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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission file number
September 9, 2003 000-22753
----------------- ---------
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-2016614
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
9300 East Central Avenue
Suite 100
Wichita, Kansas 67206
(Address of principal executive offices) (Zip code)
(316) 634-0505
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 22, 2003
-----
Common Stock, $.01 par value 9,814,631 shares
TOTAL ENTERTAINMENT RESTAURANT CORP.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
September 9, 2003 and December 31, 2002 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
September 9, 2003 and September 3, 2002 3
Condensed Consolidated Statements of
Operations for the thirty-six weeks ended
September 9, 2003 and September 3, 2002 4
Condensed Consolidated Statements of
Cash Flows for the thirty-six weeks ended
September 9, 2003 and September 3, 2002 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 14
Item 4. Procedures and Controls 14
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 15
- 1 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Balance Sheets
(Unaudited)
September 9, 2003 December 31, 2002
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 670,428 $ 1,116,094
Inventories 1,667,188 1,603,672
Prepaid income taxes 872,265 --
Deferred income taxes 260,499 212,367
Other current assets 1,739,911 1,034,151
----------------- -----------------
Total current assets 5,210,291 3,966,284
Property and equipment:
Land 600,000 600,000
Buildings 702,886 702,739
Leasehold improvements 43,352,291 36,653,603
Equipment 23,992,125 20,802,285
Furniture and fixtures 7,079,021 5,845,627
----------------- -----------------
75,726,323 64,604,254
Less accumulated depreciation and amortization 21,615,848 17,391,742
----------------- -----------------
54,110,475 47,212,512
Other assets:
Goodwill, net of accumulated amortization 3,661,134 3,661,134
Advances to developer 841,940 570,000
Other assets 938,248 485,354
----------------- -----------------
Total other assets 5,441,322 4,716,488
----------------- -----------------
Total assets $ 64,762,088 $ 55,895,284
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,617,575 $ 98,413
Accounts payable 3,125,941 4,043,123
Sales tax payable 1,282,625 1,032,184
Accrued payroll 1,295,192 1,148,677
Accrued payroll taxes 593,238 751,920
Accrued income taxes -- 960,645
Lease obligation for closed store -- 42,606
Other accrued liabilities 2,292,309 1,506,847
----------------- -----------------
Total current liabilities 10,206,880 9,584,415
Notes payable 5,837,425 2,441,587
Deferred taxes 1,863,305 98,633
Deferred revenue 53,106 73,875
Accrued rent 542,294 413,167
Stockholders' equity:
Preferred stock -- --
Common stock 97,717 98,663
Additional paid-in capital 28,047,699 29,054,438
Retained earnings 18,113,662 14,130,506
----------------- -----------------
Total stockholders' equity 46,259,078 43,283,607
----------------- -----------------
Total liabilities and stockholders' equity $ 64,762,088 $ 55,895,284
================= =================
See accompanying notes.
- 2 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Twelve weeks Twelve weeks
ended ended
September 9, 2003 September 3, 2002
----------------- -----------------
Sales:
Food and beverage $ 23,273,291 $ 19,234,931
Entertainment and other 1,995,212 1,776,977
----------------- -----------------
Total net sales 25,268,503 21,011,908
Costs and expenses:
Costs of sales 6,649,920 5,533,257
Restaurant operating expenses 14,353,331 11,824,762
Depreciation and amortization 1,485,315 1,188,059
Preopening costs 525,729 470,215
----------------- -----------------
Restaurant costs and expenses 23,014,295 19,016,293
----------------- -----------------
Restaurant operating income 2,254,208 1,995,615
General and administrative expenses 1,440,878 1,169,462
Loss on disposal of assets 24,784 --
----------------- -----------------
Income from operations 788,546 826,153
Other income (expense):
Other income/(expense) -- 23
Interest expense (59,978) (61,770)
----------------- -----------------
Income from continuing operations
before income taxes 728,568 764,406
Provision for income taxes 248,457 289,032
----------------- -----------------
Income from continuing operations 480,111 475,374
Income(loss) from discontinued operations -- --
----------------- -----------------
Net income $ 480,111 $ 475,374
================= =================
Basic earnings per share:
Income from continuing operations $ 0.05 $ 0.05
Loss on discontinued operations -- --
----------------- -----------------
Basic earnings per share $ 0.05 $ 0.05
================= =================
Diluted earnings per share
Income from continuing operations $ 0.05 $ 0.05
Loss on discontinued operations -- --
----------------- -----------------
Diluted earnings per share $ 0.05 $ 0.05
================= =================
See accompanying notes.
