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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ TO ______
Commission file number 000-22753
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-2016614
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
300 CRESCENT COURT
BUILDING 300, SUITE 850
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip code)
(214) 754-0414
(Registrant'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
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes / x / No / /
As of March 18, 1998, the aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant was $40,678,825. Solely
for the purposes of this calculation, shares held by directors and officers of
the Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are in
fact, affiliates of the Registrant.
As of March 18, 1998, there were 10,415,000 shares outstanding of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the Registrant within 120 days after the close of its fiscal
year.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business......................................................... 3
2. Properties....................................................... 11
3. Legal Proceedings................................................ 11
4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters................................. 12
6. Selected Financial Data.......................................... 13
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 14
8. Financial Statements and Supplementary Data...................... 19
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 19
PART III
10. Directors and Executive Officers of the Registrant............... 19
11. Executive Compensation........................................... 19
12. Security Ownership of Certain Beneficial Owners and Management... 19
13. Certain Relationships and Related Transactions................... 19
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20
Signatures....................................................... 23
-2-
PART I
ITEM 1. BUSINESS
GENERAL
Total Entertainment Restaurant Corp., a Delaware corporation ("the
Company"), owns and operates 17 entertainment restaurant locations which utilize
the Fox & Hound English Pub & Grille ("Fox & Hound") and Bailey's Sports Grille
("Bailey's") tradenames. The Company's entertainment concepts combine a
comfortable and inviting social gathering place, full menu and full service bar,
state-of-the-art audio and video systems for sports entertainment, traditional
games of skill such as pocket billiards and a late-night dining and
entertainment alternatives all in a single location. The Company's entertainment
restaurant concepts appeal to a broad range of guests who can participate in one
or more aspects of the Company's total entertainment restaurant experience. Fox
& Hound and Bailey's encompass the Company's multi-dimensional concept and serve
both larger urban and smaller regional markets. The first Bailey's unit was
opened in Charlotte, North Carolina in 1989 and the first Fox & Hound unit was
opened in Arlington, Texas in 1994. The Company owns and operates seven Fox &
Hound units and ten Bailey's units in Alabama, Arkansas, Illinois, Indiana,
Nebraska, North Carolina, South Carolina, Tennessee and Texas.
SECTION 351 EXCHANGE
The Company was organized on February 7, 1997 for the purpose of developing
entertainment restaurant locations. On February 20, 1997, the Company effected
an exchange (the "Exchange") of property under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"), with the stockholders of four
corporations (the "Subsidiary Corporations") and certain limited partners of
four Texas limited partnerships (the "Subisdiary Limited Partnerships").
Pursuant to the Exchange, the Company became the owner of the eight
then-existing Bailey's locations and the three then-existing Fox & Hound
locations. The Company issued 8,000,000 shares of its common stock, $0.01 par
value (the "Common Stock"), in exchange for all the outstanding stock of the
Subsidiary Corporations and the outstanding limited partnership interests of the
Subsidiary Limited Partnerships not owned by the Subsidiary Corporations. The
Subsidiary Corporations and Subsidiary Limited Partnerships thereby became
wholly-owned subsidiaries of the Company.
CONCEPT
The Company's entertainment restaurant concept differentiates itself by
offering all of the following features in a single location:
o Social Gathering Place. The Company's concepts provide a
contemporary social gathering place where friends and acquaintances
can gather regularly for food, drinks and entertainment in an
upscale yet casual environment.
o Food and Beverage. The Company's concepts offer a full menu with a
wide range of mid-priced appetizers, entrees and desserts served in
generous portions. Each location features a full service bar and a
wide variety of domestic, imported and premium craft beers. Food
and beverages can be enjoyed in all areas of each location.
-3-
o Sports Entertainment. The Company's concepts feature
state-of-the-art audio and video systems for viewing sporting
events. Each location has numerous TV's (including several big
screen TV's) with satellite and cable coverage of national,
regional and local sporting events.
o Games of Skill. The Company's concepts offer traditional games of
skill, including pocket billiards featuring tournament-quality
tables, shuffleboard and darts. Certain locations also offer "just
for fun" blackjack and a variety of popular interactive games.
o Late-night Destination. The Company provides guests with an upscale
entertainment and dining alternative by serving food and beverages
during the increasingly popular late-night segment.
STRATEGY
Management believes its unique entertainment restaurant concept will enable
the Company to distinguish itself as the leader in this market segment.
Management's strategy for attaining this leadership position is based on the
following key elements:
Total Entertainment and Restaurant Experience. The Company's concept offers
a social gathering place, food and beverages, sports entertainment, games of
skill and a late-night destination all in a single location. Each location
provides guests with a multi-dimensional entertainment and restaurant experience
that enables them to participate in one or more elements of the experience.
Seasoned Management Team. The Company employs a seasoned management team
with experience in successfully developing and operating multi-unit concepts in
a variety of geographic markets throughout the United States. The Company
intends to leverage this experience to secure favorable real estate sites,
control costs and implement proven operating procedures. In addition, the
Company maintains centralized financial and accounting controls through Coulter
Enterprises, Inc. ("Coulter Enterprises"), a corporation controlled by Jamie B.
Coulter, Chairman of the Board of the Company, which has 17 years of experience
in providing such services. By employing the services and infrastructure
provided by Coulter Enterprises, the Company is able to focus its energy and
resources on brand and unit development.
Rapid Growth and Expansion. The Company believes its entertainment
restaurant concept will be attractive in a variety of geographic markets
throughout the United States. The Company currently plans to open up to 20
locations in 1998 (one of which was opened in January 1998) and up to 20
locations in 1999. The Company is currently evaluating locations in markets that
are familiar to its management team and is actively negotiating additional
leases at a number of sites.
Flexibility and Versatility of Concept. The Company is implementing its
concept through both the Fox & Hound and Bailey's brand names. This strategy
enables the Company to target both larger urban markets as well as smaller
regional markets. The Company's concept also allows for significant versatility
through the reconfiguration of the entertainment areas within each of its
locations to accommodate various special events.
Commitment to High Quality Products and Services. The Company is committed
to providing a superior experience that includes high quality menu items, a wide
variety of domestic, imported and premium craft beers, state-of-the-art audio
and video systems and tournament-quality pocket billiard tables. These features,
combined with the Company's focus on a high level of customer service, help
build a loyal clientele and attract new guests.
-4-
LOCATIONS
The following table sets forth the location, opening date and approximate
square footage of the Company's existing entertainment and restaurant locations:
APPROXIMATE
LOCATION MONTH OPENED SQUARE FOOTAGE
-------- ------------ --------------
Fox & Hound
Arlington, TX August 1994 6,500
College Station, TX September 1994 7,700
Dallas, TX December 1995 9,600
Memphis, TN September 1997 8,400
Omaha, NE December 1997 9,000
Chicago, IL December 1997 10,100
Montgomery, AL January 1998 7,700
Bailey's
Charlotte, NC November 1989 6,100
Pineville, NC October 1990 7,600
North Little Rock, AR February 1994 8,400
Greenville, SC September 1994 7,000
Nashville #1, TN April 1995 9,400
Knoxville, TN December 1995 8,400
Johnson City, TN May 1996 8,250
Columbia, SC October 1996 10,000
Clarksville, IN March 1997 9,200
Nashville #2, TN October 1997 7,500
EXPANSION PLANS
The Company's management team has extensive experience in the restaurant
business and has successfully developed and operated numerous restaurants in
many geographic markets throughout the United States. The Company intends to
open up to 20 entertainment restaurant locations in 1998 (one of which was
opened in January 1998) and up to 20 locations in 1999. The Company is currently
evaluating locations in markets familiar to its management team. However, the
number of locations actually opened and the timing thereof may vary depending
upon the ability of the Company to locate suitable sites and negotiate favorable
leases. As of March 18, 1998 has entered into lease agreements to open six
additional Fox & Hound locations and is also actively negotiating additional
leases at a number of sites.
The Company may in the future grant license or joint venture rights to the
Fox & Hound and Bailey's concepts in certain limited geographic areas of the
United States. It is expected that these licensees or joint venture partners
will be required to develop a specific number of locations within a specified
time frame and that a license fee and/or a royalty fee will be paid to the
Company in connection with the development and operation of each such site. The
Company anticipates that one of such licenses may be granted to Dennis L.
Thompson and Thomas A. Hager, directors of the Company. Such license is
anticipated to grant the right to operate up to eight locations utilizing the
"Fox & Hound" name in North Carolina. The Company has granted to Stephen P.
Hartnett, a principal stockholder of the Company and the founder of Fox & Hound,
the right to operate one "Fox & Hound" concept in Dallas, Texas without the
payment of any license fee.
-5-
SITE SELECTION CRITERIA AND LEASING
The Company believes the site selection process is critical in determining
the potential success of each entertainment restaurant location. Senior
management devotes significant time and resources in analyzing each prospective
site and inspects and approves each location prior to final lease execution. A
variety of factors are considered in the site selection process, including local
market demographics, site visibility, traffic count, nature of the retail
environment and accessibility and proximity to major retail centers, office
complexes, hotels and entertainment centers (e.g., stadiums, arenas, theaters).
The Company currently leases all locations, with the exception of the
Bailey's unit in Columbia, South Carolina, which is owned by the Company. Most
of the units are located in shopping centers. Leases are negotiated with initial
terms of three to five years, with multiple renewal options. The Company has
generally required approximately 90 to 120 days after the signing of a lease and
obtaining required permits to complete construction and open a new location.
Additional time is sometimes required to obtain certain government approvals and
licenses, such as liquor licenses. In the future, the Company anticipates
principally leasing its locations, although it may consider purchasing
free-standing sites where it is cost-effective to do so.
UNIT ECONOMICS
The Company's management team focuses on selecting locations with the
potential of producing significant revenues while controlling capital
expenditures and rent as a percentage of net sales. The Company's restaurants
have historically generated a sales to investment ratio of 1.0:1, assuming that
the average minimum annual rents pursuant to operating leases were capitalized
for purposes of determining the investment. The Company's entertainment
restaurants averaged approximately $1.5 million in sales on an annualized basis
during the fiscal years ended December 31, 1996 and December 30, 1997. Of the 16
units open at December 30, 1997, 15 were leased facilities and had an average
cash investment of $906,000. The one open unit the Company owned as of December
30, 1997 had a cost of $1,756,000 (including the costs for land acquisition,
construction, equipment and pre-opening expenses). In the future, the Company
anticipates most locations will be leased rather than purchased, and anticipates
an average cash investment per unit between $1.0 million and $1.3 million.
MENU
Both Bailey's and Fox & Hound concepts offer a single menu for lunch
(weekends only in some locations), dinner and late-night dining. The menu
features a selection of appetizers, including quesadillas and nachos, soups and
salads, gourmet-style sandwiches and burgers, a selection of grilled entrees and
desserts. Appetizers typically range in price from $3.95 to $7.95, and entrees
range from $5.95 to $12.95, with most entrees priced below $10.00. Each location
features a full service bar and most units have over 100 brands of ales, lagers,
stouts and premium craft beers from around the world, including over 35 on tap.
Alcoholic beverage service accounted for approximately 57% of the Company's
revenues in the fiscal year ended December 30, 1997.
