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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 25, 2001
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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
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
9300 E. CENTRAL, SUITE 100
WICHITA, KS 67206
(Address of principal executive offices) (Zip code)
(316) 634-0505
(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 13, 2002, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $44,505,098. 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 13, 2002, there were 8,665,611 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
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ITEM PAGE
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PART I
1. Business ................................................................................... 3
2. Properties ................................................................................. 11
3. Legal Proceedings .......................................................................... 11
4. Submission of Matters to a Vote of Security Holders ........................................ 12
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters .................. 13
6. Selected Financial Data .................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................. 15
7A. Quantitative and Qualitative Disclosures About Market Risk ................................. 21
8. Financial Statements and Supplementary Data ................................................ 22
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................................. 22
PART III
10. Directors and Executive Officers of the Registrant ......................................... 22
11. Executive Compensation ..................................................................... 22
12. Security Ownership of Certain Beneficial Owners and Management ............................. 22
13. Certain Relationships and Related Transactions ............................................. 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................... 23
Signatures ................................................................................. 25
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PART I
ITEM 1. BUSINESS
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GENERAL
Total Entertainment Restaurant Corp., a Delaware corporation ("the
Company"), owns and operates 47 entertainment restaurant locations which utilize
the Fox and Hound English Pub & Grille and Fox and Hound Smokehouse & Tavern
("Fox and Hound"), Bailey's Sports Grille, Bailey's Pub & Grille and Bailey's
Smokehouse & Tavern ("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 alternative 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. Both the Fox and Hound and Bailey's locations encompass
the Company's multi-dimensional concept and serve both larger urban and smaller
regional markets. The Company operates in one business segment.
The first Bailey's unit was opened in Charlotte, North Carolina in 1989 and
the first Fox and Hound unit was opened in Arlington, Texas in 1994. As of March
13, 2002, the Company owns and operates 32 Fox and Hound units and 15 Bailey's
units in Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana,
Kansas, Louisiana, Michigan, Missouri, Nebraska, North Carolina, Ohio,
Pennsylvania, 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 "Subsidiary 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 and 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
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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.
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
mega-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. Most locations also offer 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
Franchise Services Company, a third party accounting and administrative services
company. By employing the services and infrastructure provided by Franchise
Services Company, the Company is able to focus its energy and resources on brand
and unit development.
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 plans to open ten to twelve locations in 2002 and
between seven and ten locations in 2003. The Company has opened four units in
2002 and currently has seven leases executed with contingencies and two
non-binding letters of intent. The Company is currently evaluating locations in
markets that are familiar to its management team and plans to actively negotiate
additional leases at a number of sites. 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.
FLEXIBILITY AND VERSATILITY OF CONCEPT. The Company is implementing its
concept through both the Fox and Hound and Bailey's brand names. The Company's
concept 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,
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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.