- 3 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Thirty-six weeks Thirty-six weeks
ended ended
September 9, 2003 September 3, 2002
----------------- -----------------
Sales:
Food and beverage $ 71,403,679 $ 58,611,361
Entertainment and other 6,154,724 5,634,129
----------------- -----------------
Total net sales 77,558,403 64,245,490
Costs and expenses:
Costs of sales 20,164,188 16,861,129
Restaurant operating expenses 41,372,428 33,497,620
Depreciation and amortization 4,244,008 3,252,288
Preopening costs 1,184,584 1,322,036
----------------- -----------------
Restaurant costs and expenses 66,965,208 54,933,073
----------------- -----------------
Restaurant operating income 10,593,195 9,312,417
General and administrative expenses 4,236,945 3,495,136
Loss on disposal of assets 41,510 18,239
----------------- -----------------
Income from operations 6,314,740 5,799,042
Other income (expense):
Other income/(expense) 304 33
Interest expense (130,020) (287,180)
----------------- -----------------
Income from continuing operations
before income taxes 6,185,024 5,511,895
Provision for income taxes 2,201,869 2,026,262
----------------- -----------------
Income from continuing operations 3,983,155 3,485,633
Income(loss) from discontinued operations -- 12,832
----------------- -----------------
Net income $ 3,983,155 $ 3,498,465
================= =================
Basic earnings per share:
Income from continuing operations $ 0.41 $ 0.39
Loss on discontinued operations -- --
----------------- -----------------
Basic earnings per share $ 0.41 $ 0.39
================= =================
Diluted earnings per share
Income from continuing operations $ 0.39 $ 0.37
Loss on discontinued operations -- --
----------------- -----------------
Diluted earnings per share $ 0.39 $ 0.37
================= =================
See accompanying notes.
- 4 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Thirty weeks Thirty weeks
ended ended
September 9, 2003 September 3, 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 3,983,155 $ 3,498,465
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of assets 41,510 15,739
Depreciation and amortization 4,302,446 3,287,140
Deferred income taxes 1,716,540 528,848
Net change in operating assets and liabilities:
Change in operating assets (2,110,150) (1,063,580)
Change in operating liabilities (1,049,286) 1,129,523
----------------- -----------------
Net cash provided by operating activities 6,884,215 7,396,135
Cash flows from investing activities:
Purchases of property and equipment (10,954,897) (12,950,973)
Advances to developer (271,940) --
Proceeds from disposal of assets 31,092 8,722
----------------- -----------------
Net cash used in investing activities (11,195,745) (12,942,251)
Cash flows from financing activities:
Proceeds from revolving note payable to bank 22,525,000 18,760,000
Payments of revolving note payable to bank (17,610,000) (28,275,000)
Proceeds from exercise of stock options 217,254 1,887,329
Sale of common stock -- 12,855,608
Purchase of common stock (1,266,390) --
----------------- -----------------
Net cash provided by financing activities 3,865,864 5,227,937
----------------- -----------------
Net decrease in cash and cash equivalents (445,666) (318,179)
Cash and cash equivalents at beginning of period 1,116,094 1,346,495
----------------- -----------------
Cash and cash equivalents at end of period $ 670,428 $ 1,028,316
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 123,970 $ 288,463
Cash paid for income taxes 2,276,789 1,721,349
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts
payable 260,947 403,259
Tax benefit related to stock options exercised 41,451 315,958
See accompanying notes
- 5 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
-------------------------------------------------
The unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements in its 2002 Form
10-K. The results of the twelve weeks ended September 9, 2003 are not
necessarily indicative of the results to be expected for the full year ending
December 30, 2003.
