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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
June 15, 2004 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
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(Address of principal executive offices) (Zip code)
(316) 634-0505
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(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 July 27, 2004
- ----------------------------
Common Stock, $.01 par value 9,908,519 shares
TOTAL ENTERTAINMENT RESTAURANT CORP.
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
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Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
June 15, 2004 and December 30, 2003 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
June 15, 2004 and June 17, 2003 3
Condensed Consolidated Statements of
Operations for the twenty-four weeks ended
June 15, 2004 and June 17, 2003 4
Condensed Consolidated Statements of
Cash Flows for the twenty-four weeks ended
June 15, 2004 and June 17, 2003 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 12
Item 4. Procedures and Controls 12
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Stockholders 13
Item 6. Exhibits and Reports on Form 8-K 13
- 1 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 15, 2004 December 30, 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 654 $ 813
Inventories 2,125 2,096
Prepaid income taxes -- 997
Deferred income taxes 204 281
Other current assets 2,052 1,538
----------------- -----------------
Total current assets 5,035 5,725
Property and equipment:
Land 600 600
Buildings 703 703
Leasehold improvements 49,800 45,092
Equipment 26,444 25,107
Furniture and fixtures 7,972 7,514
----------------- -----------------
85,519 79,016
Less accumulated depreciation and amortization 25,211 22,615
----------------- -----------------
60,308 56,401
Other assets:
Goodwill, net of accumulated amortization 3,661 3,661
Advances to developer 545 842
Other assets 1,374 983
----------------- -----------------
Total other assets 5,580 5,486
----------------- -----------------
Total assets $ 70,923 $ 67,612
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,082 $ 5,510
Sales tax payable 1,143 1,187
Accrued payroll 1,336 1,674
Accrued payroll taxes 792 824
Accrued income taxes 1,462 --
Other accrued liabilities 2,802 2,391
----------------- -----------------
Total current liabilities 11,617 11,586
Notes payable 4,960 3,635
Deferred taxes 1,610 2,503
Deferred revenue 7 21
Accrued rent 657 547
Stockholders' equity:
Preferred stock -- --
Common stock 99 98
Additional paid-in capital 29,146 28,553
Retained earnings 22,827 20,669
----------------- -----------------
Total stockholders' equity 52,072 49,320
----------------- -----------------
Total liabilities and stockholders' equity $ 70,923 $ 67,612
================= =================
See accompanying notes.
- 2 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(in thousands, except per share information)
(Unaudited)
Twelve weeks Twelve weeks
ended ended
June 15, 2004 June 17, 2003
------------- -------------
Sales:
Food and beverage $ 29,021 $ 23,264
Entertainment and other 2,120 1,985
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Total net sales 31,141 25,249
Costs and expenses:
Costs of sales 8,616 6,565
Restaurant operating expenses 16,998 13,504
Depreciation and amortization 1,554 1,403
Preopening costs 638 372
Asset impairment 2,365 --
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Restaurant costs and expenses 30,171 21,844
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Restaurant operating income 970 3,405
General and administrative expenses 1,749 1,429
Loss on disposal of assets -- 17
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Income (loss) from operations (779) 1,959
Other income (expense):
Other income/(expense) -- --
Interest expense (27) (45)
------------- -------------
Income (loss) before income taxes (806) 1,914
Income tax expense (benefit) (290) 678
------------- -------------
Net income (loss) (516) 1,236
============= =============
Basic earnings (loss) per share ($ 0.05) $ 0.13
============= =============
Diluted earnings (loss) per share ($ 0.05) $ 0.12
============= =============
See accompanying notes.
