operating expenses and occupancy
costs increased to 20.1% of net sales compared to 17.3% for the same period last
year. The increase is attributed to higher average restaurant operating
expenses and occupancy costs for the new stores added in the past two years
compared to the mature existing stores operating during the same period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to 9.1% of net sales in 1995 compared to 7.2% for the same period last
year. The increase is due, in part, to the Company changing the name of its
restaurants to "Timber Lodge Steakhouse" during 1995, resulting in one-time
costs to execute the change, including new signage, printing expenses, and
advertising costs to communicate the new identity. The Company also increased
its radio advertising during the fourth quarter of 1995.
AMORTIZATION OF PRE-OPENING COSTS. Amortization of pre-opening costs
increased to 2.8% of net sales compared to 2.4% for the same period last year.
The increase is due to the fact that steakhouses which had opened in 1994 were
open during all of 1995, combined with the two new steakhouses opened in 1995.
The company amortizes pre-opening costs associated with new restaurants over a
twelve-month period commencing with the first full period after the restaurant's
opening.
LOSS ON SALE AND ABANDONMENT OF RESTAURANTS. In June 1995, the Company
sold Q. Cumbers, an upscale salad bar restaurant that resulted in a pre-tax gain
of $278,120. In July 1995, the Company closed its Williamsville, New York steak
house which resulted in a loss of $607,164.
INTEREST AND OTHER INCOME. Interest was earned on marketable securities
consisting of short-term government securities and from a promissory note
related to the Q. Cumbers sale. Net interest income and other income was
$179,902 for fiscal 1995 compared with $194,780 for the same period last year.
This decrease is due to a reduction of marketable securities to finance new
restaurant construction.
PROVISION FOR INCOME TAXES. The provision for income taxes for 1995
reflects expected taxes due subject to AMT regulations offset by the benefit of
deferred taxes. The net result is a net tax benefit for the year of $7,750.
NET INCOME (LOSS). The Company's net loss for the year was ($88,231)
compared to net income of $923,416 for the same period last year. The net loss
for the year is attributable primarily to the one-time costs associated with the
name change conversion and the costs related to closing the Williamsville, New
York store. In addition, two stores which opened in 1994 had exceptionally
strong initial sales and earnings, even more so than is typical with new
restaurants which normally experience strong volumes during their early stages
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has leased its restaurant sites under
non-cancelable leases for periods of six to twenty years, with renewal options
of between three and ten years. In fiscal 1996, the Company funded the
development of its' restaurants through internally generated cash flow.
Cash provided by operating activities was $3,052,701 compared to $731,342
for the same period last year. The Company had net working capital deficit
of ($337,912) at January 1, 1997 compared to working capital of $1,277,004 at
January 3, 1996. The decrease in working capital is a result of utilizing
existing cash to fund new restaurant development. The Company has a $500,000
bank line of credit which it has used to fund short-term cash needs. At the
end of fiscal 1996, this line did not have an outstanding balance. Most of
the Company's sales are paid by cash or credit card and the Company generally
receives 30 days credit from trade suppliers.
The Company's Board of Directors passed a resolution in May 1995
authorizing the purchase of shares of the Company's Common Stock in the open
market as management of the Company deems appropriate. During 1996, the Company
purchased 10,000 shares of its Common Stock on the open market at an average
price of $3.48 per share. These repurchases represented less than 1% of the
Company's outstanding stock.
10
<PAGE>
The Company currently intends to focus its expansion on steakhouse
restaurants and estimates that the average costs of developing a new steakhouse
restaurant to be approximately $1,200,000. The actual cost will vary depending
on the size of the restaurant, the amount of landlord contributions, if any, and
whether extensive renovation or remodeling is required. Pre-opening costs,
primarily labor, advertising, travel and other costs related to the three new
steakhouses opened in 1996 were $119,000 per restaurant. Expenses for new
restaurants opening in the future are expected to be lower as training and
general start-up efficiencies are achieved from the Company opening additional
restaurants in markets away from Minnesota.
The Company expects that further expansion will be financed through cash
flows from operations and funds available from its line of credit.