2. Accounting for Stock-Based Compensation
---------------------------------------
In accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, 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 with grant prices equal to
the fair value of the Company's common stock 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.
Pro forma information regarding net income and earnings per share is
required by Statement 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 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate ranging from
2.3% to 5.3%; no dividend yields; volatility factor ranging from 0.281 to 0.853;
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 from 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 is as follows:
- 6 -
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------- -------------------------
September 9, September 3, September 9, September 3,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported $ 480,111 $ 475,374 $ 3,983,155 $ 3,498,465
Pro forma stock-based employee
compensation cost, net of tax 157,132 89,327 384,901 267,980
----------- ----------- ----------- -----------
Pro forma net income $ 322,979 $ 386,047 $ 3,598,254 $ 3,230,485
Earnings per share:
Basic, as reported $ 0.05 $ 0.05 $ 0.41 $ 0.39
Basic, pro forma 0.03 0.04 0.37 0.36
Diluted, as reported 0.05 0.05 0.39 0.37
Diluted, pro forma 0.03 0.04 0.35 0.34
Weighted average fair value of options
granted during the period $ 5.66 N/A $ 5.36 $ 6.09
3. Stock Options
-------------
During the twelve week period ended September 9, 2003, the Company granted
to certain key employees stock options for 22,500 shares of Common Stock at a
weighted average exercise price of $8.54 per share and options to purchase
37,192 shares were exercised at a weighted-average exercise price of $3.30 per
share pursuant to its 1997 Incentive and Nonqualified Stock Option Plan.
4. Earnings Per Share
------------------
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. The number of weighted averaged
shares outstanding for the twelve week periods ended September 9, 2003 and
September 3, 2002 were 9,753,883 and 9,573,356, respectively; the number of
weighted average shares outstanding for the thirty-six week periods ended
September 9, 2003 and September 3, 2002 were 9,785,127 and 9,007,756,
respectively.
Diluted earnings per share are computed similar to basic earnings per
share except that the weighted average shares outstanding are increased to
include additional shares for the assumed exercise of stock options, if
dilutive. The number of additional shares is calculated by assuming that
outstanding stock options were exercised and the proceeds from such exercises
were used to acquire common shares at an average price during the reporting
period. The number of shares resulting from this computation of diluted earnings
per share for the twelve weeks ended September 9, 2003 and September 3, 2002
were 10,212,946 and 10,140,017, respectively, and for the thirty-six week
periods ended September 9, 2003 and September 3, 2002 were 10,183,126 and
9,500,124, respectively.
- 7 -
5. New Accounting Standards
------------------------
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a
single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
the provisions of SFAS No. 144 effective December 26, 2001. The Company closed
and abandoned one restaurant on March 31, 2002. Pursuant to SFAS No. 144, each
restaurant is a component of the entity, and the operations of the closed
restaurant can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of the Company. Accordingly, the
operations of the closed restaurant, net of applicable income tax effect, have
been presented as discontinued operations.
6. Legal Proceedings
-----------------
Certain former employees have filed a complaint on their own behalf and on
the behalf of similarly situated persons alleging the Company violated certain
provisions of the Fair Labor Standards Act. Management of the Company is of the
opinion that any resulting liability will not have a material adverse effect on
the Company's financial statements.
7. Note Payable
------------
The Company's note payable (line of credit) with a bank was amended
effective October 1, 2003 resulting in an extension of the terms of the line of
credit by three years. The line of credit now requires monthly payments of
interest only until November 1, 2006, at which time equal monthly installments
of principal and interest are required as necessary to fully amortize the
outstanding indebtedness plus future interest over a period of four years. All
other terms of the line of credit remained unchanged.
Item 2. 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 Financial Statements and Notes thereto included elsewhere in this Form
10-Q.