- 3 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(in thousands, except per share information)
(Unaudited)
Twenty-four weeks Twenty-four weeks
ended ended
June 15, 2004 June 17, 2003
------------- -------------
Sales:
Food and beverage $ 60,442 $ 48,130
Entertainment and other 4,546 4,160
------------- -------------
Total net sales 64,988 52,290
Costs and expenses:
Costs of sales 17,732 13,514
Restaurant operating expenses 33,970 27,019
Depreciation and amortization 3,058 2,759
Preopening costs 1,070 659
Asset impairment 2,365 --
------------- -------------
Restaurant costs and expenses 58,195 43,951
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Restaurant operating income 6,793 8,339
General and administrative expenses 3,494 2,796
Loss on disposal of assets -- 17
------------- -------------
Income from operations 3,299 5,526
Other income (expense):
Other income/(expense) 3 --
Interest expense (62) (70)
------------- -------------
Income before income taxes 3,240 5,456
Provision for income taxes 1,082 1,953
------------- -------------
Net income 2,158 3,503
============= =============
Basic earnings per share $ 0.22 $ 0.36
============= =============
Diluted earnings per share $ 0.21 $ 0.34
============= =============
See accompanying notes.
- 4 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Twenty-Four Twenty-Four
weeks ended weeks ended
June 15, 2004 June 17, 2003
------------- -------------
Net income 2,158 3,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset impairment 2,365 --
Loss on disposal of assets -- 17
Depreciation and amortization 3,102 2,791
Deferred income taxes (816) 65
Net change in operating assets and liabilities:
Change in operating assets 221 (953)
Change in operating liabilities 84 (223)
------------- -------------
Net cash provided by operating activities 7,114 5,200
Purchases of property and equipment (9,274) (6,605)
Advances to developer 297 (532)
------------- -------------
Net cash used in investing activities (8,977) (7,137)
Proceeds from revolving note payable to bank 18,975 15,610
Payments of revolving note payable to bank (17,650) (13,005)
Proceeds from exercise of stock options 379 94
Purchase of common stock -- (1,266)
------------- -------------
Net cash provided by financing activities 1,704 1,433
------------- -------------
Net decrease in cash and cash equivalents (159) (504)
Cash and cash equivalents at beginning of period 813 1,116
------------- -------------
Cash and cash equivalents at end of period 654 612
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest 65 77
Cash paid for income taxes, net of refunds received (729) 1,279
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts payable 43 113
Tax benefit related to stock options exercised 215 --
See accompanying notes
- 5 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Notes to Condensed Consolidated FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
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 2003 Form
10-K. The results of the twelve weeks ended June 15, 2004 are not necessarily
indicative of the results to be expected for the full year ending December 28,
2004.
2. Impairment of Long-Lived Assets
-------------------------------
Long-lived assets and certain intangibles, including goodwill, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company reviews
applicable intangible assets and long-lived assets related to each restaurant on
a periodic basis. When events or changes in circumstances indicate an asset may
not be recoverable, the Company estimates the future cash flows expected to
result from the use of the asset. If the sum of the expected undiscounted cash
flows is less than the carrying value of the asset, an impairment loss is
recognized. The impairment loss is recognized by measuring the difference
between the carrying value of the assets and the fair value of the assets. The
Company's estimates of fair values are based on the best information available
and require the use of estimates, judgments and projections as considered
necessary. The actual results may vary significantly. A provision for impairment
amounting to $2,365 ($1,514 net of income tax effect of $851) has been recorded
for the twelve-weeks ended June 15, 2004. The Company does not intend to close
the related restaurants.
3. 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
2.9% 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.