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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
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FOX AND HOUND ENGLISH PUB & GRILLE
Arlington, TX August 1994 6,500
College Station, TX September 1994 7,700
Dallas, TX December 1995 9,600
Memphis #1, TN September 1997 8,400
Omaha, NE December 1997 9,000
Chicago, IL December 1997 10,100
Montgomery, AL January 1998 7,700
Cleveland, OH May 1998 8,500
Evansville, IN July 1998 8,600
Springfield, MO August 1998 9,100
San Antonio, TX August 1998 8,400
Erie, PA August 1998 10,400
Lubbock, TX October 1998 10,600
Dayton, OH October 1998 8,700
Memphis #2, TN November 1998 7,600
Overland Park, KS November 1998 9,100
Canton, OH November 1998 9,700
New Orleans, LA December 1998 9,200
Pittsburgh, PA January 1999 10,500
Winston-Salem, NC January 1999 9,400
Indianapolis, IN February 1999 8,400
Houston, TX February 1999 9,100
Baton Rouge, LA March 1999 11,500
Cleveland #2, OH October 2000 13,500
Lewisville, TX December 2000 7,600
Ft. Worth, TX April 2001 9,900
Ft. Worth #2, TX February 2002 14,000
FOX AND HOUND SMOKEHOUSE & TAVERN
Charlotte #3, NC August 2001 15,300
Dallas #2, TX December 2001 13,360
Denver, CO January 2002 10,500
Phoenix, AZ January 2002 11,600
Charlotte #4, NC March 2002 7,200
BAILEY'S SPORTS GRILLE
Charlotte #2, NC October 1990 7,600
Little Rock, AR February 1994 8,400
Greenville, SC September 1994 7,000
Nashville #1, TN April 1995 9,400
Knoxville, TN December 1995 9,400
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
BAILEY'S PUB & GRILLE
Atlanta #1, GA October 1998 8,500
Detroit, MI November 1998 9,100
Chapel Hill, NC December 1998 9,000
Dearborn, MI December 2000 8,450
Nashville #3, TN May 2001 11,400
BAILEY'S SMOKEHOUSE & TAVERN
Atlanta #2, GA November 2001 10,500
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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 ten to twelve entertainment restaurant locations in 2002 and between seven
to ten locations in 2003. 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 has granted a license agreement to operate one "Fox and Hound"
concept in Lincoln, Nebraska. This unit opened in February 2001. The Company may
in the future franchise and/or grant additional license or joint venture rights
to the Fox and Hound and Bailey's concepts in certain limited geographic areas
of the United States. It is expected that these franchisees, 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 has granted to Stephen P. Hartnett, Co-Chairman, the
right to operate one "Fox and Hound" concept in Dallas, Texas without the
payment of any license fee.
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 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 generally negotiated with initial
terms of three to ten 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 approximately 0.8 to
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 $1,780,000 and $1,590,000 in sales during
fiscal years ended December 25, 2001 and December 26, 2000, respectively. Of the
43 units open at December 25, 2001, 42 were leased facilities and had an average
cash investment of $1,258,000. The one open unit the Company owned as of
December 25, 2001 had a cost of $1,845,000
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(including the costs for land acquisition, construction, equipment and
pre-opening costs). 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 $1.5 million.
MENU
Both Bailey's and Fox and 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, chicken wings and
nachos, soups and salads, gourmet-style sandwiches, pizzas, ribs, burgers, a
selection of grilled and smoked barbecued entrees and desserts. Appetizers
typically range in price from $3.49 to $6.99, and entrees range from $5.99 to
$16.99, 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 60% of the Company's revenues in
the fiscal year ended December 25, 2001.
AMBIANCE AND DESIGN
FOX AND HOUND ENGLISH PUB & GRILLE, FOX AND HOUND SMOKEHOUSE & TAVERN,
BAILEY'S PUB & GRILLE, AND BAILEY'S SMOKEHOUSE & TAVERN. The Fox and Hound
English Pub & Grille, Fox and Hound Smokehouse & Tavern, Bailey's Pub & Grille,
and Bailey's Smokehouse & Tavern entertainment restaurant concepts incorporate
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 location features a full service restaurant and bar as well as
state-of-the-art audio and video technology (including several mega-screen TV's)
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 locations are also capable of
accommodating business and social organizations for special events.
Fox and Hound is the evolution of a concept originally conceived by Stephen
P. Hartnett, Co-Chairman. The first Fox and Hound unit was opened in August
1994. Management believes the design of Fox and 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 guests 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 SPORTS GRILLE. The Bailey's Sports Grille 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. Most
locations also feature a variety of popular interactive games. 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 Dennis L.
Thompson, Co-Chairman and Thomas A. Hager, a director of the Company. The first
Bailey's unit opened in Charlotte, North Carolina in November 1989. There are
presently nine locations operating in five states. Since the opening of the
first location in 1989, management has modified and
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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 have incorporated the general layout
and design of the Fox and Hound unit in Dallas, Texas. The Company anticipates
this layout and design will be utilized for future locations.
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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 media in selected markets. These media 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 the NCAA basketball
tournament, which attract locally active groups of fans, supporters or alumni.