As of September 9, 2003, the Company owned and operated 60 restaurants
under the Fox and Hound Smokehouse & Tavern and Fox and Hound English Pub &
Grille ("Fox and Hound"), Bailey's Smokehouse & Tavern, Bailey's Sports Grille
and Bailey's Pub & Grille ("Bailey's") brand names. The Company's restaurants
offer a broad menu of mid-priced appetizers, entrees, and desserts served in
generous portions. In addition, each location features a full-service bar and
offers a wide selection of major domestic, imported and specialty beers. Each
restaurant emphasizes a high energy environment with multiple billiard tables
and satellite and cable coverage of a variety of sporting events and music
videos. In addition to its food, the Company believes that customers are
attracted to the elegant yet comfortable atmosphere of polished brass,
embroidered chairs and booths, hunter green and burgundy walls, and etched
glass. The Fox and Hound and Bailey's restaurants share identical design and
operational principles and menus. As of September 9, 2003, the Company owned and
operated 45 Fox and Hound restaurants and 15 Bailey's restaurants located in
Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas,
Louisiana, Michigan, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Texas and Virginia. As of September 3, 2002, the
Company owned and operated 37 Fox and Hound restaurants and 14 Bailey's
restaurants.
- 8 -
The components of the Company's net sales are food and non-alcoholic
beverages, alcoholic beverages, and entertainment and other (principally
billiard table rental fees). For the twelve weeks ended September 9, 2003, food
and non-alcoholic beverages were 35.0% of total sales, alcoholic beverages were
57.1% of total sales and entertainment and other were 7.9% of total sales. For
the twelve weeks ended September 3, 2002, food and non-alcoholic beverages were
33.5% of total sales, alcoholic beverages were 57.7% of total sales and
entertainment and other were 8.8% of total sales.
The components of the Company's cost of sales primarily include direct
costs of food, non-alcoholic beverages and alcoholic beverages. These costs are
generally variable and will fluctuate with changes in sales volume and sales
mix.
Components of restaurant operating expenses include operating payroll
and fringe benefits, and occupancy, maintenance and utilities. All but one of
the Company's locations are leased and provide for a minimum annual rent, with
some leases calling for additional rent based on sales volume at the particular
location in excess of specified minimum sales levels.
Depreciation and amortization costs primarily include depreciation and
amortization of capital expenditures for restaurants.
Preopening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide an
infrastructure to support future growth. Management, supervisory and staff
salaries, employee benefits, travel, information systems, training, rent and
office supplies as well as accounting services fees are major items of costs in
this category.
In calculating comparable restaurant sales, the Company includes a
restaurant in the comparable restaurant base after it has been in operation for
18 full months. As of September 9, 2003, there were 45 restaurants in the
comparable restaurant base. Annualized average weekly sales are computed by
dividing net sales during the period by the number of store operating weeks and
multiplying the result by 52. These calculations include sales and store
operating weeks for the one unit included in discontinued operations.
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 Operations bear to net sales, and (ii) other selected operating data. The
Company operates on a 52 or 53 week fiscal year ending the last Tuesday in
December. Fiscal year 2002 consisted of 53 weeks and fiscal year 2003 consists
of 52 weeks. Fiscal quarters consist of three accounting periods of 12 weeks
each and a final period of 16 or 17 weeks.
- 9 -
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------- --------------------------
September 9, September 3, September 9, September 3,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating Statement Data:
Net sales .................................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ......................................... 26.3 26.3 26.0 26.2
Restaurant operating expenses .......................... 56.8 56.3 53.3 52.1
Depreciation and amortization .......................... 5.9 5.7 5.5 5.1
Preopening costs ....................................... 2.1 2.2 1.5 2.1
----------- ----------- ----------- -----------
Restaurant costs and expenses ...................... 91.1 90.5 86.3 85.5
----------- ----------- ----------- -----------
Restaurant operating income ................................ 8.9 9.5 13.7 14.5
General and administrative expenses ........................ 5.7 5.6 5.5 5.4
Loss on disposal of assets ................................. 0.1 -- 0.1 --
----------- ----------- ----------- -----------
Income from operations ..................................... 3.1 3.9 8.1 9.1
Interest expense ........................................... 0.2 0.3 0.2 0.4
----------- ----------- ----------- -----------
Income from continuing operations before income taxes ...... 2.9 3.6 7.9 8.7
Provision for income taxes ................................. 1.0 1.3 2.8 3.2
----------- ----------- ----------- -----------
Income from continuing operations .......................... 1.9 2.3 5.1 5.5
Loss from discontinued operations .......................... -- -- -- --
----------- ----------- ----------- -----------
Net income ................................................. 1.9% 2.3% 5.1% 5.5%
----------- ----------- ----------- -----------
Restaurant Operating Data (dollars in thousands):
Annualized average weekly sales per location ............... $ 1,840 $ 1,822 $ 1,965 $ 1,972
Number of restaurants at end of the period ................. 60 51 60 51
Twelve Weeks Ended September 9, 2003 Compared to Twelve Weeks Ended September 3,
2002
Net sales increased $4,257,000 (20.3%) for the twelve weeks ended September
9, 2003 to $25,269,000 from $21,012,000 for the twelve weeks ended September 3,
2002. This increase was due to a 19.3% increase in store weeks (714 versus 600)
as a result of nine restaurants opened since September 3, 2002 and a 1.0%
increase in annualized average weekly sales per location. Comparable restaurant
sales decreased 2.8% for the twelve weeks ended September 9, 2003.