- 6 -
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:
Twelve Weeks Ended Twenty-four Weeks Ended
------------------------ -----------------------
June 15, June 17, June 15, June 17,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss), as reported $ (516) $ 1,236 $ 2,158 $ 3,503
Pro forma stock-based employee
compensation cost, net of tax 155 138 318 228
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (671) $ 1,098 $ 1,840 $ 3,275
Earnings per share:
Basic, as reported $ (0.05) $ 0.13 $ 0.22 $ 0.36
Basic, pro forma (0.07) 0.11 0.19 0.33
Diluted, as reported (0.05) 0.12 0.21 0.34
Diluted, pro forma (0.06) 0.11 0.18 0.32
Weighted average fair value of options
granted during the period $ 5.33 $ 5.21 $ 5.17 $ 5.34
3. Stock Options
-------------
During the twelve week period ended June 15, 2004, the Company granted to
certain key employees stock options for 93,570 shares of Common Stock at a
weighted-average exercise price of $13.54 per share and options to purchase
17,903 shares were exercised at a weighted-average exercise price of $3.80 per
share pursuant to its 1997 Incentive and Nonqualified Stock Option Plan. Options
to purchase 55,000 shares were granted at a weighted-average exercise price of
$13.26 per share and options to purchase 12,611 shares were exercised at a
weighted-average exercise price of $5.80 per share pursuant to its 1997
Directors 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 June 15, 2004 and June 17, 2003
were 9,888,512 and 9,736,841, respectively; the number of weighted average
shares outstanding for the twenty-four week periods ended June 15, 2004 and June
17, 2003 were 9,869,512 and 9,800,749, respectively.
Diluted earnings per share are computed similar to basic earnings per share
except that the weighted average shares outsanding 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 June 15, 2004 and June 17, 2003 were 10,487,462 and
10,088,751, respectively, and for the twenty-four week periods ended June 15,
2004 and June 17, 2003 were 10,465,002 and 10,168,216, respectively.
- 7 -
Item 2. Management's Discussion and Anaysis 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 June 15, 2004, the Company owned and operated 69 restaurants
under the Fox and Hound Smokehouse & Tavern, Fox and Hound English Pub & Grille,
and Fox and Hound 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 our food, the Company believes
that customers are attracted to the elegant yet comfortable atmosphere of dark
wood interiors, polished brass, embroidered chairs and booths, and etched glass.
The Fox and Hound and Bailey's restaurants share identical design and
operational principles and menus. As of June 15, 2004, the Company owned and
operated 52 Fox and Hound restaurants and 17 Bailey's restaurants located in
Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas,
Louisiana, Michigan, Missouri, Nebraska, New Mexico, North Carolina, Ohio,
Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas and Virginia. As of
June 17, 2003, the Company owned and operated 44 Fox and Hound restaurants and
14 Bailey's restaurants.
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 June 15, 2004, food and
non-alcoholic beverages were 35.3% of total sales, alcoholic beverages were
57.9% of total sales and entertainment and other were 6.8% of total sales. For
the twelve weeks ended June 17, 2003, food and non-alcoholic beverages were
33.0% of total sales, alcoholic beverages were 59.1% of total sales and
entertainment and other were 7.9% 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 June 15, 2004, there were 54 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.
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 years 2003 and 2004 each consists of 52 weeks. Fiscal quarters
consist of three accounting periods of 12 weeks each and a final period of 16 or
17 weeks.
- 8 -
Twelve Weeks Ended Twenty-four Weeks Ended
------------------------- ------------------------
June 15, June 17, June 15, June 17,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Operating Statement Data:
Net sales ...................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ............................. 27.7 26.0 27.3 25.8
Restaurant operating expenses .............. 54.6 53.5 52.3 51.7
Depreciation and amortization .............. 5.0 5.5 4.7 5.3
Preopening costs ........................... 2.0 1.5 1.6 1.3
Asset impairment ........................... 7.6 -- 3.6 --
---------- ---------- ---------- ----------
Restaurant costs and expenses .......... 96.9 86.5 89.5 84.1
---------- ---------- ---------- ----------
Restaurant operating income .................... 3.1 13.5 10.5 15.9
General and administrative expenses ............ 5.6 5.6 5.4 5.4
Loss on disposal of assets ..................... -- 0.1 -- --
---------- ---------- ---------- ----------
Income (loss) from operations ................. (2.5) 7.8 5.5 10.5
Interest expense ............................... 0.1 0.2 0.1 0.1
---------- ---------- ---------- ----------
Income (loss) before income taxes .............. (2.6) 7.6 5.0 10.4
Income tax expense (benefit) ................... (0.9) 2.7 1.7 3.7
---------- ---------- ---------- ----------
Net income (loss) .............................. (1.7)% 4.9% 3.3% 6.7%
Restaurant Operating Data (dollars in thousands):
Annualized average weekly sales per location ... $ 2,019 $ 1,928 $ 2,137 $ 2,031
Number of restaurants at end of the period ..... 69 58 69 58
Twelve Weeks Ended June 15, 2004 Compared to Twelve Weeks Ended June 17, 2003
Net sales increased $5,892,000 (23.3%) for the twelve weeks ended June 15,
2004 to $31,141,000 from $25,249,000 for the twelve weeks ended June 17, 2003.