-6-
AMBIANCE AND DESIGN
Fox & Hound. The Fox & Hound entertainment restaurant concept incorporates
the tradition, spirit and sophistication of a contemporary social gathering
place, with an elegant yet comfortable atmosphere of finished wood, polished
brass, embroidered chairs and booths, hunter green and burgundy walls and etched
glass. Each Fox & Hound features a full service restaurant and bar as well as
state-of-the-art audio and video technology and traditional games of skill such
as pocket billiards generously spaced to avoid crowding, darts and shuffleboard.
The entertainment area can be readily configured into a comfortable "arena" for
viewing national, regional and local sporting and other television events. All
seven locations are also capable of accommodating business and social
organizations for special events.
Fox & Hound is the evolution of a concept originally conceived by Stephen
P. Hartnett. Management believes that the design of Fox & Hound plays an
essential role in its success. The bar and primary dining room are centrally
located while the wing rooms are partitioned from the bar and dining area by
etched glass and house games of skill along with state-of-the-art audio and
video technology. This layout provides guest with an open view of the main
dining room, bar and gaming areas. The open kitchen is organized for efficient
work flow and is also centrally located so as to entice guests with its
flavorful aromas.
Bailey's. The Bailey's concept has a casual, relaxed atmosphere that
features a full-service restaurant and bar, numerous TV's (including several big
screen TV's) with satellite and cable coverage of sporting events, pocket
billiard tables, darts, foosball and shuffleboard. Certain locations also
feature "just for fun" blackjack and a variety or popular interactive games.
Like Fox & Hound, the bar and primary dining room in each Bailey's unit is
centrally located with games situated around the perimeter.
Bailey's is the evolution of a concept originally conceived by Thomas A.
Hager and Dennis L. Thompson, each of whom are directors of the Company. The
first Bailey's unit opened in Charlotte, North Carolina in November 1989. There
are presently ten locations operating in five states. Since the opening of the
first location in 1989, management has modified and improved its original
concept. With each successive opening, the decor has been modified to a more
upscale yet casual decor.
All locations opened since July 1997 (four Fox & Hound units and one
Bailey's unit) have incorporated the layout and design of the Fox & Hound unit
in Dallas, Texas. The Company anticipates this layout and design will be
utilized for all future locations for both Fox & Hound and Bailey's.
MARKETING
The Company believes its entertainment restaurant concept attracts a loyal
clientele, and the Company relies primarily on word-of-mouth to attract new
business. The Company does, however, advertise through traditional marketing and
advertising mediums in selected markets. These mediums include billboard
signage, radio and print advertising, local store marketing to households and
volunteer community involvement.
The Company's marketing efforts also seek to focus on national, regional
and local sporting events such as the Super Bowl and World Series, which attract
locally active groups of fans, supporters or alumni. The versatile layout and
design of the units can also accommodate group events.
-7-
OPERATIONS AND MANAGEMENT
The Company's operations and management systems are based upon systems and
controls that were developed by senior management and have been successfully
used to manage a large number of restaurants located in numerous states. The
Company strives to maintain quality and consistency in its entertainment
restaurant locations through the careful training and supervision of personnel
and the establishment of standards relating to food and beverage preparation,
maintenance of locations and conduct of personnel.
The management of a typical unit consists of one general manager and two or
three supporting managers. Each general manager is responsible for the unit's
day-to-day operations and is required to follow the Company's established
operating procedures and standards. Each entertainment restaurant location also
employs a staff of hourly employees, many of whom are part-time personnel. Unit
management personnel participate in an eight-week training program which focuses
on various aspects of the unit's operations and customer service. Working in
concert with general managers, the Company's senior management team participates
in an incentive cash bonus program. Awards under the incentive plan are tied to
achievement of specified operating targets, including achievement of specific
unit objectives and control of operating expense budgets. Senior management
regularly visits the Fox & Hound and Bailey's locations and meets with the
respective management teams to ensure the Company's strategies and standards of
quality are complied with.
The Company maintains financial and accounting controls for each of its
entertainment restaurant locations through the use of centralized accounting and
management information systems. Sales information is collected daily from each
location, and general managers are provided with operating statements for their
locations. Cash is controlled through daily deposits of sales proceeds in local
operating accounts, the balances of which are wire-transferred weekly to the
Company's principal operating account. The Company utilizes a comprehensive peer
review reporting system for its general managers. After the close of each 28-day
accounting period, profit and loss statements are produced and, subsequently,
the general managers of each location meet in person with the senior management
of the Company to review the profit and loss statements. The participants offer
each other feedback on their respective performances and suggest ways of
improving profitability. The Company believes the peer review system enables
each general manager to benefit from the collective experience of all of the
Company's management.
The Company believes customer service and satisfaction are keys to the
success of its operations. The Company's commitment to customer service and
satisfaction is evidenced by several Company practices and policies, including
periodic visits by unit management to guests' tables, active involvement of
management in responding to guest comments and assigning wait persons so as to
ensure customer satisfaction. Teamwork is emphasized for efficient and timely
service.
Each new unit employee of the Company participates in a training program
during which the employee works under the close supervision of a general
manager. Management strives to instill enthusiasm and dedication in its
employees and to create a stimulating and rewarding working environment where
employees know what is expected of them in measurable terms. Management
continuously solicits employee feedback concerning unit operations and strives
to be responsive to the employees' concerns.
-8-
PURCHASING
The Company's management negotiates directly with suppliers for most food
and beverage products to ensure uniform quality, adequate supplies, and to
obtain competitive prices. Food and supplies are shipped directly to
entertainment restaurant locations, although invoices for purchases are
forwarded to a central location for payment. Due to the experience of the
Company's senior management in the restaurant business, the Company has been and
expects to continue to be able to purchase most of its restaurant equipment
directly from equipment manufacturers. The Company has not experienced any
significant delays in receiving supplies or equipment.
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes an in-store computer-based management support system
which is designed to improve labor scheduling and food and beverage cost
management, provide corporate management quick access to financial data and
reduce the general manager's administrative time. Each general manager uses the
system for production planning, labor scheduling and food and beverage cost
variance analysis. The system generates reports on sales, bank deposits and
variance data for the Company's management on a daily basis.
The Company generates weekly consolidated sales reports and food, beverage
and lower-cost variance reports as well as detailed profit and loss statements
for each entertainment restaurant location every four weeks. Additionally, the
Company monitors sales mix, sales growth, labor variances and other sales trends
on a daily basis.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon computer systems and software to
conduct its business. The systems and software include those developed and
maintained by the Coulter Enterprises' in-house computer department as well as
purchased software which is run on in-house computer systems, including
networks. In 1997, the Company initiated a review and assessment of all hardware
and software to confirm it will function properly in the year 2000. In addition,
selected major vendors have been contacted to ensure they are addressing this
issue. All in-house systems and software are expected to be year 2000 compliant
no later than the third quarter of 1998. Vendor responses indicate their
hardware and/or software will be compliant, collectively, no later than the end
of 1998. This timetable will allow time for testing such compliance. While there
may be some expenses incurred in the next two years, it is not expected to have
a material effect on the Company's consolidated financial statements. The
Company is expensing all costs associated with any system changes relating to
year 2000 compliance.
ACCOUNTING AND ADMINISTRATIVE SERVICES
On July 17, 1997, the Company entered into a services agreement with
Coulter Enterprises for certain accounting and administrative services. The
fixed annual charge, which was pro rated for 1997, was $94,000 and the per unit
per 28-day period fee was $426. For fiscal year 1998, the fixed annual charge is
$194,500 and the per restaurant per 28-day accounting period fee is $466, plus
reimbursement of all direct out-of-pocket costs and expenses. The increase in
the fixed charge is due to an increase in the number of entertainment
restaurants operated by the Company. In the future, the Company may satisfy its
accounting and administrative needs by hiring employees directly.
-9-
COMPETITION
The entertainment and restaurant industries are highly competitive. There
are a great number of restaurants and entertainment businesses that compete
directly and indirectly with the Company. The Company competes with restaurants
primarily on the basis of quality of food and service, ambiance and location and
competes with sports bars and entertainment complexes on the basis of
entertainment quality. Competition for sales in the entertainment and restaurant
industries is intense. While the Company believes its entertainment restaurant
units are distinctive in design and operating concept, it is aware of
competitors that operate with similar concepts. Many of the Company's existing
and potential competitors are well-established and have significantly greater
financial, marketing and other resources than does the Company. In addition to
other entertainment and restaurant companies, the Company competes with numerous
businesses for suitable locations for its units. The legalization of casino
gambling in geographic areas near any entertainment restaurant location operated
by the Company could also create the possibility for entertainment alternatives
that could have a material adverse effect on the Company's business.
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
As a result of the revenues associated with each new location, the timing
of new unit openings will result in significant fluctuations in quarterly
results. The Company expects seasonality to be a factor in the operation or
results of its business in the future due to expected lower second and third
quarter revenues due to the summer season. The primary inflationary factors
affecting the Company's operations include food, liquor and labor costs.
Although a large number of the Company's restaurant personnel are paid at the
federal minimum wage level, the majority of personnel are tipped employees, and
therefore, recent as well as future minimum wage changes will have very little
effect on labor costs. As costs of food and labor have increased, the Company
has historically been able to offset these increases through economies of scale
and improved operating procedures. To date, inflation has not had a material
impact on operating margins.
GOVERNMENT REGULATION
The Company's entertainment restaurant locations are subject to numerous
federal, state and local laws affecting health, sanitation, safety and Americans
with Disabilities Act accessibility standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each location has
appropriate licenses from regulatory authorities allowing it to sell liquor,
beer and wine, and each location has food service licenses from local health
authorities. The Company's licenses to sell alcoholic beverages must be renewed
annually and may be suspended or revoked at any time for cause, including
violation by the Company or its employees of any law or regulation pertaining to
alcoholic beverage control, such as those regulating the minimum age of patrons
or employees, advertising, wholesales purchasing, and inventory control. The
failure of a location to obtain or retain liquor or food service licenses would
have a material adverse effect on the Company's operations. In order to reduce
this risk, each location is operated in accordance with standardized procedures
designed to assure compliance with all applicable codes and regulations.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance and has never been named as a
defendant in a lawsuit involving "dram-shop" statutes.
The development and construction of additional locations will be subject to
compliance with applicable zoning, land use and environmental regulations. The
Company's operations are also subject to federal and state minimum wage laws
governing such matters as working conditions, overtime and tip credits and other
employee matters. Significant numbers of the company's personnel are paid at
rates related to the federal minimum wage which is currently $5.25 per hour.
Accordingly, increases in the minimum wage will increase the Company's labor
costs.
A portion of the Company's revenues is derived from the use and operation
of video gaming machines. There can be no assurance that any future regulations
or legislation will not limit, restrict or eliminate the use or operation of
video gaming machines.
-10-
TRADEMARKS
The Company has registered its "Fox & Hound" service mark in Texas and has
applied for federal registration of such mark. The Company's "7 Bailey's Sports
Grille" and "Serious Fun 7 Bailey's Sports Grille" design marks are federally
registered and the Company has applied for registration of the "Bailey's Sports
Grille" service mark. The Company regards its service marks as having
significant value and as being an important factor in the marketing of its
entertainment restaurant concept. The Company is aware of names and marks
similar to the service marks of the Company that are used by other persons in
certain geographic areas. The Company believes such uses will not have a
material adverse effect on the Company as either the Bailey's or Fox & Hound
tradenames may be used if either name is unavailable. The Company's policy is to
pursue registration of its marks whenever possible and to oppose vigorously any
infringement of its marks.