Costs of sales increased $1,117,000 (20.2%) for the twelve weeks ended
September 9, 2003 to $6,650,000 from $5,533,000 in the twelve weeks ended
September 3, 2002, and was 26.3% of sales for both periods.
Restaurant operating expenses increased $2,528,000 (21.4%) for the twelve
weeks ended September 9, 2003 to $14,353,000 from $11,825,000 in the twelve
weeks ended September 3, 2002, and increased as a percentage of net sales to
56.8% from 56.3%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units, higher utility costs, and
higher liability insurance and claims expense offset by lower advertising costs.
Depreciation and amortization increased $297,000 (25.0%) for the twelve
weeks ended September 9, 2003 to $1,485,000 from $1,188,000 in the twelve weeks
ended September 3, 2002, and increased as a percentage of sales to 5.9% from
5.7%. This increase in expense is due to additional depreciation on nine
restaurants opened since September 3, 2002.
Preopening costs increased $56,000 (11.8%) for the twelve weeks ended
September 9, 2003 to $526,000 from $470,000 in the twelve weeks ended September
3, 2002. These costs are attributable to two units that opened during the twelve
weeks ended September 9, 2003 and partial preopening expenses for five
restaurants which have yet to open. Three restaurants were opened in the twelve
weeks ended September 3, 2002.
- 10 -
General and administrative expenses increased $272,000 (23.2%) for the
twelve weeks ended September 9, 2003 to $1,441,000 from $1,169,000 in the twelve
weeks ended September 3, 2002, due to an increase in corporate infrastructure to
support the Company's expansion. General and administrative expenses increased
as a percentage of net sales to 5.7% from 5.6%.
Loss on disposal of assets was $25,000 for the twelve weeks ended September
9, 2003. The losses reflect the disposal of certain point of sale equipment.
Interest expense was $60,000 for the twelve weeks ended September 9, 2003
and $62,000 for the twelve weeks ended September 3, 2002.
The effective income tax rate was 34.1% for the twelve weeks ended
September 9, 2003 and 37.8% for the twelve weeks ended September 3, 2002. This
decrease is due primarily to the impact of the credit for social security taxes
paid on tips in excess of minimum wage relative to the amount of income before
taxes.
Thirty-six Weeks Ended September 9, 2003 Compared to Thirty-six Weeks Ended
September 3, 2002
Net sales increased $13,313,000 (20.7%) for the thirty-six weeks ended
September 9, 2003 to $77,558,000 from $64,245,000 for the thirty-six weeks ended
September 3, 2002. This increase was due to a 20.6% increase in store weeks
(2,053 versus 1,703) as a result of nine restaurants opened since September 3,
2002 and a 0.4% decrease in annualized average weekly sales per location.
Comparable restaurant sales decreased 1.9% for the thirty-six weeks ended
September 9, 2003.
Costs of sales increased $3,303,000 (19.6%) for the thirty-six weeks ended
September 9, 2003 to $20,164,000 from $16,861,000 in the thirty-six weeks ended
September 3, 2002, and decreased as a percentage of sales to 26.0% from 26.2%.