This increase was due to a 17.8% increase in store weeks (802 versus 681) as a
result of eleven restaurants opened since June 17, 2003 and a 4.7% increase in
annualized average weekly sales per location. Comparable restaurant sales
decreased 0.2% for the quarter ended June 15, 2004.
Costs of sales increased $2,051,000 (31.2%) for the twelve weeks ended June
15, 2004 to $8,616,000 from $6,565,000 in the twelve weeks ended June 17, 2003,
and increased as a percentage of sales to 27.7% from 26.0%. This increase as a
percentage of sales is principally attributable to an increase in the cost of
certain raw products and increased promotional activities.
Restaurant operating expenses increased $3,494,000 (25.9%) for the twelve
weeks ended June 15, 2004 to $16,998,000 from $13,504,000 in the twelve weeks
ended June 17, 2003, and increased as a percentage of net sales to 54.6% from
53.5%. This increase as a percentage of sales is principally attributable to
higher occupancy costs on new units and higher labor and benefits expense.
Depreciation and amortization increased $151,000 (10.8%) for the twelve
weeks ended June 15, 2004 to $1,554,000 from $1,403,000 in the twelve weeks
ended June 17, 2003, and decreased as a percentage of sales to 5.0% from 5.5%.
This decrease in expense as a percentage of sales is due to additional
depreciation on eleven restaurants opened since June 17, 2003 offset by lower
depreciation on assets impaired in the fourth quarter of fiscal 2003 as well as
assets which became fully depreciated in the past year.
Preopening costs increased $266,000 (71.5%) for the twelve weeks ended June
15, 2004 to $638,000 from $372,000 in the twelve weeks ended June 17, 2003.
These costs are attributable to three units that opened during the twelve weeks
ended June 15, 2004 and partial preopening expenses for four restaurants which
have yet to open. Two restaurants were opened in the twelve weeks ended June 17,
2003.
The provision for asset impairment of $2,365,000 for the twelve weeks ended
June 15, 2004, reflects the charges made for the write down of restaurant assets
related to two underperforming units. We periodically review our long-lived
assets that are held and used in our restaurant operations for indications of
impairment. As of June 15, 2004, we have no plans to close either of these
units.
General and administrative expenses increased $320,000 (22.4%) for the
twelve weeks ended June 15, 2004 to $1,749,000 from $1,429,000 in the twelve
weeks ended June 17, 2003, due to an increase in corporate infrastucture to
support the Company's expansion. General and administrative expenses as a
percentage of net sales remained at 5.6%.
- 9 -
Loss on disposal of assets was $17,000 for the twelve weeks ended June 17,
2003. The loss reflects the disposal of certain point of sale equipment.
Interest expense was $27,000 for the twelve weeks ended June 15, 2004 and
$45,000 for the twelve weeks ended June 17, 2003. 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 36.0% for the twelve weeks ended June 15,
2004 and 35.4% for the twelve weeks ended June 17, 2003. This increase 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.
Twenty-four Weeks Ended June 15, 2004 Compared to Twenty-four Weeks Ended June
17, 2003
Net sales increased $12,698,000 (24.3%) for the twenty-four weeks ended
June 15, 2004 to $64,988,000 from $52,290,000 for the twenty-four weeks ended
June 17, 2003. This increase was due to a 18.1% increase in store weeks (1,581
versus 1,339) as a result of eleven restaurants opened since June 17, 2003 and a
5.2% increase in annualized average weekly sales per location. Comparable
restaurant sales increased 0.8% for the twenty-four weeks ended June 15, 2004.