EMPLOYEES
As of December 30, 1997, the Company employed approximately 750 persons,
two of whom are executive officers, three of whom are mult-unit supervisors, 58
of whom are entertainment restaurant location management personnel and the
remainder of whom are hourly entertainment restaurant personnel. None of the
Company's employees is covered by a collective bargaining agreement. The Company
believes its employee relations are satisfactory.
ITEM 2. PROPERTIES
All of the Company's units are located in leased space with the exception
of the Bailey's unit in Columbia, South Carolina, which is owned by the Company.
Initial lease terms range from three to five years, with multiple renewal
options. All of the Company's leases provide for a minimum annual rent, and some
leases call for additional rent based on sales volume at the particular location
over specified minimum levels. Generally, the leases are net leases which
require the Company to pay the costs of insurance, taxes and a portion of
lessors' operating cost. See "Business-Locations."
The Company's executive offices are located at 300 Crescent Court,
Building 300, Suite 850, Dallas, Texas 75201. The Company believes there is
sufficient office space available at favorable leasing terms in the Dallas,
Texas area to satisfy the additional needs of the Company that may result from
future expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of the Company's Common
Stock during the fourth quarter of the Company's fiscal year ended December 30,
1997.
-11-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market System (ticker symbol: TENT). The following table sets forth,
for the periods indicated, the high and low bid quotations for the Common Stock,
as reported by Nasdaq. These quotations reflect the inter-dealer prices, without
retail markup, markdown or commission and may not necessarily represent actual
transactions.
BID PRICES
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FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
Third Quarter (1) 11-1/4 8-1/4
Fourth Quarter 9 4-1/2
- -------------------
(1) The Company's Common Stock commenced trading on July 18, 1997.
HOLDERS
As of March 18, 1998, there were 100 holders of record of the Company's
Common Stock. The Company believes that there are in excess of 4,000 beneficial
owners of the Company's Common Stock.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock for the foreseeable
future. The Company intends to retain future earnings to finance future
development.
SALE OF UNREGISTERED SECURITIES
(c) The following unregistered securities were issued by the Company
during the sixteen weeks ended December 30, 1997:
Number of Shares
Description of Sold/Issued/Subject Offering/Exercise
Date of Sale/Issuance Securities Issued to Options or Warrants Price Per Share
--------------------- ----------------- ---------------------- ---------------
September 29, 1997 Common Stock Options 6,452 $ 7.75
December 22, 1997 Common Stock Options 10,811 $ 4.625
December 29, 1997 Common Stock Options 10,811 $ 4.625
-12-
All of the above options were granted to certain key employees
pursuant to the 1997 Incentive and Nonqualified Stock Option Plan.
The issuance of these securities is claimed to be exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended, as transactions by an issuer not involving a public
offering. There were no underwriting discounts or commissions paid
in connection with the issuance of any of these securities.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
(4) (v) Actual underwriting discounts and commissions $ 1,521,450
Actual other expenses paid to a corporation controlled by
Jamie B. Coulter, Chairman of the Board of the Company,
for air travel 82,325
Estimated other expenses paid to others 976,701
-------------
Total expenses $ 2,580,476
(vi) Net offering proceeds $ 19,154,524
(vii) Amount of net offering proceeds used for:
Actual repayment of indebtedness including interest $ 10,894,648
Estimated purchases and installation of furniture, fixtures
and equipment 2,976,091
Estimated remaining net offering proceeds invested in
various tax exempt securities and funds 5,283,785
-------------
Total net offering proceeds $ 19,154,524
(viii) Not applicable
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company and its predecessors
should be read in conjunction with the financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K. The historical
income statement data for Fox & Hound Entertainment and Restaurant Group
("FHERG") for the fiscal years ended December 31, 1994, 1995 and 1996, the
historical income statement data for F&H Restaurant Corp ("FHRC") for the period
from January 1, 1997 through February 20, 1997, the historical income statement
data for the Company for the period from February 7, 1997 through December 30,
1997, the balance sheet data for FHERG as of December 31, 1995 and 1996 and the
balance sheet data for the Company as of December 30, 1997 are derived from the
Company's and its predecessors' audited financial statements. The table also
-13-
sets forth the pro forma income statement data for the Company as if the
Exchange had occurred on January 1, 1996. The pro forma data set forth below for
the periods presented are unaudited and have been prepared by management solely
to facilitate period-to-period comparison and do not purport to be indicative of
the consolidated results of operations that would have occurred had the Exchange
occurred at January 1, 1996, or which may be expected to occur in the future.
Historical
-----------------------------------------------------------------
Fox & Hound F&H The Company
Entertainment and Restaurant The Company Pro Forma
Restaurant Group Corp. 46 weeks and Year Ended
Year Ended December 31, 51 days ended 5 days ended Dec. 31, Dec. 30
1994 1995 1996 Feb. 20, 1997 Dec. 30, 1997 1996 1997
------- -------- --------- -------------- ------------------ ------- -------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Net sales $ 730 $2,618 $5,507 $ 858 $ 16,163 $ 14,844 $ 18,557
Costs and expenses:
Cost of sales 246 824 1,721 245 4,287 4,177 4,912
Operating expenses 456 1,390 2,759 393 7,142 6,747 8,281
Depreciation and amortization 90 224 311 35 939 855 1,052
----- ------ ------ ------ --------- --------- ---------
Entertainment and restaurant costs
and expenses 792 2,439 4,791 673 12,368 11,779 14,245
----- ------ ------ ------ --------- --------- ---------
Entertainment and restaurant
operating income (62) 179 716 185 3,795 3,065 4,312
General and administrative expenses 21 70 296 36 1,794 915 2,014
Goodwill amortization --- --- --- 24 210 237 242
----- ------ ------ ------ --------- --------- ---------
Income (loss) from operations (83) 109 420 125 1,791 1,913 2,056
Other expense (1) (13) (56) 63 266 656 370
------ ------- ------- ------ --------- --------- ---------
Income (loss) before provision for
income taxes (84) 96 364 62 1,525 1,257 1,686
Provision for income taxes --- --- --- 11 545 471 605
Minority interest --- --- --- 34 --- --- ---
----- ------ ------ ------ --------- --------- ---------
Net income (loss) $ (84) $ 96 $ 364 $ 17 $ 980 $ 786 $ 1,081
====== ====== ====== ====== ========= ========= =========
Basic and diluted net income per share $ .11 $ .10 $ .12
========= ========= =========
Weighted number of shares outstanding 9,182 8,000 9,062
========= ========== =========
HISTORICAL
---------------------------------------------------------------
Fox & Hound
Entertainment and
Restaurant Group The Company
Year Ended December 31, December 30,
1994 1995 1996 1997
------------ ------------ ------------ -----------
(In thousands)
BALANCE SHEET DATA:
Working capital (deficit) $ (44) $ (447) $ (554) $ 4,579
Total assets 1,346 2,638 2,520 23,224
Long-term debt, including current portion 198 759 696 ---
Stockholders'/partners' equity 1,012 1,559 1,564 21,665
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS GENERAL
The following discussion and analysis should be read in conjunction with
the information set forth under "Selected Financial Data" and the Financial
Statements and Notes thereto included elsewhere in this Form 10-K.
The Company began operations February 20, 1997 with three Fox & Hound and
eight Bailey's
-14-
entertainment restaurant locations, and opened three Fox & Hound and two
Bailey's entertainment restaurant locations during the year ended December 30,
1997.
Pre-opening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants, and are
capitalized and amortized over a 12 month period, beginning in the period that
the restaurant opens.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Income bear to net sales, and (ii) other selected operating data.
Fox & Hound The Company
Entertainment and Pro Forma
Restaurant Group Year Ended(1)
Year Ended December 31, Dec. 31, Dec. 30,
1995 1996 1996 1997
---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 31.5 31.3 28.1 26.4
Operating expenses 53.1 50.1 45.4 44.6
Depreciation and amortization 8.6 5.6 5.8 5.7
----- ----- ----- -----
Restaurant costs and expenses 93.2 87.0 79.3 76.7
----- ----- ----- -----
Restaurant operating income 6.8 13.0 20.7 23.3
General and administrative 2.6 5.4 6.2 10.8
Goodwill amortization -- -- 1.6 1.3
----- ----- ----- -----
Income from operations 4.2 7.6 12.9 11.2
Other income, principally interest 0.6 0.4 0.2 0.6
Interest expense (1.1) (1.4) (4.6) (2.7)
----- ----- ----- ------
Income before provision for income taxes 3.7% 6.6% 8.5 9.1
Provision for income taxes (2) -- -- 3.2 3.3
----- ----- ----- -----
Net income 3.7% 6.6% 5.3% 5.8%
===== ===== ===== =====
RESTAURANT OPERATING DATA:
Number of locations at end of period 3 3 11 16
Number of store operating weeks (3) 107 159 516 644
Annualized average weekly sales per location (4) $1,252 $1,801 $1,491 $1,492
- --------------------------------------
(1) The Company operates on a 52 or 53 week fiscal year ending the
last Tuesday in December. The fiscal quarters for the Company
consist of accounting periods of 12, 12, 12 and 16 or 17
weeks, respectively.
(2) No income tax provision is presented for the historical
results of Fox & Hound Entertainment and Restaurant Group as
the entities operated as partnerships and were not subject to
income taxes at the entity level.
(3) Store operating weeks represents the number of full weeks all
locations were open during the period.
(4) Annualized average weekly sales per location are computed by
dividing net sales for full weeks open during the period by
the number of store operating weeks and multiplying the result
by fifty-two.
F&H RESTAURANT CORP.
F&H Restaurant Corp. (FHRC) was organized on November 4, 1996, for the
purpose of acquiring a 75% partnership interest in the Fox & Hound Entertainment
and Restaurant Group (FHERG). The acquisition was completed on December 6, 1996,
for a total purchase price of $4,568,995 and was accounted for as a purchase in
accordance with Accounting Principles
-15-
Board Opinion 16. The acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition resulting in goodwill of
approximately $3,448,000 which is being amortized over 20 years. The purchase
was financed by a loan from a principal stockholder in the initial amount of
$1,500,000 and an additional loan from such stockholder of $3,030,071 in January
1997. Other than the interest from the acquisition debt and the amortization
from the goodwill, which are both insignificant for the period from November 4,
1996 (inception) through December 31, 1996, the operating results also include
25 days of operations of FHERG which is included in the table above and
discussed in the Fox & Hound Entertainment and Restaurant Group comparisons
below. Therefore, no separate operating data is presented or discussed for FHRC.
THE COMPANY (PRO FORMA)
Fifty-two Weeks Ended December 30, 1997 Compared to Fifty-three Weeks Ended
December 31, 1996
Net sales increased $3,713,000 (25.0%) for the fifty-two weeks ended
December 30, 1997 to $18,557,000 from $14,844,000 in the fifty-three weeks ended
December 31, 1996, which is principally attributable to $2,327,000 in sales from
the five new locations opened since December 1996. Same store sales increased
2.7% for the fifty-two weeks ended December 30, 1997.