This decrease as a percentage of sales is principally attributable to price
increases implemented in the first quarter of fiscal year 2003.
Restaurant operating expenses increased $7,874,000 (23.5%) for the
thirty-six weeks ended September 9, 2003 to $41,372,000 from $33,498,000 in the
thirty-six weeks ended September 3, 2002, and increased as a percentage of net
sales to 53.3% from 52.1%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units, higher utility costs, and
higher liability insurance and claims.
Depreciation and amortization increased $992,000 (30.5%) for the thirty-six
weeks ended September 9, 2003 to $4,244,000 from $3,252,000 in the thirty-six
weeks ended September 3, 2002, and increased as a percentage of sales to 5.5%
from 5.1%. This increase in expense is due to additional depreciation on nine
restaurants opened since September 3, 2002.
Preopening costs decreased $137,000 (10.4%) for the thirty-six weeks ended
September 9, 2003 to $1,185,000 from $1,322,000 in the thirty-six weeks ended
September 3, 2002. These costs are attributable to six units that opened during
the thirty-six weeks ended September 9, 2003 and partial preopening expenses for
five restaurants which have yet to open. Nine restaurants were opened in the
thirty-six weeks ended September 3, 2002.
General and administrative expenses increased $742,000 (21.2%) for the
thirty-six weeks ended September 9, 2003 to $4,237,000 from $3,495,000 in the
thirty-six weeks ended September 3, 2002, due to an increase in corporate
infrastructure to support the Company's expansion. General and administrative
expenses increased as a percentage of net sales to 5.5% from 5.4%.
- 11 -
Loss on disposal of assets was $42,000 for the thirty-six weeks ended
September 9, 2003 and $18,000 for the thirty-six weeks ended September 3, 2002.
The losses reflect the disposal of certain point of sale equipment in the
current fiscal year and video games in the prior fiscal year.
Interest expense was $130,000 for the thirty-six weeks ended September 9,
2003 and $287,000 for the thirty-six weeks ended September 3, 2002. This
decrease is due mainly to a lower average balance applicable to the revolving
note payable in the current fiscal year compared with the prior fiscal year as
well as a lower interest rate.
The effective income tax rate was 35.6% for the thirty-six weeks ended
September 9, 2003 and 36.8% for the thirty-six weeks ended September 3, 2002.
This decrease is due primarily to the impact of the credit for social security
taxes paid on tips in excess of minimum wage relative to the amount of income
before taxes.
Income from discontinued operations was $13,000 for the thirty-six weeks
ended September 3, 2002 applicable to the restaurant closed on March 31, 2002.
Quarterly Fluctuations, Seasonality and Inflation
The timing of new unit openings will result in significant fluctuations
in quarterly results. The Company expects seasonality to be a factor in the
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. A large
number of the Company's restaurant personnel are tipped employees who are paid
at the federal subminimum wage level; therefore, future subminimum wage changes
will have a significant 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, improved operating procedures and menu price
changes; however, short-term fluctuations in raw product pricing may have an
impact on the Company's costs of food. To date, inflation has not had a material
impact on operating margins.
Liquidity and Capital Resources
As is customary in the restaurant industry, the Company operates with
negative working capital. Negative working capital decreased $622,000 to
$4,997,000 as of September 9, 2003 from $5,618,000 as of December 31, 2002. This
decrease is attributable primarily to the excess of working capital provided by
operations and net proceeds from the line of credit in excess of the cost of
purchases of property and equipment and repurchases of common stock offset by
the increase in current portion of notes payable of $1,519,000. Cash decreased
$446,000 to $670,000 at September 9, 2003 compared to the balance of $1,116,000
at December 31, 2002. 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.
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Line of Credit") which provides for a line of credit of
$20,000,000 subject to certain limitations based on earnings before interest,
taxes, depreciation and amortization of the past fifty-two weeks and the amount
of capital lease obligations on personal property. The Line of Credit is secured
by substantially all of the Company's assets. The Line of Credit was amended on
October 1, 2003 resulting in an extension of the terms of the Line of Credit by
three years. The Line of Credit requires monthly payments of interest only until
November 1, 2006, at which time
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equal monthly installments of principal and interest are required as necessary
to fully amortize the outstanding indebtedness plus future interest over a
period of four years. Interest is accrued at 1/2% below the prime rate as
published in The Wall Street Journal. Proceeds from the Line of Credit are being
used for restaurant development. As of September 9, 2003 the Company had
borrowed $7,455,000 under the Line of Credit. The Company is in compliance with
all debt covenants.