IMPACT OF INFLATION
Inflation has not significantly impacted the Company's operations during
fiscal 1996 or 1995. Substantial increases in either food costs, particularly
meat prices, or labor costs could negatively impact the Company in the future.
Because many of the Company's employees are paid at federal and state minimum
wage levels, changes in such laws this year have had an affect on labor costs.
In the event that inflation increases future operating costs, there is no
assurance that the Company could fully recover such increases by raising menu
prices or through cost reduction measures.
ITEM 7. FINANCIAL STATEMENTS.
See Financial Statements beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by Item 9 is incorporated herein by reference to
the section entitled "Principal Shareholders" in the Company's proxy statement
for its Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days of the Company's fiscal year ended
January 1, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 is incorporated herein by reference to
the section entitled "Executive Compensation" in the Company's proxy statement
for its Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days of the Company's fiscal year ended
January 1, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated herein by reference to
the section entitled "Principal Shareholders" in the Company's proxy statement
for its Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days of the Company's fiscal year ended
January 1, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is incorporated herein by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Company's proxy statement for its Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year ended January 1, 1997.
11
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Articles of Incorporation of Timber Lodge Steakhouse, Inc.(1)
3.2 Bylaws(2)
11 Statement Regarding Computation of Per Share Earnings
23.1 Consent of Independent Auditors
- ----------------------
(1) Incorporated by reference to the specific exhibit included in the
Company's Quarterly Report on Form 10-QSB for the quarter ended
June 14, 1995.
(2) Incorporated by reference to the specific exhibit included in the
Company's Registration Statement on Form SB-2, SEC File
No. 33-71176-C.
- ----------------------
(b) Reports on Forms 8-K:
The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended January 1, 1997.
12
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
Year Ended Year Ended
January 1, January 3,
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
Weighted average common share outstanding............. 3,573,258 3,607,123
Common stock equivalents using average stock price.... 86,524
------------ ------------
3,659,782 3,607,123
------------ ------------
------------ ------------
Net income (loss)....................................... $982,981 $(88,231)
------------ ------------
------------ ------------
Net income (loss) per share............................. $.27 $(.02)
------------ ------------
------------ ------------
FULLY DILUTED INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding............ 3,573,258 3,607,123
Common stock equivalents using the higher of the
ending stock price or average stock price........... 86,524
------------ ------------
3,659,782 3,607,123
------------ ------------
------------ ------------
Net income (loss)....................................... $982,981 $(88,231)
------------ ------------
------------ ------------
Net income (loss) per share............................. $.27 $(.02)
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-93030) pertaining to Timber Lodge
Steakhouse, Inc. 1993 Stock Option Plan of our report dated
February 7, 1997, with respect to the fianncial statements of
Timber Lodge Steakhouse, Inc. included in the Annual Report (Form
10-KSB) for the year ended January 1, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 1997
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-KSB
to be signed on its behalf by the undersigned, thereunto duly authorized.
TIMBER LODGE STEAKHOUSE, INC.
Dated: April 1, 1997 By: /s/ Dermot F. Rowland
------------- -------------------------------
Dermot F. Rowland
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-KSB has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dermot F. Rowland
- --------------------------- Chairman of the Board, Chief Executive April 1, 1997
Dermot F. Rowland Officer (Principal Executive Officer),
Secretary and Director.
/s/ Robert G. Cornell
- --------------------------- Chief Financial Officer (Principal April 1, 1997
Robert G. Cornell Financial and Accounting Officer)
/s/ Laurence F. LeJeune
- --------------------------- Director April 1, 1997
Laurence F. LeJeune
/s/ John P. Uphoff
- --------------------------- Director April 1, 1997
John P. Uphoff
/s/ Peter S. Bedzyk
- --------------------------- Director April 1, 1997
Peter S. Bedzyk
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
TIMBER LODGE STEAKHOUSE, INC.
FISCAL YEARS ENDED JANUARY 1, 1997
AND JANUARY 3, 1996
<PAGE>
Timber Lodge Steakhouse, Inc.