Costs of sales, primarily food and beverages, increased $735,000 (17.6%)
for the fifty-two weeks ended December 30, 1997 to $4,912,000 from $4,177,000 in
the fifty-three weeks ended December 31, 1996, and such expenses decreased as a
percentage of sales from 28.1% to 26.5%. This decrease is attributable to
improved control procedures and a new menu implemented during the first quarter
of 1997.
Restaurant operating expenses for the fifty-two weeks ended December 30,
1997 increased $1,534,000 (22.7%) to $8,281,000 from $6,747,000 in the
fifty-three weeks ended December 31, 1996, and such expenses decreased as a
percentage of net sales to 44.6% from 45.4%. Substantially all of this
improvement is attributable to improved labor controls at the locations.
Depreciation and amortization increased $197,000 (23.0%) for the fifty-two
weeks ended December 30, 1997 to $1,052,000 from $855,000 in the fifty-three
weeks ended December 31, 1996, principally reflecting the depreciation relating
to the opening of five new restaurants since December 1996.
General and administrative expenses increased $1,098,000 (120.0%) for the
fifty-two weeks ended December 30, 1997 to $2,014,000 from $915,000 in the
fifty-three weeks ended December 31, 1996, and such expenses increased as a
percentage of net sales from 6.2% to 10.8%. The increase reflects the management
fee paid to Coulter Enterprises prior to the initial public offering of the
Company, which commenced on July 17, 1997 (the "Initial Public Offering"), and
the additional corporate infrastructure added during the first quarter of 1997
to enable the Company to rapidly develop additional units.
Other income, principally interest, increased $97,000 (307.9%) for the
fifty-two weeks ended December 30, 1997 to $129,000 from $32,000 in the
fifty-three weeks ended December 31, 1996. This increase was a result of
interest earned from the investment of the net proceeds of the Initial Public
Offering.
Interest expense decreased $188,000 for the fifty-two weeks ended December
30, 1997 to $499,000 from $687,000 in the fifty-three weeks ended December 31,
1996. All debt was repaid in July 1997 from the net proceeds of the Initial
Public Offering.
-16-
The effective pro forma income tax rate for the fifty-two weeks ended
December 30, 1997 was 35.9% and the effective pro forma income tax rate for the
fifty-two weeks ended December 31, 1996 was 37.5%. This decrease was primarily
due to the impact of tax exempt interest income earned during 1997.
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased $2,888,000 (110.3%) in 1996 compared to 1995. Store
operating weeks increased by 48.6% in 1996 compared to 1995 due to the opening
of the third unit. Annualized average weekly sales per location increased by
43.8% in 1996 compared to 1995 due to the higher sales at the Dallas (Midway),
Texas location compared with the two previously opened locations.
Cost of sales increased $897,000 (108.8%) in 1996 compared to 1995. Such
expenses declined insignificantly as a percentage of net sales to 31.3% in 1996
from 31.5% in 1995.
Operating expenses increased $1,368,000 (98.4%) in 1996 compared to 1995.
Such expenses declined as a percentage of net sales to 50.1% in 1996 from 53.1%
in 1995, primarily due to an improvement in labor expense resulting from the
higher average sales per location and the fixed elements of management costs and
certain operating labor.
General and administrative expenses increased $227,000 (329.0%) in 1996
compared to 1995. As a percentage of net sales, such expenses increased to 5.4%
in 1996 from 2.6% in 1995, primarily due to the addition of personnel and
related costs.
Depreciation and amortization increased $86,000 (38.4%) in 1996 compared to
1995 but declined as a percentage of net sales to 5.6% in 1996 from 8.6% in
1995. Depreciation and amortization of operating assets increased $107,000 in
1996 compared to 1995 primarily due to the increase in store operating weeks for
new locations while amortization of pre-opening costs declined by $59,000 in
1996 compared to 1995 due to the timing of the opening of new locations and
lower pre-opening costs for the third location compared to the two previously
opened locations.
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
As a result of the revenues associated with each new location, the
timing of new unit openings will result in significant fluctuations in quarterly
results. The Company expects seasonality to be a factor in the operation or
results of its business in the future due to expected lower second and third
quarter revenues due to the summer season. The primary inflationary factors
affecting the Company's operations include food, liquor and labor costs.
Although a large number of the Company's restaurant personnel are paid at the
federal minimum wage level, the majority of personnel are tipped employees, and
therefore, recent as well as future minimum wage changes will have very little
effect on labor costs. As costs of food and labor have increased, the Company
has historically been able to offset these increases through economies of scale
and improved operating procedures. To date, inflation has not had a material
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES
The Company was formed on February 7, 1997 and, pursuant to the Exchange on
February 20, 1997, the Company became the owner of the eight then-existing
Bailey's locations and three
-17-
then-existing Fox & Hound locations. Prior to the Exchange, Bailey's financed
its expansion primarily with loans from stockholders and loans from banks. Prior
to the Exchange, Fox & Hound financed its expansion primarily with partners'
equity contributions and loans from related parties.
As is customary in the restaurant industry, prior to the Initial Public
Offering the Company had operated with negative working capital. The Company
does not have significant receivables or inventory and receives trade credit
based upon negotiated terms in purchasing food and supplies. Because funds
available from cash sales are not needed immediately to pay for food and
supplies, or to finance inventory, they may be considered as a source of
financing for noncurrent capital expenditures.
Immediately following the Initial Public Offering, the Company repaid
outstanding indebtedness to Intrust Bank, N.A., Wichita, in the principal amount
of approximately $10.8 million out of a total credit line of $12.0 million
available to the Company. This outstanding indebtedness was incurred to
refinance the debt of the acquired entities in the Exchange of approximately
$9.1 million and to finance the stockholder dividend payment to the former
stockholders of Bailey's of approximately $1.7 million. While the Company
believes it can arrange a new working capital line, no definitive agreement has
been entered into for a new line of credit facility and there is no assurance
that the Company will be able to establish such facility.
Cash flows from operations were $1,824,000 and purchases of property and
equipment were $6,358,000 for the period from February 7, 1997 (inception)
through December 30, 1997.
The Company intends to open twenty locations in 1998. One unit was opened
in January 1998, two additional units are currently under construction, and
leases have been signed on four additional sites. The Company expects to expend
approximately $22.0 million to open new locations over the next 12 months.
The Company believes the proceeds from the Initial Public Offering, its
cash flow from operations and funds anticipated to be available from a credit
facility will be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 12 months. There can be no
assurance, however, that changes in the Company's operating plans, the
unavailability of a credit facility, the acceleration of the Company's expansion
plans, lower than anticipated revenues, increased expenses, potential
acquisitions or other events will not cause the Company to seek additional
financing sooner than anticipated, prevent the Company from achieving the goals
of its expansion strategy or prevent any newly opened locations from operating
profitably. There can be no assurance that additional financing will be
available on acceptable terms or at all.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1936, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, and any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included in this report
will prove to be accurate. Factors that could cause actual results to differ
from the results discussed in the forward-looking statements include, but are
not limited to, potential increases in food and liquor costs, competition and
the inability to find suitable new locations. In light of the significant
uncertainties inherent in the forward-looking statements included
-18-
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements listed in the accompanying Index
to Financial Statements on Page F-1 herein. Information required for financial
schedules under Regulation S-X is either not applicable or is included in the
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
-19-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears on page F-1
herein.
(2) Exhibits
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
**2.1 Form of Stock for Stock Exchange Agreement between
the Registrant, the Shareholders of F&H Restaurant
Corp., Fox & Hound, Inc., Fox & Hound II, Inc. and
Bailey's Sports Grille, Inc. and Certain Limited
Partners of N. Collins Enter- tainment, Ltd., 505
Entertainment, Ltd., Midway Entertainment, Ltd.
and F&H Dallas, L.P., dated February 20, 1997.
**3.1 Certificate of Incorporation of the Registrant.
**3.1.1 Amendment to the Certificate of Incorporation of
the Registrant.
**3.2 By-laws of the Registrant.
**4.1 Specimen Certificate of the Registrant's Common
Stock.
**10.1 Form of Services Agreement between the Registrant
and Coulter Enterprises, Inc.
*10.1.1 Amendment to Services Agreement between the
Registrant and Coulter Enterprises, Inc., dated
February 8, 1998.
**10.2 Form of Employment Agreement between the
Registrant and Gary M. Judd.
**10.3 Form of Employment Agreement between the
Registrant and James K. Zielke.
**10.4 Form of 1997 Incentive and Nonqualified Stock
Option Plan of the Registrant.
**10.5 Form of 1997 Directors' Stock Option Plan of the
Registrant.
**10.6 Form of Indemnification Agreement for officers and
directors of the Registrant.
-20-
**10.7 Confidentiality and Non-Competition Agreement
among F&H Dallas, L.P., Midway Entertainment,
Ltd., N. Collins Entertainment, Ltd., 505
Entertainment, Ltd. and Jamie B. Coulter, dated
December 6, 1996.
**10.8 Non-Competition, Confidentiality and
Non-Solicitation Agreement between the Registrant
and Dennis L. Thompson, dated February 20, 1997.
**10.9 Non-Competition, Confidentiality and
Non-Solicitation Agreement between the Registrant
and Thomas A. Hager, dated February 20, 1997.
**10.10 Lease by and between Real Alchemy, I, L.P. and
Midway Entertainment, Ltd., dated June 1, 1995.
**10.11 First Amendment to Lease by and between Real
Alchemy I, L.P. and Midway Entertainment, Ltd.,
dated December 6, 1996.
**10.12 Amendment to Lease by and between Real Alchemy I,
L.P. and Midway Entertainment, Ltd., dated
December 6, 1996.
**10.13 Lease by and between 505 Center, L.P. and 505
Entertainment, Ltd., dated January 31, 1994.
**10.14 Amendment to Lease by and between 505 Center, L.P.
and 505 Entertainment, Ltd., dated December 6,
1996.
*21.1 Subidiaries of Registrant.
*24.1 Powers of Attorney (included on the signature page
of this Form 10-K).
*27.1 Financial Data Schedule.
- ----------------------
(b) Reports on Form 8-K filed in the fourth quarter of 1997: none
* Filed herewith.
** Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Commission File No. 333-23343).
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on this 27th day of March 1998.
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Registrant)
/s/ James K. Zielke
-----------------------------------------------
James K. Zielke
Chief Financial Officer,
Treasurer and Secretary
(principal accounting officer)
-22-
SIGNATORIES
Know all men by these presents, that each person whose signature appears below
hereby constitutes and appoints Jamie B. Coulter and James K. Zielke his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form 10-K and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jamie B. Coulter
- ----------------------------- Chairman of the Board March 27, 1998
Jamie B. Coulter
/s/ Gary M. Judd
- ----------------------------- Chief Executive Officer, March 27, 1998
Gary M. Judd President, Chief Operating
Officer and Director
(principal executive officer)
/s/ James K. Zielke
- ----------------------------- Chief Financial Officer, March 27, 1998
James K. Zielke Treasurer and Secretary
(principal accounting officer)
/s/ Dennis L. Thompson
- ---------------------------- Director March 27, 1998
Dennis L. Thompson
/s/ Thomas A. Hager
- ---------------------------- Director March 27, 1998
Thomas A. Hager
-23-
/s/ Steven Wolosky
- --------------------------- Director March 27, 1998
Steven Wolosky
/s/ William F. Orthwein
- --------------------------- Director March 27, 1998
William F. Orthwein
/s/ Christopher Goldsbury
- --------------------------- Director March 27, 1998
Christopher Goldsbury
-24-
TOTAL ENTERTAINMENT RESTAURANT CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
TOTAL ENTERTAINMENT RESTAURANT CORP.