Cash flows from operations were $6,884,000 in the thirty-six weeks ended
September 9, 2003 compared to $7,396,000 in the thirty-six weeks ended September
3, 2002. Purchases of property and equipment were $10,955,000 in the thirty-six
weeks ended September 9, 2003 compared to $12,951,000 in the thirty-six weeks
ended September 3, 2002. Advances made to the developer of two build-to-suit
locations were $272,000 in the thirty-six weeks ended September 9, 2003. Net
proceeds from the revolving note payable to bank was $4,915,000 for the
thirty-six week period ending September 9, 2003 compared to net repayments of
$9,515,000 for the thirty-six weeks ending September 3, 2002. At September 9,
2003, the Company had $670,000 in cash and cash equivalents.
The Company intends to open ten new locations in fiscal year 2003 and
twelve to fifteen new locations in fiscal year 2004. At September 9, 2003, six
units had been opened in fiscal 2003, four units were under construction, leases
had been executed on three additional sites, and lease negotiations had begun on
seven additional sites. 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. The Company expects to
expend approximately $15.0 to $23.0 million to open new locations over the next
twelve months.
The Company believes the funds available from the Line of Credit and its
cash flow from operations will be sufficient to satisfy its working capital and
capital expenditure requirements for at least the next twelve months. There can
be no assurance, however, that changes in the Company's operating plans, the
acceleration or modification of the Company's expansion plans, lower than
anticipated revenues, increased expenses, stock repurchases, 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 terms acceptable to the Company 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 1934, 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, 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. Our actual results may differ materially from the
forward-looking statements contained herein. 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, alcohol, labor,
and other operating costs, changes in competition, the inability to find
suitable new locations, changes in consumer preferences or spending patterns,
changes in demographic trends, the effectiveness of our operating and growth
initiatives and promotional efforts, and changes in
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government regulation. Further information about the factors that might affect
the Company's financial and other results are included in the Company's 10-K,
filed with the Securities and Exchange Commission. In light of the significant
uncertainties inherent in the forward-looking statements included 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 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Interest Rate Risk
The Company's Line of Credit has a variable rate which is directly affected
by changes in U.S. interest rates. The average interest rate of the Line of
Credit was 3.54% for the twelve weeks ended September 9, 2003. The interest rate
at September 9, 2003 was 3.50%. The following table presents the quantitative
interest rate risks at September 9, 2003:
Principal Amount by Expected Maturity
-----------------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2003 2004 2005 2006 2007 after Total 9/9/03
---------------------- ---- ---- ---- ---- ---- ----- ----- ------
Variable rate debt $290 $1,778 $1,841 $1,906 $1,640 $ -- $7,455 $7,455
Average Interest Rate--
1/2% below prime -- 3.50% 3.50% 3.50% 3.50% 3.50%
Item 4. Procedures and Controls
-----------------------
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
Exhibit 10.1 - First Restated Loan Agreement by and among Intrust Bank,
N.A., TENT Finance, Inc., the Registrant, and various subsidiaries of
Registrant, as "Guarantors," dated October 1, 2003.
Exhibit 31.1 - Certification by Steven M. Johnson pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification by James K. Zielke pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 - Certification by Steven M. Johnson pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2 - Certification by James K. Zielke pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Reports on Form 8-K
A Current Report on Form 8-K (Item 9) dated July 2, 2003, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp,
announcing July 8, 2003 conference call to discuss the Company's third quarter
2003 financial results.
A Current Report on Form 8-K (Item 9) dated July 8, 2003, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp,
announcing the Company's third quarter 2003 financial results.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Total Entertainment Restaurant Corp.
(Registrant)
Date October 22, 2003 /s/ JAMES K. ZIELKE
------------------------ -----------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
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