Financial Statements
Fiscal Years ended January 1, 1997
and January 3, 1996
CONTENTS
Report of Independent Auditors..........................................1
Audited Financial Statements
Balance Sheets..........................................................2
Statements of Operations................................................3
Statement of Changes in Shareholders' Equity............................4
Statements of Cash Flows................................................5
Notes to Financial Statements...........................................7
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Timber Lodge Steakhouse, Inc.
We have audited the accompanying balance sheets of Timber Lodge Steakhouse, Inc.
as of January 1, 1997 and January 3, 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for the years then
ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Timber Lodge Steakhouse, Inc.
at January 1, 1997 and January 3, 1996, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 7, 1997
1
<PAGE>
Timber Lodge Steakhouse, Inc.
Balance Sheets
January 1, January 3,
1997 1996
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,178,373 $ 2,020,096
Accounts receivable 136,576 87,716
Inventories 203,268 166,002
Pre-opening costs 168,933 156,544
Deferred tax assets 64,300 259,200
Prepaid expenses and other current assets 366,240 274,696
---------------------------
2,117,690 2,964,254
Property and equipment, net 10,970,370 7,972,221
Deferred tax assets 23,200 -
Note receivable 396,000 406,000
Other assets 190,182 242,010
---------------------------
Total assets $13,697,442 $11,584,485
---------------------------
---------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,127,673 $ 777,329
Accrued salaries and wages 262,346 186,913
Sales tax payable 136,327 116,332
Gift certificates payable 535,997 429,326
Accrued expenses and other liabilities 97,569 162,753
Income taxes payable 295,690 14,597
---------------------------
2,455,602 1,687,250
Deferred rent 1,248,224 826,412
Deferred tax liabilities - 28,900
---------------------------
Total liabilities 3,703,826 2,542,562
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 10,000,000
Issued shares - 3,566,833 at
January 1, 1997 and 3,575,500
at January 3, 1996 35,668 35,755
Additional paid-in capital 8,793,814 8,825,015
Retained earnings 1,164,134 181,153
---------------------------
Total shareholders' equity 9,993,616 9,041,923
---------------------------
Total liabilities and shareholders' equity $13,697,442 $11,584,485
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
2
<PAGE>
Timber Lodge Steakhouse, Inc.
Statements of Operations
FOR FISCAL YEARS ENDED
JANUARY 1, JANUARY 3,
1997 1996
------------------------------
Net sales $20,636,760 $17,040,506
Costs and expenses:
Food and beverage costs 7,767,907 6,613,278
Labor and related benefit costs 5,873,869 4,929,462
Restaurant operating expenses 1,805,317 1,466,891
Occupancy costs 2,234,300 1,944,446
------------------------------
17,681,393 14,954,077
------------------------------
Restaurant operating income 2,955,367 2,086,429
Operating expenses:
General and administrative 1,445,313 1,556,485
Amortization of pre-opening costs 316,077 469,290
Loss on sale and abandonment of
restaurants, net - 329,044
------------------------------
Operating income (loss) 1,193,977 (268,390)
Interest expense 31,269 7,493
Interest and other income (98,513) (179,902)
------------------------------
Income (loss) before income taxes 1,261,221 (95,981)
Income taxes (benefit) 278,240 (7,750)
------------------------------
Net income (loss) $ 982,981 $ (88,231)
------------------------------
------------------------------
Net income (loss) per share $.27 $(.02)
------------------------------
------------------------------
Weighted average number of common and
common equivalent shares outstanding 3,659,782 3,607,123
------------------------------
------------------------------
SEE ACCOMPANYING NOTES.
3
<PAGE>
<TABLE>
<CAPTION>
Timber Lodge Steakhouse, Inc.
Statement of Changes in Shareholders Equity
Common Stock Additional Total
-------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 28, 1994 3,617,500 $36,175 $8,959,859 $ 269,384 $9,265,418
Purchase and retirement of
common stock (42,000) (420) (134,844) - (135,264)
Net loss - - - (88,231) (88,231)
--------------------------------------------------------------------------------------
Balance at January 3, 1996 3,575,500 35,755 8,825,015 181,153 9,041,923
Purchase and retirement of
common stock (10,000) (100) (34,687) - (34,787)
Exercise of stock options 1,333 13 3,486 - 3,499
Net income - - - 982,981 982,981
--------------------------------------------------------------------------------------
Balance at January 1, 1997 3,566,833 $35,688 $8,793,814 $1,164,134 $9,993,616
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
Timber Lodge Steakhouse, Inc.