The versatile layout and design of the units can also accommodate group events.
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
between two and four supporting managers depending upon unit revenue and hours
of operation. 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. The Company currently
employs nine district managers, each of which oversees between two and six
units. The district managers, general managers and support managers participate
in incentive cash bonus programs. Awards under the incentive plans 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 and Hound and Bailey's locations and meets with the
respective management teams to ensure compliance with the Company's strategies
and standards of quality.
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 and labor information are 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 daily or
weekly to the Company's principal operating account. The Company utilizes a
comprehensive peer review reporting system for its general managers. Within 10
days 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 their respective district managers to review the profit and
loss statements. The participants offer each other feedback on their respective
performances and suggest ways of improving profitability. The district managers
then meet in person with the senior management team to review the performance
for the past accounting period as well as set the operating agenda for the next
period. The Company believes the peer review system enables each general manager
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and district 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
multiple mystery-shop visits every 28-day period by a national restaurant
evaluation firm, 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 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.
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. The Company engages a purchasing consultant to assist
in the negotiation of purchasing agreements with suppliers. Food and supplies
are shipped directly to the 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 labor-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.
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ACCOUNTING AND ADMINISTRATIVE SERVICES
On March 1, 2002, the Company entered into a three-year services agreement
with Franchise Services Company ("FSC") for certain accounting and
administrative services, which renewed its prior three-year agreement. The per
unit per 28-day accounting fee is at a market rate with no fixed annual charge
and is to remain fixed for the entire three-year agreement.
COMPETITION
The entertainment and restaurant industries are highly competitive. There
are a large 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, ambiance and location. 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.
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.
Significant numbers of the Company's personnel are paid at rates related to the
federal minimum wage which is currently $5.15 per hour. Accordingly, increases
in the minimum wage will increase the company's 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.
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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, wholesale, 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 ensure 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.
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 $5.15 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. In August 1999, law changes in South Carolina resulted
in a significant decrease in the revenue of video gaming machines. Further law
changes in July 2000 completely eliminated the use of video gaming machines in
South Carolina. Video gaming revenue was $100,253 and $350,306 during the fiscal
years ended December 26, 2000 and December 28, 1999, respectively.
TRADEMARKS
The Company has federally registered its "Fox and Hound" and "Bailey's
Sports Grille" service marks. The Company's "7 Bailey's Sports Grille" and
"Serious Fun 7 Bailey's Sports Grille" design marks are also federally
registered. The Company regards its service and design 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 and 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.
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However, as more fully described in Item 3 - Legal Proceedings, below, a
cancellation proceeding has recently been filed with the Trademark Trial and
Appeal Board of the U.S. Patent and Trademark Office seeking to cancel certain
of the Bailey's marks.
EMPLOYEES
As of December 25, 2001, the Company employed approximately 3,000 persons,
four of whom are executive officers, ten of whom are support staff, nine of whom
are multi-unit supervisors, 200 of whom are entertainment restaurant unit
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
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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 ten 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 9300 E. Central, Suite 100,
Wichita, Kansas 67206. The Company believes there is sufficient office space
available at favorable leasing terms in the Wichita, Kansas area to satisfy the
additional needs of the Company that may result from future expansion.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 28, 2001, Patrick O'Shea, David W. Faber, Ann Swanson, Stacy
Gregory, Wes L. Patterson, Dale Sproat, Mark Thagard, and Patrick Wilson filed a
complaint on their own behalf and on behalf of other similarly situated persons
against the Company, Fox & Hound of Indiana, Inc., a subsidiary of the Company,
Gary Judd, the Company's president, Steven M. Johnson, the Company's chief
executive officer, J.C. Weinberg, the Company's former chief operating officer,
and Kenneth Syvarth, the Company's vice president - operations, in the United
States District Court for the Southern District of Indiana.