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets as of December 30, 1997
and February 7, 1997......................................................F-3
Consolidated Statement of Income for the period from February 7, 1997
(Inception) through December 30, 1997.....................................F-5
Consolidated Statement of Stockholders' Equity for the period
from February 7, 1997 (Inception) through December 30, 1997...............F-6
Consolidated Statement of Cash Flows for the period from
February 7, 1997 (Inception) through December 30, 1997...................F-7
Notes to Consolidated Financial Statements..................................F-9
F & H RESTAURANT CORP.
Report of Independent Auditors..............................................F-19
Consolidated Balance Sheet as of December 31, 1996..........................F-20
Consolidated Statements of Income for the period from January 1, 1997 through
February 20, 1997 and for the period from November 4, 1996 (Inception)
through December 31, 1996.................................................F-22
Consolidated Statements of Stockholders' Equity for the period from
January 1, 1997 through February 20, 1997 and for the period from
November 4, 1996 (Inception) through December 31, 1996....................F-23
Consolidated Statements of Cash Flows for the period from
January 1, 1997 through February 20, 1997 and for the period
from November 4, 1996 (Inception) through December 31, 1996...............F-24
Notes to Consolidated Financial Statements..................................F-25
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
Report of Independent Auditors..............................................F-31
Combined Balance Sheet as of December 31, 1996..............................F-32
Combined Statements of Income for the Years Ended December 31, 1996 and
1995......................................................................F-34
Combined Statements of Partners' Equity for the Years
Ended December 31, 1996 and 1995.........................................F-35
Combined Statements of Cash Flows for the Years Ended December 31, 1996
and 1995.................................................................F-36
Notes to Combined Financial Statements......................................F-37
All financial statement schedules have been omitted since the required
information is not present.
F-1
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Total Entertainment Restaurant Corp.
We have audited the accompanying consolidated balance sheets of Total
Entertainment Restaurant Corp. as of December 30, 1997 and February 7, 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for the period from February 7, 1997 (inception) through December 30,
1997. 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 consolidated financial position of Total
Entertainment Restaurant Corp. at December 30, 1997 and February 7, 1997, and
the consolidated results of its operations and its cash flows for the period
from February 7, 1997 (inception) through December 30, 1997, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
March 25, 1998
Wichita, Kansas
F-2
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, FEBRUARY 7,
1997 1997
---------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,220,598 $1,000
Marketable securities, available for sale 3,315,056 -
Inventories 396,758 -
Preopening costs, net 386,402 -
Deferred income taxes 156,571 -
Prepaid expenses 350,324 -
--------------------------------------------
Total current assets 5,825,709 1,000
Property and equipment:
Land 600,000 -
Buildings 655,795 -
Leasehold improvements 6,018,499 -
Equipment 4,980,541 -
Furniture and fixtures 1,225,981 -
--------------------------------------------
13,480,816
Less accumulated depreciation and amortization 898,735 -
--------------------------------------------
12,582,081
Other assets:
Goodwill, net of accumulated amortization of $245,471 4,637,784 -
Other assets 178,695 -
--------------------------------------------
Total other assets 4,816,479 -
--------------------------------------------
Total assets $23,224,269 $1,000
============================================
F-3
DECEMBER 30, FEBRUARY 7,
1997 1997
----------------------------------------------
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $ 799,119 $ -
Accounts payable - affiliates 24,646 -
Accrued payroll 154,693 -
Other accrued liabilities 268,290 -
------------------------------------------
Total current liabilities 1,246,748 -
Deferred income taxes 312,450 -
Commitments - -
Stockholders' equity:
Preferred stock, $.10 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 20,000,000 shares
authorized; 10,415,000 shares issued and outstanding
(8,000 at February 7, 1997) 104,150 80
Additional paid-in capital 20,580,764 920
Retained earnings 980,157 -
------------------------------------------
Total stockholders' equity 21,665,071 1,000
------------------------------------------
Total liabilities and stockholders' equity $23,224,269 $1,000
==========================================
See notes to consolidated financial statements
F-4
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM
FEBRUARY 7, 1997
(INCEPTION) THROUGH
DECEMBER 30,
1997
----------------------
Sales:
Food and beverage $13,509,874
Entertainment and other 2,652,783
-----------------
Total net sales 16,162,657
Cost and expenses:
Cost of sales 4,287,185
Entertainment and restaurant operating expenses 7,141,800
Depreciation and amortization 939,160
-----------------
Entertainment and restaurant costs and expenses 12,368,145
-----------------
Entertainment and restaurant operating income 3,794,512
General and administrative expenses:
Related parties 337,140
Other 1,456,684
Goodwill amortization 209,539
-----------------
Income from operations 1,791,149
Other income (expense):
Other income (principally interest income) 129,011
Interest expense:
Related parties (27,315)
Other (367,960)
------------------
Income before provision for income taxes 1,524,885
Provision for income taxes 544,728
------------------
Net income $ 980,157
==================
Basic and diluted earnings per share $ 0.11
==================
See notes to consolidated financial statements.
F-5
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------------------ ADDITIONAL
PAID-IN RETAINED
NUMBER AMOUNT CAPITAL EARNINGS TOTAL
-------------------------------------------------------------------------------------------
Balance at February 7, 1997
(inception) 8,000 $ 80 $ 920 $ - $ 1,000
Common stock canceled (8,000) (80) 80 - -
Shares issued to acquire restaurant
companies 8,000,000 80,000 1,449,390 - 1,529,390
Shares issued - initial public
offering 2,415,000 24,150 19,130,374 - 19,154,524
Net income - - - 980,157 980,157
===========================================================================================
Balance at December 30, 1997
10,415,000 $104,150 $20,580,764 $980,157 $21,665,071
===========================================================================================
See notes to consolidated financial statements.
F-6
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM
FEBRUARY 7, 1997
(INCEPTION) THROUGH
DECEMBER 30,
1997
------------------------
Operating Activities
Net income $ 980,157
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 638,598
Amortization 510,101
Deferred taxes 77,284
Net change in operating assets and liabilities:
Accounts receivable - affiliate 20,774
Accounts receivable 56,702
Inventories (122,644)
Preopening costs (399,640)
Prepaid expenses (150,307)
Other assets (236,649)
Accounts payable 653,906
Accounts payable - affiliates (104,404)
Accrued liabilities (100,323)
---------------
Net cash provided by operating activities 1,823,555
Investing Activities
Purchases of property and equipment (6,358,118)
Cash of companies acquired in Exchange 720,029
Purchase of marketable securities (7,465,056)
Proceeds from sale of marketable securities 4,150,000
---------------
Net cash used in investing activities (8,953,145)
Financing Activities
Proceeds from revolving note payable to bank 10,835,695
Payment of revolving note payable to bank (10,835,695)
Payment of dividends payable to certain predecessor stockholders
(1,675,332)
Payment of notes payable to affiliates (233,000)
Payment of notes payable to banks (4,366,933)
Payment of notes payable to stockholders (4,530,071)
Net proceeds from issuance of common stock 19,154,524
---------------
Net cash provided by financing activities 8,349,188
Net increase in cash and cash equivalents 1,219,598
Cash and cash equivalents at beginning of period 1,000
==============
Cash and cash equivalents at end of period $ 1,220,598
==============
F-7
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $458,971
Cash paid for income taxes 547,812
See notes to consolidated financial statements.
F-8
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Total Entertainment Restaurant Corp. (the "Company") was organized as a Delaware
corporation on February 7, 1997, for the purpose of developing entertainment
restaurant locations. Effective February 20, 1997, the Company entered into
simultaneous stock exchange transactions and issued an aggregate of 8,000,000
shares of its common stock for all the common stock of Bailey's Sports Grille,
Inc., all the common stock of F&H Restaurant Corp. and the remaining 25%
minority interest in Fox & Hound Entertainment and Restaurant Group
(collectively, the "Exchange"). The Exchange among the Company and F&H
Restaurant Corp. was accounted for as a business combination using the purchase
method of accounting in accordance with Accounting Principles Board (APB)
Opinion No. 16. For accounting purposes, F&H Restaurant Corp. was deemed to be
the acquiring corporation since, on completion of the Exchange, its former
stockholders controlled 50% of the Company. Accordingly, the assets and
liabilities of F&H Restaurant Corp. were recorded by the Company on the
acquisition date using their historical amounts.
The Exchange among the Company and the owners of the remaining 25% of Fox &
Hound Entertainment and Restaurant Group and the owners of Bailey's Sports
Grille, Inc. was also accounted for using the purchase method of accounting in
accordance with APB No. 16. The operations of the Company effectively commenced
on February 20, 1997, and include the operating results of the companies
acquired in the Exchange from that date. The acquired assets and liabilities
assumed have been recorded at their estimated fair values at the Exchange date,
with exception of F&H Restaurant Corp. which was recorded at historical costs as
described previously. The Exchange resulted in goodwill of approximately
$4,740,000, including approximately $3,448,000 previously recorded by F&H
Restaurant Corp. in its acquisition of its 75% partnership interest in the Fox &
Hound Entertainment and Restaurant Group. The purchase price allocation to the
assets and liabilities acquired in the Exchange is summarized as follows:
Assets acquired:
Current assets $ 1,498,276
Property and equipment 7,039,719
Goodwill and other assets 4,789,911
---------------
13,327,906
Less assumed liabilities:
Current liabilities 822,428
Dividends payable to certain predecessor
stockholders 1,675,332
Notes payable to stockholder 4,530,071
Notes payable to affiliates 233,000
Notes payable to banks 4,366,933
Deferred taxes 170,752
===============
Net assets acquired $ 1,529,390
===============
F-9
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED)
Upon formation, the Company issued 8,000 shares of common stock at $0.125 per
share. In connection with the Exchange, the shares originally issued were
canceled and 100,000 new shares of common stock were issued. In February 1997,
the Company's Board of Directors approved a 79 for 1 stock dividend. All share,
per share and stock option data included in the accompanying financial
statements and notes thereto have been restated to reflect the stock dividend.
The following supplemental proforma information presents the combined results of
operations of the Company as though the Exchange had occurred at January 1,
1997. The proforma information is unaudited and not necessarily indicative of
the results of the Company had the Exchange occurred at such date.
Revenues $18,557,115
Net income $ 1,081,192
Basic earnings per share $0.12
The Company owns and operates 17 entertainment restaurant locations under the
Fox & Hound English Pub & Grille (Fox & Hound) and Bailey's Sports Grille
(Bailey's) brand names. The Company's entertainment restaurant locations combine
a comfortable and inviting social gathering place, full menu and full service
bar, state-of-the-art audio and video systems for sports entertainment,
traditional games of skill such as pocket billiards and late-night dining
alternatives in a single location. The Company's entertainment restaurant
locations appeal to a broad range of guests who can participate in one or more
aspects of the Company's total entertainment restaurant experience. Fox & Hound
and Bailey's encompass the Company's multi-dimensional concept and serve both
larger urban and smaller regional markets. The Company owns and operates seven
Fox & Hounds and ten Bailey's in Alabama, Illinois, Indiana, Nebraska, North
Carolina, South Carolina, Tennessee and Texas.