Statements of Cash Flows
FOR FISCAL YEARS ENDED
JANUARY 1, JANUARY 3,
1997 1996
-------------------------------
OPERATING ACTIVITIES
Net income (loss) $982,981 $(88,231)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation 926,815 710,915
Amortization 316,077 465,375
Deferred rent 421,812 223,062
Deferred taxes 142,800 (124,200)
Loss on sale and abandonment
of assets, net - 100,885
Changes in operating assets
and liabilities:
Receivables (48,860) 19,619
Inventories (37,266) 9,142
Pre-opening costs (328,466) (240,923)
Prepaid expenses and other
current assets (91,544) (146,630)
Accounts payable 350,344 (252,045)
Accrued salaries and wages 75,433 (6,017)
Sales tax payable 19,995 30,467
Gift certificates payable 106,671 167,867
Income taxes payable 281,093 (261,111)
Other accrued expenses (65,184) 123,167
-------------------------------
Net cash provided by operating activities 3,052,701 731,342
INVESTING ACTIVITIES
Proceeds used in restaurant development - 943,893
Cash from sale of restaurant - 125,000
Purchases of property and equipment (3,924,964) (3,047,925)
Sales of property and equipment - 65,546
Purchases of marketable securities - (1,532,000)
Sales of marketable securities - 4,504,161
Other assets 51,828 (15,300)
-------------------------------
Net cash (used in) provided by investing
activities (3,873,136) 1,043,375
5
<PAGE>
Timber Lodge Steakhouse, Inc.
Statements of Cash Flows (continued)
For Fiscal Years Ended
January 1, January 3,
1997 1996
--------------------------------
FINANCING ACTIVITIES
Exercise of stock options $ 3,499 $ -
Common stock repurchased (34,787) (135,264)
Payments received on note receivable 10,000 -
--------------------------------
Net cash used in financing activities (21,288) (135,264)
--------------------------------
Net (decrease) increase in cash and
cash equivalents (841,723) 1,639,453
Cash and cash equivalents at
beginning of year 2,020,096 380,643
--------------------------------
Cash and cash equivalents at end of year $1,178,373 $2,020,096
--------------------------------
--------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 15,324 $ 364,159
Interest paid $ 31,269 $ 7,493
SEE ACCOMPANYING NOTES.
6
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 1, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS--The Company is engaged primarily in
the development and operation of full-service steakhouse restaurants. The
Company currently has restaurants in Minnesota, Wisconsin, New York and South
Dakota.
ACCOUNTING PERIOD--The Company uses a 52/53 week fiscal year ending on the
Wednesday nearest to the end of the calendar year. Fiscal 1996 includes 52 weeks
and fiscal 1995 includes 53 weeks.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents are carried at amortized cost which approximates market value and
are considered available-for-sale.
MARKETABLE SECURITIES--At the time of purchase, management determines the
appropriate classification of marketable securities. Marketable securities,
consisting of U.S. govern-ment and agency notes and commercial paper, are
classified as available-for-sale. Marketable securities are stated at fair
value, which approximates cost. Interest on securities is included in interest
income.
INVENTORIES--Inventories consist principally of food and supplies and are stated
at the lower of cost (first-in, first-out) or market.
PRE-OPENING COSTS--Pre-opening costs consist of direct costs of hiring and
training the initial workforce and other direct costs associated with opening a
new restaurant. Such costs are amortized over a twelve-month period commencing
with the restaurant opening.
Accumulated amortization of pre-opening costs totaled $975,872 and $663,695 at
January 1, 1997 and January 3, 1996, respectively.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets which range from five to ten years. Leasehold improvements are
amortized using the straight-line method over the shorter of their estimated
useful lives or the lease term, including option periods.