Costs of sales increased $4,218,000 (31.2%) for the twenty-four weeks ended
June 15, 2004 to $17,732,000 from $13,514,000 in the twenty-four weeks ended
June 17, 2003, and increased as a percentage of sales to 27.3% from 25.8%. This
increase as a percentage of sales is principally attributable to an increase in
the cost of certain raw products and increased promotional activities.
Restaurant operating expenses increased $6,951,000 (25.7%) for the
twenty-four weeks ended June 15, 2004 to $33,970,000 from $27,019,000 in the
twenty-four weeks ended June 17, 2003, and increased as a percentage of net
sales to 52.3% from 51.7%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units and higher labor and
benefits expense.
Depreciation and amortization increased $299,000 (10.8%) for the
twenty-four weeks ended June 15, 2004 to $3,058,000 from $2,759,000 in the
twenty-four weeks ended June 17, 2003, and decreased as a percentage of sales to
4.7% from 5.3%. This decrease in expense as a percentage of sales is due to
additional depreciation on eleven restaurants opened since June 17, 2003 offset
by lower depreciation on assets impaired in the fourth quarter of fiscal 2003 as
well as assets which became fully depreciated in the past year.
Preopening costs increased $411,000 (62.4%) for the twenty-four weeks ended
June 15, 2004 to $1,070,000 from $659,000 in the twenty-four weeks ended June
17, 2003. These costs are attributable to five units that opened during the
twenty-four weeks ended June 15, 2004 and partial preopening expenses for four
restaurants which have yet to open. Four restaurants were opened in the
twenty-four weeks ended June 17, 2003.
The provision for asset impairment of $2,365,000 for the twenty-four weeks
ended June 15, 2004, reflects the charges made for the write down of restaurant
assets related to two underperforming units. We periodically review our
long-lived assets that are held and used in our restaurant operations for
indications of impairment. As of June 15, 2004, we have no plans to close either
of these units.
General and administrative expenses increased $698,000 (25.0%) for the
twenty-four weeks ended June 15, 2004 to $3,494,000 from $2,796,000 in the
twenty-four weeks ended June 17, 2003 and remained at 5.4% as a percentage of
sales.
Loss on disposal of assets was $17,000 for the twenty-four weeks ended June
17, 2003. The loss reflects the disposal of certain point of sale equipment.
Interest expense was $62,000 for the twenty-four weeks ended June 15, 2004
and $70,000 for the twenty-four weeks ended June 17, 2003. 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 33.4% for the twenty-four weeks ended
June 15, 2004 and 35.8% for the twenty-four weeks ended June 17, 2003. 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.
Quarterly Fluctuations, Seasonality and Inflation
The timing of new unit openings will result in significant fluctuations
in quarterly results. The Company expects seasonality continue 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
- 10 -
at the federal subminimum wage level; therefore, future subminimum wage changes
will have a significant effect on labor costs. Historically, inflation has not
had a material impact on operating margins. As costs of food and labor have
increased, the Company has previously been able to offset these increases
through economies of scale, improved operating procedures and menu price
changes. However, during fiscal 2004, the Company has experienced significant
increases in certain commodity prices above historical levels which has
negatively impacted our costs of food and operating margins. Additionally,
competitive pressures may limit the Company's ability to fully recover cost
increases with the implementation of menu price increases. To the extent that we
continue to experience significant increases in commodity prices, it may have a
material negative 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 increased $721,000 to
$6,582,000 as of June 15, 2004 from $5,861,000 as of December 30, 2003. This
increase is attributable to the costs of purchasing property and equipment in
excess of cash provided by operations and net proceeds from the line of credit.
Cash decreased $159,000 to $654,000 at June 15, 2004 compared to the balance of
$813,000 at December 30, 2003. 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 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. Interest is accrued at 1/2% below the prime rate as published in
The Wall Street Journal. As of June 15, 2004 the Company had borrowed $4,960,000
under the Line of Credit. The Company is in compliance with all debt covenants.