The company has a 52/53 week fiscal year ending on the last Tuesday in December.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Total
Entertainment Restaurant Corp. and its wholly-owned subsidiaries. All
significant intercompany accounts have been eliminated.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on hand,
demand deposits with banks or financial institutions, and short-term investments
with maturities of three months
F-10
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or less when purchased. Cash and cash equivalents are carried at cost which
approximates fair value.
o Concentration of Credit Risk
The Company's financial instruments exposed to credit risk consist primarily of
cash, short-term investments, and marketable securities. The Company places its
cash with high credit financial institutions and, at times, such cash may be in
excess of the Federal Depository insurance limit. The Company has cash
equivalents and short-term investments in investment grade securities with
municipal, state, and U.S. government agencies of approximately $5,284,000.
Marketable securities
The company's marketable securities represent debt securities classified as
available-for-sale. These securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
shareholders' equity. As of December 30, 1997, the fair value of these
securities approximated cost. Accordingly, no unrealized gains or losses have
been recorded. Interest on these securities is included in other income.
o Inventories
Inventories consist of food and beverages and are stated at the lower of cost
(first-in, first-out) or market.
Preopening Costs
Labor costs and costs of hiring and training personnel and certain other costs
relating to opening new restaurants are capitalized until the restaurant is open
and then amortized over the subsequent 12 months. Accumulated amortization
related to stores opened during 1997 was approximately $137,023 at December 30,
1997.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and renewals
which do not enhance the value of or increase the life of the assets are
expensed as incurred.
Buildings and leasehold improvements are amortized on the straight-line method
over the lesser of the life of the lease, including renewal options, or the
estimated useful lives of the assets which range from 5 to 30 years. Equipment
and furniture and fixtures are depreciated using the straight-line method over
the estimated useful lives of the assets which range from five to seven years.
F-11
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill represents the excess of the cost of companies acquired over the fair
value of the net assets at the date of acquisition and is being amortized over
20 years. The carrying value of goodwill will be reviewed if the facts and
circumstances suggest it may be impaired.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the period
ended December 30, 1997, was $179,737.
Accounting for Stock-Based Compensation
In accordance with APB Opinion No. 25, the Company uses the intrinsic
value-based method for measuring stock-based compensation cost which measures
compensation cost as the excess, if any, of the quoted market price of Company's
common stock at the grant date over the amount the employee must pay for the
stock. The Company's policy is to grant stock options at fair value at the date
of grant. Proceeds from the exercise of common stock options issued to officers,
directors and key employees under the Company's stock option plans are credited
to common stock to the extent of par value and to additional paid-in capital for
the excess. Required pro forma disclosures of compensation expense determined
under the fair value method of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, are presented in Note
6.
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
F-12
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported in the financial statements and accompanying notes. Actual results
could differ from estimates.
o Earnings per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share. Statement 128 replaced primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, where
appropriate, restated to conform to the Statement 128 requirements.
o Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income,
Statement No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. Statement
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. Statement No. 131 establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial Statement disclosures for prior periods are required to be restated.
The Company has not yet determined the impact of adoption of these two
standards; however, the adoption of these standards will have no impact on the
Company's consolidated results of operations, financial position or cash flows.
In February 1998, the FASB cleared Accounting Standards Executive Committee's
(AcSEC) Statement of Position (SOP), Reporting for the Costs of Start-Up
Activities, for final issuance subject to certain editorial changes. AcSEC plans
to issue the SOP by June of 1998. The SOP will require entities upon adoption to
write off as a cumulative effect of a change in accounting principle any
previously capitalized preopening costs. On a prospective basis, this SOP will
require start-up costs to be expensed as incurred. The SOP will be effective for
most entities for fiscal years beginning after December 15, 1998. The SOP is
effective fiscal year 1999. If the Company adopted the SOP for the year ended
December 30, 1997, the impact on entertainment and restaurant operating expenses
would be $386,402.
F-13
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
3. INITIAL PUBLIC OFFERING
On July 17, 1997, the Company completed an initial public offering of 2,415,000
shares of its common stock at an offering price of $9.00 per share. Total net
proceeds to the Company from the offering, after deducting commissions and
offering costs were $19,154,524.
4. PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preference
and the number of shares constituting any series or the designation of such
series.
5. REVOLVING NOTE PAYABLE
On February 24, 1997, the Company borrowed approximately $10,800,000 under a
$12,000,000 revolving line of credit with Intrust Bank, N.A., Wichita, Kansas.
The proceeds from the borrowing were used to retire certain indebtedness assumed
in connection with the Exchange, including all notes payable to affiliates,
notes payable to banks and dividends payable to certain predecessor stockholders
representing substantially all of the undistributed S Corporation earnings
attributable to such stockholders prior to the Exchange. The line of credit
required monthly payments of interest and was retired upon completion of the
Company's initial public offering in July 1997.
6. STOCK OPTIONS
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, Accounting for Stock-Based Compensation,
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
o 1997 Incentive and Nonqualified Stock Option Plan
In March 1997, the Board of Directors adopted a stock option plan
providing for incentive and nonqualified stock options pursuant to
which up to 1,500,000 shares of common stock will be available for
issuance. The Plan covers the Chairman of the Board, certain officers
and key employees. Options granted have a vesting period of five years
and a life of ten years.
F-14
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
6. STOCK OPTIONS (CONTINUED)
o Directors' Stock Option Plan
In March 1997, the Board of Directors adopted a stock option plan
providing for nondiscretionary grants to nonemployee directors pursuant
to which up to 150,000 shares of common stock will be available for
issuance.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires the information be determined as if the
Company has accounted for its employee stock options granted under the fair
value of that Statement. The fair value method for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 5.0%; no
dividend yields; volatility factor of .344; and a weighted-average expected life
of the option of 5 years.
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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information for 1997 follows:
Pro forma net income $838,152
============
Pro forma earnings per share:
Basic $0.09
============
Diluted $0.09
============
F-15
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
6. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity and related information for the
period ended December 30, 1997, follows:
WEIGHTED
AVERAGE
EXERCISE
PRICE OPTIONS
----- -------
Outstanding beginning of period $ - -
Granted 8.89 829,414
Exercised - -
Canceled (9.00) (16,668)
=============
Outstanding end of period $ 8.87 812,746
=============
As of December 30, 1997, the Company's outstanding options have a
weighted-average exercise price of $8.87 and a weighted average remaining
contract life of 10 years. There were no options exercisable at December 30,
1997.
7. RELATED PARTY TRANSACTIONS
The Company utilizes an affiliate to provide certain accounting, computer, and
administrative services. The Company incurred fees of $337,140 related to these
services for the period ended December 30, 1997.
Additionally, the Company paid interest to a certain stockholder in the amount
of $27,315 related to a note payable acquired in the Exchange.
8. LEASES
The Company leases many of its facilities under noncancelable operating leases
having terms expiring between 1998 and 2007. The leases have renewal clauses of
3 to 5 years, exercisable at the option of the lessee. In addition, certain
leases contain escalation clauses based on a fixed percentage increase and
provisions for contingent rentals based on a percentage of gross revenues, as
defined by the lease. Total rental expense for the period ended December 30,
1997, was $846,330, of which $229,218 was paid to a related party. There were no
contingent rentals during 1997.
As of December 30, 1997, future minimum lease payments under noncancelable
operating leases with initial terms in excess of one year for each of the next
five years and thereafter total $4,420,195 (1998 - $1,099,437; 1999 - $955,269;
2000 - $801,180; 2001 - $582,520; 2002 - $477,592; and thereafter - $504,197).
F-16
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
9. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated by dividing net income of
$980,157 by the weighted average shares outstanding of 9,182,000.
Options to purchase 812,746 shares of common stock at a weighted average price
of $8.87 per share were outstanding during 1997 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
10. INCOME TAXES
The Company's provision for income taxes consists of the following:
Current:
Federal $378,051
State 89,393
-----------
Total Current 467,444
Deferred:
Federal 64,165
State 13,119
-----------
Total Deferred 77,284
===========
Total income tax expense $544,728
===========
The income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities at December 30, 1997, are
as follows:
Deferred tax assets:
Preopening and organization costs $149,151
Vacation 16,456
Other 18,034
Total deferred tax assets --------
183,641
---------
Deferred tax liabilities:
Property and equipment 235,587
Goodwill 103,933
---------
Total deferred tax liabilities 339,520
=========
Net deferred tax liabilities $155,879
=========
F-17
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1997
10. INCOME TAXES (CONTINUED)
A reconciliation between the reported provision for income taxes and tax
determined by applying the applicable U.S. Federal Statutory income tax rate to
income before taxes follows:
AMOUNT RATE
------ ----
Income tax expense at federal statutory rate $518,460 34.0%
State income taxes, net of federal benefit 65,418 4.3
Tax credits (59,151) (3.9)
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates 20,001 1.3
========== =========
Actual income tax expense $544,728 35.7%
========== =========
11. MARKETABLE SECURITIES
The Company's marketable securities (primarily bonds and commercial paper from
municipalities) are classified as available-for-sale securities. As of December
30, 1997, the cost and estimated fair market value of these securities was
$3,315,056. There have been no realized or unrealized gains and losses recorded
on these securities for 1997. Interest income during 1997 was $115,806. All of
the securities have a maturity date of less than one year.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for all financial
instruments, including cash and cash equivalents and debt instruments,
approximate their fair value.
13. COMMITMENTS
As of December 30, 1997, the Company has entered into operating lease
agreements, subject to certain contingencies, on two additional sites. These
leases generally have initial lease terms of five years and the aggregate future
minimum lease payments total approximately $1,412,000.
Subsequent to December 30, 1997, the Company has entered into operating lease
agreements, subject to certain contingencies, on four additional sites with
aggregate future minimum lease payments totaling $2,142,000.
F-18
REPORT OF INDEPENDENT AUDITORS
The Stockholders
F & H Restaurant Corp.
We have audited the accompanying consolidated balance sheet of F & H Restaurant
Corp. as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the period from January 1, 1997
through February 20, 1997 and the period from November 4, 1996 (inception)
through December 31, 1996. 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 consolidated financial position of F & H Restaurant
Corp. at December 31, 1996, and the consolidated results of its operations and
its cash flows for the period from January 1, 1997 through February 20, 1997 and
for the period from November 4, 1996 (inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
March 25, 1998
Wichita, Kansas
F-19
F & H RESTAURANT CORP.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1996
-------------
Assets
Current assets:
Cash and cash equivalents $ 254,463
Accounts receivable - affiliates 28,343
Accounts receivable 5,003
Inventories 92,455
Deferred taxes 47,289
Other current assets 25,758
--------------
Total current assets 453,311
Property and equipment:
Leasehold improvements 1,150,312
Equipment 821,295
Furniture and fixtures 151,416
--------------
2,123,023
Less accumulated depreciation and amortization 19,302
--------------
2,103,721
Other assets:
Goodwill, net of accumulated amortization of $11,776 3,436,290
Other assets 15,760
--------------
Total other assets 3,452,050
--------------
Total assets $6,009,082
==============
F-20
DECEMBER 31, 1996
-----------------
Liabilities and stockholders' equity:
Current liabilities
Note payable to stockholder $1,500,000
Notes payable to affiliates 233,000
Amounts due to sellers 3,030,071
Accounts payable 66,363
Accounts payable - affiliates 15,128
Accrued liabilities:
Sales tax payable 70,057
Accrued payroll 69,298
Insurance 29,765
Other 61,672
Current maturities - long-term debt 463,465
--------------
Total current liabilities 5,538,819
Deferred income taxes 67,057
Minority interest 390,214
Commitments -
Stockholders' equity
Common stock, no par value; 1,000 shares authorized,
issued and outstanding
1,000
Retained earnings 11,992
--------------
Total stockholders' equity 12,992
--------------
Total liabilities and stockholders' equity $6,009,082
==============
See notes to consolidated financial statements.