7
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE--Net income (loss) per share is based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common share equivalents include stock warrants
and common stock options using the treasury stock method.
INCOME TAXES--Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company will record impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
STOCK BASED COMPENSATION--The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," but applies Accounting Principles Board Opinion No.
25 (APB 25) and related interpretations in accounting for its plans. Under APB
25, when the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
RECLASSIFICATION--Certain 1995 items have been reclassified to conform with the
current year presentation.
8
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JANUARY 1, JANUARY 3,
1997 1996
---------------------------------
Leasehold improvements $ 8,432,010 $5,311,473
Equipment 3,518,824 2,811,140
Furniture and fixtures 1,073,938 986,197
Office equipment 139,909 119,963
---------------------------------
13,164,681 9,228,773
Less accumulated depreciation
and amortization (2,194,311) (1,256,552)
---------------------------------
$10,970,370 $7,972,221
---------------------------------
---------------------------------
3. COMMON STOCK
In May 1995, the Company reincorporated as a Minnesota corporation. As a result
of the reincorporation, the par value of the Company's common stock was adjusted
from $1.00 to $.01. As a result, all periods presented have been adjusted to
reflect the new par value.
4. STOCK OPTIONS AND WARRANTS
Under the Company's stock option plan, the Company may grant either incentive
based or non-qualified options to employees, management and Directors. Under the
plan, options may be granted at prices not less than the fair market value of
the Company's common stock at the grant date. Options become exercisable at the
rate of one-third of the granted shares after six, eighteen and thirty months
from the date of grant. The options are outstanding for ten years following the
date of grant.
In December 1995, the Company's Board of Directors decreased the exercise price
for incentive stock options previously granted to employees under the plan to
$2.63 per share, the closing price of the Company's common stock on the day of
the Board resolution. In addition, the Board decreased the exercise price of
options granted to a former Board member to $3.06.
9
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVAILABLE OPTIONS AVERAGE EXERCISE
FOR GRANT OUTSTANDING PRICE PER SHARE
-------------------------------------------------------
<S> <C> <C> <C>
Balance at December 28, 1994 434,500 190,500 $2.74
Granted (47,500) 47,500 2.625
Canceled 25,500 (25,500) 2.625
--------------------------------
Balance at January 3, 1996 412,500 212,500 2.73
Granted (59,500) 59,500 3.59
Canceled 49,167 (49,167) 3.06
Exercised - (1,333) 2.625
--------------------------------
Balance at January 1, 1997 402,167 221,500 $2.88
--------------------------------
--------------------------------
</TABLE>
In November 1992, the Company granted a non-qualified option to an officer to
purchase 33,750 shares at $.74 per share. The option expires on January 15,
2003.
At January 1, 1997 and January 3, 1996, options of 194,250 and 194,750,
respectively, were exercisable at weighted average exercise prices of $2.30 and
$2.37, respectively.
The weighted average fair value of options granted during the years ended
January 1, 1997 and January 3, 1996 was $1.43 and $1.13 per share, respectively.
PRO FORMA DISCLOSURES
Pro forma information regarding net income and earnings per share is required by
Statement 123, and is determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement. The fair
value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for both fiscal 1996 and 1995: risk free interest rate of 6%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's stock of .461; and a weighted-average expected life of the option of
4 years.
10
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The effect of applying Statement 123's fair value method to the Company's
stock-based awards results in net income (loss) and earnings (loss) per share
that are not materially different from the actual amounts reported.
WARRANTS
In connection with the Company's initial public offering in December 1993, the
Company issued to the underwriter a warrant to purchase 120,000 shares of common
stock. The warrant became exercisable on December 9, 1994 and remains
outstanding until December 9, 1998. The warrant is exercisable at $7.20. The
warrant contains antidilution provisions and is non-transferable.
5. LINE OF CREDIT
The Company has entered into a $500,000 line of credit with a bank. The line of
credit bears interest at the prime rate plus 1%. The line of credit expires in
May 1997. At January 1, 1997, there were no borrowings outstanding against the
line of credit.