Cash flows from operations were $7,114,000 in the twenty-four weeks ended
June 15, 2004 compared to $5,200,000 in the twenty-four weeks ended June 17,
2003. Purchases of property and equipment were $9,274,000 in the twenty-four
weeks ended June 15, 2004 compared to $6,605,000 in the twenty-four weeks ended
June 17, 2003. Advances made to the developer of two build-to-suit locations
were $532,000 in the twenty-four weeks ended June 17, 2003. Net proceeds from
the revolving note payable to bank was $1,325,000 for the twenty-four week
period ending June 15, 2004 compared to $2,605,000 for the twenty-four weeks
ending June 17, 2003. At June 15, 2004, the Company had $654,000 in cash and
cash equivalents.
The Company intends to open eleven to twelve new locations in fiscal year
2004 and twelve to fifteen new locations in fiscal year 2005. At June 15, 2004,
five units had been opened in fiscal 2004, five units were under construction,
leases had been executed on five additional sites, and lease negotiations had
begun on five 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 $20.0 to $25.0 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
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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 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 3.50% for the twelve weeks ended June 15, 2004. The interest rate at
June 15, 2004 was 3.50%. The following table presents the quantitative interest
rate risks at June 15, 2004:
Principal Amount by Expected Maturity
--------------------------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2004 2005 2006 2007 2008 after Total 6/15/04
---------------------- ---- ---- ---- ---- ---- ----- ----- -------
Variable rate debt $ - $ - $ 193 $1,183 $1,225 $2,359 $4,960 $4,960
Average Interest Rate--
1/2% below prime 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Item 4. Procedures and Controls
-----------------------
As of the end of the period covered by 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 4. Submission of Matters to a Vote of Stockholders
-----------------------------------------------
On May 19, 2004, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, the stockholders elected Dennis L. Thompson, Stephen
P. Hartnett, and Nestor R. Weigand, Jr. to the Board of Directors to serve until
the 2007 Annual Meeting of Stockholders and until their successors have been
duly elected and qualified. As to the new elected Directors, there were
8,268,544 votes "For" and 355,233 votes "Withheld" for Dennis L. Thompson,
7,487,105 votes "For" and 1,136,672 votes "Withheld" for Stephen P. Hartnett,
and 8,336,200 votes "For" and 287,577 votes "Withheld" for Nestor R. Weigand,
Jr. The continuing directors and the expiration of their current terms as
directors are as follows:
Steven M. Johnson................................2005
Gary M. Judd.....................................2005
John D. Harkey, Jr...............................2005
James K. Zielke..................................2006
C. Wells Hall III................................2006
E. Gene Street...................................2006
The stockholders also ratified the appointment of KPMG LLP as the Company's
independent auditors for the year ending December 28, 2004. As to the
ratification of auditors, there were 8,614,952 votes "For," 4,950 votes
"Against," and 3,875 votes "Abstained."
The stockholders also approved an amendment to the Company's 1997 Incentive
and Non-Qualified Option Plan to approve an increase in authorized shares
reserved for issuance pursuant to the Plan from 1,600,000 shares to 2,000,000
shares of common stock. As to the amendment, there were 5,379,944 votes "For",
714,224 votes "Against", and 271,879 votes "Abstained."
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
Exhibit 10.1 - Second Amendment to 1997 Incentive and Non-Qualified Stock
Option Plan of Total Entertainment Restaurant Corp.
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 Rule
13a-14(b) and 15d-14(b) and 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 Rule
13a-14(b) and 15d-14(b) 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 5) dated April 7, 2004, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
A Current Report on Form 8-K (Item 12) dated April 12, 2004, reporting
the filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
A Current Report on Form 8-K (Item 5) dated May 17, 2004, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
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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 July 30, 2004 /s/ JAMES K. ZIELKE
-------------------- ----------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
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