F-21
F & H RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF INCOME
PERIOD FROM PERIOD FROM NOVEMBER 4,
JANUARY 1, 1997 THROUGH 1996 (INCEPTION) THROUGH
FEBRUARY 20, 1997 DECEMBER 31, 1996
-------------------------------------------------
Net sales $858,312 $384,522
Cost and expenses:
Cost of sales 245,371 115,725
Entertainment and restaurant operating expenses 392,967 185,430
Depreciation and amortization 58,688 27,179
-----------------------------------------
Entertainment and restaurant costs and expenses 697,026 328,334
-----------------------------------------
Entertainment and restaurant operating income 161,286 56,188
General and administrative expenses:
Related parties 30,187 15,797
Other 5,647 4,337
-----------------------------------------
Income from operations 125,452 36,054
Other income (expense):
Other income 64 4,775
Interest expense:
Related parties (63,250) (12,256)
Other - (3,427)
-----------------------------------------
Income before income taxes and minority interest 62,266 25,146
Provision for income taxes 10,440 3,181
Minority interest 34,428 9,973
=========================================
Net income $ 17,398 $ 11,992
=========================================
See notes to consolidated financial statements.
F-22
F & H RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
----------------------------------------
RETAINED
NUMBER AMOUNT EARNINGS TOTAL
-------------------------------------------------------------------------
Balance at November 4, 1996
(inception) - $ - $ - $ -
Issuance of common stock 1,000 1,000 - 1,000
Net income - - 11,992 11,992
-------------------------------------------------------------------------
Balance at December 31, 1996 1,000 1,000 11,992 12,992
Net income - - 17,398 17,398
-------------------------------------------------------------------------
Balance at February 20, 1997 1,000 $1,000 $29,390 $30,390
===========================================================================
See notes to consolidated financial statements.
F-23
F & H RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM NOVEMBER 4,
JANUARY 1, 1997 THROUGH 1996 (INCEPTION) THROUGH
FEBRUARY 20, 1997 DECEMBER 31, 1996
---------------------------------------------------
Operating Activities
Net income $ 17,398 $ 11,992
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 58,688 31,156
Deferred taxes 7,199 1,809
Minority interest in income of subsidiaries 34,428 9,973
Net change in operating assets and liabilities:
Accounts receivable (21,767) 7,041
Inventories 5,695 (414)
Other current assets (47,505) 11,562
Other assets 11,192 -
Accounts payable 66,618 (20,926)
Accrued liabilities (59,205) 5,026
-----------------------------------------------
Net cash provided by operating activities 72,741 57,219
Investing Activities
Payment for purchase of interest in Fox & Hound
Entertainment and Restaurant Group,
net of cash acquired - (1,327,925)
Purchases of property and equipment - (7,517)
Proceeds from sale of property and equipment 2,963 -
Other - (1,000)
-----------------------------------------------
Net cash provided by (used in) investing activities 2,963 (1,336,442)
Financing Activities
Net proceeds from issuance of common stock - 1,000
Proceeds from notes payable - stockholder - 1,500,000
Payment of note receivable - partner - 42,322
Net proceeds from short term note payable to affiliate 5,232,515 -
Payment of notes payable - stockholder (1,500,000) -
Payment of notes payable - affiliates (233,000) -
Payment of amounts due to sellers (3,030,071) -
Payment of long-term debt (463,465) (9,636)
-----------------------------------------------
Net cash provided by financing activities 5,979 1,533,686
-----------------------------------------------
Net increase in cash and cash equivalents 81,683 254,463
Cash and cash equivalents at beginning of period 254,463 -
===============================================
Cash and cash equivalents at end of period $ 336,146 $ 254,463
===============================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 29,989 $ 11,628
See notes to consolidated financial statements.
F-24
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ACQUISITION
F&H Restaurant Corp. (FHRC) was organized as a Delaware corporation on November
4, 1996, for the purpose of acquiring a 75% partnership interest in the Fox &
Hound Entertainment and Restaurant Group (FHERG). FHERG owned and operated three
entertainment restaurant locations in the state of Texas under the name of "Fox
& Hound English Pub and Grille." The acquisition was completed on December 6,
1996; thus, the accompanying consolidated financial statements as of December
31, 1996 and for the period from November 4, 1996 through December 31, 1996
include 25 days of operations of FHERG.
The acquisition was financed by a loan from a principal stockholder of FHRC in
the initial amount of $1,500,000 and an additional loan from such stockholder of
$3,030,071 in January 1997. The aggregate consideration paid by FHRC was
$4,568,995, consisting of $1,538,924 in cash and a promissory note for
$3,030,071 which was due January 2, 1997.
The acquisition was accounted for as a purchase and, accordingly, the acquired
underlying assets and liabilities were recorded at their estimated fair values
at the date of acquisition. The acquisition resulted in goodwill of
approximately $3,448,000 which is being amortized over 20 years. The purchase
price allocation to the assets and liabilities acquired was as follows:
Assets acquired
Current assets $ 388,913
Property and equipment 2,115,506
Goodwill and other assets 3,504,158
------------
Total assets acquired 6,008,577
------------
Liabilities assumed
Current liabilities 520,191
Long-term debt (including current portion) 473,101
Other 66,049
------------
Total liabilities assumed 1,059,341
------------
Net assets acquired 4,949,236
Minority interest 380,241
============
Total purchase price allocated $4,568,995
============
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying financial statements include the accounts of FHRC and its
majority-owned subsidiaries. All significant intercompany accounts have been
eliminated.
F-25
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
FHRC considers cash and cash equivalents to include currency on hand, demand
deposits with banks or financial institutions, and short-term investments with
maturities of three months or less when purchased. Cash and cash equivalents are
carried at cost which approximates fair value.
Inventories
Inventories consist of food and beverages and are stated at the lower of cost
(first-in, first-out) or market.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and renewals
which do not enhance the value of or increase the life of the assets are
expensed as incurred.
Leasehold improvements are amortized on the straight-line method over the lesser
of the maximum life of the lease or 20 years, or the estimated useful lives of
the assets. Equipment and furniture and fixtures are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from five to seven years.
o Goodwill
Goodwill represents the excess of the acquisition cost of the 75% interest in
FHERG over the fair value of its net assets at the date of acquisition and is
being amortized on a straight-line method over 20 years. The carrying value of
goodwill will be reviewed if the facts and circumstances suggest that it may be
impaired.
o 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 estimates.
o Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Valuation allowances are established when necessary to reduce
F-26
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
deferred tax assets to the amounts expected to be realized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
3. NOTE PAYABLE - STOCKHOLDER
At December 31, 1996, FHRC had an outstanding note payable to a principal
stockholder for $1,500,000. This note was payable on demand and accrued interest
at the prime interest rate as published in the Wall Street Journal (8.25% at
December 31, 1996). In January of 1997, this note was increased by $3,030,071 to
pay the remaining amount due to sellers in the acquisition as described in Note
1. Subsequent to the Exchange Transaction (Note 9), this note was refinanced
with a note payable to Total Entertainment Restaurant Corp.
4. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates represents notes to certain partners of FHERG
totaling $233,000 at December 31, 1996. These notes were payable on demand and
accrued interest at 10%. Subsequent to the Exchange Transaction (Note 9), this
note was refinanced with a note payable to Total Entertainment Restaurant Corp.
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
Installment loan to bank, payable in varying monthly payments including
interest at the bank's base rate plus 2% (10.25% at December 31, 1996),
due September 1999, secured by leasehold improvements and restaurant
equipment with an approximate carrying value of $1,960,000 and a
guarantee from a general partner.
$110,058
Installment loan to bank payable in varying monthly payments including
interest at the bank's base rate plus 1.5% (11.25% at December 31,1996),
due September 2000, secured by leasehold improvements and restaurant
equipment with an approximate carrying value of $1,960,000 and a
guarantee from several partners
353,407
-------
Less current portion 463,465
463,465
--------
$ -
========
F-27
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (CONTINUED)
Subsequent to the acquisition of FHRC as described in Note 9, the installment
notes payable were refinanced with a note payable to Total Entertainment
Restaurant Corp. Accordingly, the installment notes payable have been classified
as current.
6. RELATED PARTY TRANSACTIONS
FHRC utilizes an affiliate to provide certain accounting, computer
administrative services and certain management services. FHRC incurred fees of
$30,187 and $15,797 related to such services for the periods ended February 20,
1997 and December 31, 1996, respectively.
7. LEASES
FHRC leases two entertainment restaurant locations from affiliates and another
from a third party. These leases are noncancelable operating leases having terms
expiring between 1999 and 2000. The leases have renewal clauses of 5 to 20
years, exercisable at the option of the lessee. FHRC also leases various office,
entertainment and restaurant equipment under noncancelable operating leases
having terms from one to three years. Total rental expense for the periods ended
February 20, 1997 and December 31, 1996, was $23,568 and $19,066, respectively,
including $20,838 and $17,786, respectively, involving related parties.
Remaining minimum lease payments under operating leases in effect at December
31, 1996, are as follows:
RELATED UNRELATED
FISCAL YEAR PARTIES PARTIES TOTAL
-------- ---------- -----
1997 $193,416 $36,132 $229,548
1998 178,416 36,132 214,548
1999 178,416 10,588 189,004
2000 163,548 - 163,548
F-28
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
PERIOD FROM PERIOD FROM
JANUARY 1, 1997 NOVEMBER 4, 1996
THROUGH THROUGH
FEBRUARY 20, 1997 DECEMBER 31, 1996
----------------- -----------------
Current:
Federal $ 3,109 $ 318
State 132 1,054
------------------------------------------
Total current 3,241 $1,372
Deferred:
Federal 6,393 1,206
State 806 603
------------------------------------------
Total deferred 7,199 1,809
==========================================
Total income tax expense $10,440 $3,181
==========================================
Significant components of FHRC's deferred tax assets and liabilities at December
31, 1996, are as follows:
Deferred tax assets:
Other assets $47,289
Deferred tax liabilities:
Property and equipment 889
Goodwill and other assets 66,168
--------
67,057
========
Net deferred tax liabilities $19,768
========
F-29
F & H RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The reconciliation of income tax expense computed at the U.S. federal statutory
rate to the actual income tax expense for the periods ended February 20, 1997
and December 31, 1996, respectively, is:
PERIOD FROM JANUARY 1, PERIOD FROM NOVEMBER
1997 THROUGH 4, 1996 THROUGH
FEBRUARY 20, 1997 DECEMBER 31, 1996
-------------------------------- ------------------------
AMOUNT RATE AMOUNT RATE
---------- ------ -------- -----
Income tax expense at federal statutory rate $ 9,465 34% $5,158 34%
State income taxes, net of federal benefit 1,194 4 1,077 4
Tax credits (2,366) (8) (2,581) (10)
Effect of graduated tax rates - - (1,386) (19)
Other 2,147 8 913 4
=========================================================
Actual income tax expense $ 10,440 38% $3,181 21%
=========================================================
9. EXCHANGE TRANSACTION
On February 20, 1997, the stockholders of FHRC completed an Exchange Transaction
whereby they exchanged all of their interests in FHRC's common stock for common
stock of Total Entertainment Restaurant Corp. Subsequent to the acquisition of
FHRC, the long-term installment note payable of $463,465, the note payable to a
stockholder of $4,530,071 and the note payable to affiliates of $233,000 were
refinanced with a short-term loan from Total Entertainment Restaurant Corp. from
funds it obtained from a revolving note payable to a bank. The aggregate debt
related to this refinancing was $5,226,536.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for all financial instruments,
including cash and cash equivalents and debt instruments, approximates its fair
value.