11
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of income tax expense (benefit) for the years ended January 1,
1997 and January 3, 1996 are as follows:
1997 1996
--------------------------
Current:
Federal $101,600 $ 87,450
State 33,840 29,000
Deferred:
Federal 121,380 (103,100)
State 21,420 (21,100)
--------------------------
$278,240 $ (7,750)
--------------------------
--------------------------
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
JANUARY 1, JANUARY 3,
1997 1996
--------------------------
Deferred tax assets:
Alternative minimum tax credit
carryforwards and net operating
loss carryforwards $190,600 $256,600
General business credit carryforwards 279,800 158,800
Other 20,400 146,000
--------------------------
Total deferred tax assets 490,800 561,400
Deferred tax liabilities:
Depreciation 345,900 285,500
Pre-opening costs 57,400 45,600
--------------------------
Total deferred tax liabilities 403,300 331,100
--------------------------
Net deferred tax assets $ 87,500 $230,300
--------------------------
--------------------------
12
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At January 1, 1997 the Company had AMT credit carryforwards and the general
business credit carryforwards of $470,400. These credits expire at various times
through the year 2011.
A reconciliation of statutory federal income taxes to the actual income tax
expense (benefit) is as follows:
YEAR ENDED
JANUARY 1, JANUARY 3,
1997 1996
-------------------------
Income taxes at statutory rate $428,815 $(32,635)
State income taxes, net of federal benefit 54,950 (5,068)
Reduction of taxes previously provided for (205,525) -
Alternative minimum tax - 116,450
Tax credits - (86,497)
-------------------------
$278,240 $ (7,750)
-------------------------
-------------------------
7. RELATED PARTY TRANSACTIONS
Two shareholders of the Company own a construction company that managed the
construction of some of the Company s restaurants. Payments to this construction
company totaled $632,312 in fiscal 1995.
The Company rents office space for $2,885 per month in a building owned by an
officer of the Company.
8. LEASE COMMITMENTS
The Company leases restaurant facilities under noncancelable operating leases
that expire at various dates, including renewal options, through 2016. In
addition, certain leases contain escalation clauses based upon a fixed
percentage increase and provisions for contingent rentals based on a percentage
of gross revenues, as defined. The Company also pays real estate taxes,
insurance and common area maintenance expenses related to these leases.
13
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. LEASE COMMITMENTS (CONTINUED)
Rental expense under these lease agreements was $901,115 and $745,768 for the
years ended January 1, 1997 and January 3, 1996, respectively.
At January 1, 1997, future minimum lease payments, including option periods,
under all noncancelable lease agreements are as follows:
Period Ending:
1997 $ 1,047,346
1998 1,069,558
1999 1,088,940
2000 1,112,163
2001 1,072,930
Thereafter 8,364,971
-------------
$13,755,908
-------------
-------------
9. 401(k) PLAN
In 1995, the Company adopted a defined contribution benefit plan which covers
virtually all full-time employees. Under the plan, eligible employees can elect
to contribute up to 15% of their annual compensation to the plan. The Company is
permitted, but not required, to make a matching contribution to the plan up to a
maximum of 6% of each participating employee's annual compensation. The Company
did not make a matching contribution in fiscal 1996 or 1995, respectively.
10. SALE AND ABANDONMENT OF RESTAURANTS
The Company sold its Q. Cumbers unit to the existing store manager, who was
then a related party, on June 14, 1995. The Company retained the services of
an independent consultant to assess the fair market value of the business and
validate the Company's selling price. The store was sold for $531,000. The
Company received $125,000 in cash and a promissory note for $406,000. The
sale resulted in a pre-tax gain of $278,120. The promissory note bears
interest at the prime rate. Interest is payable monthly. The buyer is
required to make future principal payments of $50,000 from 1997-2002. In
2003, the remaining principal balance is due in full.
14
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SALE AND ABANDONMENT OF RESTAURANTS (CONTINUED)
In May 1995, the Company closed its Williamsville, New York restaurant. The
abandonment costs of $607,164 consist of the write-off of non-reusable assets
and related close down costs.
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