F-30
REPORT OF INDEPENDENT AUDITORS
The Partners
Fox & Hound Entertainment and Restaurant Group
We have audited the accompanying combined balance sheet of Fox & Hound
Entertainment and Restaurant Group as of December 31, 1996, and the related
combined statements of income, partners' equity and cash flows for the two years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Fox & Hound Entertainment and Restaurant Group'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 combined financial position of Fox & Hound
Entertainment and Restaurant Group at December 31, 1996, and the combined
results of its operations and its cash flows for the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
March 10, 1997
Wichita, Kansas
F-31
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
COMBINED BALANCE SHEET
DECEMBER 31,
1996
------------
Assets
Current assets:
Cash and cash equivalents $ 252,229
Accounts receivable 5,003
Accounts receivable - affiliates 27,343
Inventories 92,455
Other current assets 25,758
-----------
Total current assets 402,788
Property and equipment:
Leasehold improvements 1,252,445
Equipment 1,048,438
Furniture and fixtures 186,232
----------
2,487,115
Less accumulated depreciation and amortization 383,394
----------
2,103,721
Other assets 13,720
----------
Total assets $2,520,229
==========
F-32
DECEMBER 31, 1996
-------------------
Liabilities and stockholders' equity:
Current liabilities
Notes payable - partners $ 233,000
Accounts payable 66,363
Accrued liabilities:
Sales and gross receipts tax payable 70,057
Payroll and related expenses 69,298
Insurance 29,765
Other 24,363
Current maturities - long-term debt 463,465
----------------
Total current liabilities 956,311
Commitments -
Partners' equity 1,563,918
----------------
Total liabilities and partners' equity $2,520,229
================
See notes to combined financial statements.
F-33
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1996 1995
------------------------------------
Net sales $5,506,697 $2,617,834
Cost and expenses:
Cost of sales 1,721,088 824,089
Entertainment and restaurant operating expenses 2,759,146 1,390,982
Depreciation and amortization 310,512 224,219
-----------------------------------
Entertainment and restaurant costs and expenses 4,790,746 2,439,290
-----------------------------------
Entertainment and restaurant operating income 715,951 178,544
General and administrative expenses:
Related parties 225,600 29,820
Other 70,416 39,524
-----------------------------------
Income from operations 419,935 109,200
Other income (expense):
Other income 23,370 15,384
Interest expense:
Related parties (18,945) (6,398)
Other (59,868) (22,388)
-----------------------------------
(55,443) (13,402)
-----------------------------------
Net income $ 364,492 $ 95,798
===================================
See notes to combined financial statements.
F-34
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
COMBINED STATEMENTS OF PARTNERS' EQUITY
NOTE TOTAL
RECEIVABLE PARTNERS' PARTNERS'
PARTNER EQUITY EQUITY
---------------------------------------------------------
Balance at December 31, 1994 $ - $1,012,028 $1,012,028
Contributed capital (50,000) 750,000 700,000
Partners' distributions - (248,400) (248,400)
Net income - 95,798 95,798
--------------------------------------------------------
Balance at December 31, 1995 (50,000) 1,609,426 1,559,426
Partners' distributions - (410,000) (410,000)
Proceeds from note receivable 50,000 - 50,000
Net income - 364,492 364,492
========================================================
Balance at December 31, 1996 $ - $1,563,918 $1,563,918
========================================================
See notes to combined financial statements.
F-35
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995
------------------------------------
Operating Activities
Net income $ 364,492 $ 95,798
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 310,512 224,219
Net change in operating assets and liabilities:
Accounts receivable 7,689 (31,295)
Inventories (16,737) (44,194)
Preopening costs - (87,818)
Other current assets 18,350 7,208
Accounts payable 62,016 (3,420)
Accrued liabilities 12,280 52,376
------------------------------------
Net cash provided by operating activities 758,602 212,874
Investing Activities
Purchases of property and equipment (371,212) (995,186)
Other 7,195 (5,971)
------------------------------------
Net cash used in investing activities (364,017) (1,001,157)
Financing Activities
Capital contributions 50,000 700,000
Proceeds from long-term debt - 450,000
Proceeds from note payable - partner 70,000 158,000
Payment of long-term debt (132,875) (46,367)
Partner distributions (410,000) (248,400)
------------------------------------
Net cash (used in) provided by financing activities (422,875) 1,013,233
Net (decrease) increase in cash and cash equivalents (28,290) 224,950
Cash and cash equivalents at beginning of period 280,519 55,569
====================================
Cash and cash equivalents at end of period $ 252,229 $ 280,519
====================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 79,118 $ 24,426
See notes to combined financial statements.
F-36
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business Description
The accompanying combined financial statements include the assets, liabilities
and operations associated with the limited partnerships listed below. The
combined partnerships are collectively referred to as Fox & Hound Entertainment
and Restaurant Group (FHERG). Pursuant to an acquisition agreement entered into
on December 6, 1996, a 75% partnership interest was purchased from each partner
by F&H Restaurant Corp. All such limited partnerships have been presented on a
combined basis because they have common partners and management and significant
interrelated activities. All significant intercompany transactions have been
eliminated.
Entity Store Opening Date
------ ------------------
Midway Entertainment, Ltd. November 30, 1995
505 Entertainment, Ltd. September 10, 1994
North Collins Entertainment, Ltd. August 29, 1994
Each of the above entities operates a stand-alone entertainment restaurant
location in the state of Texas under the name of "Fox & Hound English Pub and
Grille."
Significant Accounting Policies
o Cash and Cash Equivalents
FHERG considers cash and cash equivalents to include currency on hand, demand
deposits with banks or other financial institutions, and short-term investments
with maturities of three months or less when purchased. Cash and cash
equivalents are carried at cost which approximates fair value.
o Inventories
Inventories consist of food and beverages, and are stated at the lower of cost
(first-in, first-out) or market.
o Property and Equipment
Property and equipment are stated at cost. Maintenance, repairs and renewals
which do not enhance the value of or increase the life of the assets are
expensed as incurred.
Leasehold improvements are amortized on the straight-line method over the lesser
of the maximum life of the lease or 20 years, or the estimated useful lives of
the assets. Equipment and furniture and fixtures are depreciated using the
straight-line method over seven years, which is
F-37
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
ESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the estimated useful life of the assets. Depreciation expense incurred for the
years ended December 31, 1996 and 1995 was approximately $128,900 and $122,000,
respectively.
o 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 estimates.
Pre-opening Costs
Labor costs and costs of hiring and training personnel and certain other costs
relating to opening new entertainment restaurant locations are capitalized until
the entertainment restaurant location is open and then amortized over the
subsequent 12 months. Accumulated amortization related to such entertainment
restaurant locations was approximately $237,800 at December 31, 1996.
o Income Taxes
The entities comprising FHERG are limited partnerships and are taxed as such
pursuant to the Internal Revenue Code and are not individually subject to
federal or state income taxes because their taxable income or loss accrues to
the individual partners or members. Accordingly, the accompanying combined
financial statements do not include a provision for income taxes.
2. NOTES PAYABLE
At December 31, 1995, FHERG had an available line of credit with a bank of up to
$450,000. Interest was payable on the outstanding balance at the bank's base
rate plus 2%. Borrowings under the line of credit were guaranteed by several
partners of FHERG. The note matured in May 1996 and was refinanced with an
installment loan with the bank (see Note 4). Notes payable to partners
represents notes to certain partners totaling $233,000 at December 31, 1996.
These notes are payable on demand and accrue interest at 10%.
F-38
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
4. LONG-TERM DEBT
Long-term debt at December 31, 1996 consisted of the following:
Installment loan to bank, payable in varying monthly payments including
interest at the bank's base rate plus 2% (10.25% at December 31, 1996), due
September 1999, secured by leasehold improvements and restaurant equipment
and a guarantee from a general partner.............................................$110,058
Installment loan to bank payable in varying monthly payments including
interest at the bank's base rate plus 1.5% (11.25% at December 31,1996), due
September 2000, secured by leasehold improvements and restaurant equipment
and a guarantee from several partners...............................................353,407
-------
463,465
Less current portion................................................................463,465
-------
$ -
========
In connection with the acquisition of FHERG as described in Note 8, the
installment notes payable were refinanced with a short-term note payable to
Total Entertainment Restaurant Corp. Accordingly, the installment notes payable
have been classified as current portion of long-term debt.
5. RELATED PARTY TRANSACTIONS
FHERG utilizes certain affiliates to provide accounting, computer,
administrative services and certain management services. The Company incurred
fees of $225,600 and $29,820 related to these services for fiscal years 1996 and
1995, respectively.
6. LEASES
FHERG leases two entertainment restaurant locations from affiliates and another
from a third party. These leases are noncancelable operating leases having terms
expiring between 1999 and 2000. The leases have renewal clauses of 5 to 20
years, exercisable at the option of the lessee. FHERG also leases various
office, entertainment and restaurant equipment under noncancelable operating
leases having terms from one to three years. Total rental expense for the years
ended December 31, 1996 and 1995, was $306,280 and $123,546, respectively,
including $260,400 and $77,600, respectively, involving related parties.
F-39
FOX & HOUND ENTERTAINMENT AND RESTAURANT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
6. LEASES (CONTINUED)
Remaining minimum lease payments under operating leases in effect at December
31, 1996, are as follows:
RELATED UNRELATED
FISCAL YEAR PARTIES PARTIES TOTAL
--------- ---------- -------
1997 $193,416 $36,132 $229,548
1998 178,416 36,132 214,548
1999 178,416 10,588 189,004
2000 163,548 - 163,548
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for all financial instruments,
including cash and cash equivalents and all debt instruments, approximates fair
value.
8. EXCHANGE TRANSACTION
On February 20, 1997, the partners of FHERG completed an Exchange Transaction
whereby they exchanged all of their interests for common stock of Total
Entertainment Restaurant Corp. Subsequent to the Exchange Transaction, long-term
installment notes payable of $463,465 were refinanced with a short-term loan
from Total Entertainment Restaurant Corp. from funds it obtained from a
revolving note payable to a bank.
F-40