The plaintiffs, who purport to have been employees of the defendants with
the titles of manager-in-training, assistant manager, and/or general manager,
each alleged that the Company and the other defendants willfully and in bad
faith failed to pay the defendants overtime pay for hours worked in excess of
forty hours per week in violation of the provisions of the Fair Labor Standards
Act. The plaintiffs' complaint seeks (1) declaratory judgment that the Company
and other defendants violated the plaintiffs' legal rights, (2) an accounting of
compensation to which the defendants are owed, (3) monetary damages in the form
of back pay compensation and benefits, unpaid entitlements, liquidated damages,
and pre-judgment and post-judgment interest, and (4) attorneys' fees and costs.
Defendants including the Company have filed their answer to the plaintiffs'
complaint. The court has not yet entered its order establishing this case as a
collective action. On June 27, 2001, the Magistrate Judge held
-15-
an initial pre-trial conference and entered orders establishing deadlines in
this action. A settlement conference is scheduled for June 27, 2002 and a
five-day trial is scheduled for March 3, 2003.
Although it is not possible at this time for the Company to evaluate the
merits of this claim, nor their likelihood of success, management of the Company
is of the opinion that any resulting liability should not have a material
adverse effect on the Company's financial statements.
On October 2, 2000, R&A Bailey & Company of Dublin, Ireland, filed a notice
of opposition in the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office to the Company's U.S. service mark applications for "BAILEY'S
PUB & GRILLE" (color), "BAILEY'S PUB & GRILLE" (stylized), and "BAILEY'S PUB &
GRILLE." Additionally, on November 14, 2000, R&A Bailey & Company filed a
petition in the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office to cancel the Company's U.S. service mark registrations for "7
BAILEY'S SPORTS GRILLE" (+ Design), "SERIOUS FUN 7 BAILEY'S SPORTS GRILLE" (+
Design), and "BAILEY'S SPORTS GRILLE."
R&A Bailey & Company claims to be the owner of several U.S. trademark
registrations, including "BAILEYS ORIGINAL IRISH CREAM" (+ Design), "BAILEYS,"
"BAILEYS THE ORIGINAL LIGHT CREAM," "BAILEYS" (+ Design), and "BAILEYS YUM,"
that are claimed to be used in association with liqueurs, distilled spirits, ice
cream, coffee cups, and other ceramic accessories. R&A Bailey & Company has
alleged that the cited Company registrations and applications cause it damage,
are likely to create a likelihood of confusion, mistake, or deception, and would
likely dilute and lessen its "famous" marks in violation of the Lanham Act. R&A
Bailey & Company seeks cancellation of the Company's registrations and opposes
the registration of the Company's applications for registration of the
above-listed marks.
On December 29, 2000, the Company through its trademark counsel filed an
answer to R&A Bailey & Company's notice of opposition, denying its allegations.
On February 16, 2001, the Company filed a Stipulated Motion to Extend Answer to
Petition in response to the petition to cancel by R&A Bailey & Company. The
actions have been suspended by the Trademark Trial & Appeal Board to allow the
parties time to negotiate for possible settlement of these pending actions. The
Company is actively pursuing settlement, and is of the opinion that any
resulting liability should not have a material adverse effect on the Company's
financial statements.
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 25,
2001.
-16-
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
----------
Fiscal Year 1999 High Low
---------------- ---- ---
First Quarter 5.88 2.75
Second Quarter 4.25 2.50
Third Quarter 3.06 1.25
Fourth Quarter 1.75 1.50
Fiscal Year 2000 High Low
---------------- ---- ---
First Quarter 1.75 1.38
Second Quarter 2.50 1.50
Third Quarter 2.31 2.19
Fourth Quarter 2.38 1.44
Fiscal Year 2001 High Low
---------------- ---- ---
First Quarter 3.31 1.38
Second Quarter 3.20 2.10
Third Quarter 3.32 2.50
Fourth Quarter 3.20 2.19
HOLDERS
As of March 13, 2002, there were 70 holders of record 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.
-17-
SALE OF UNREGISTERED SECURITIES
(c) The following unregistered securities were issued by the Company during
the sixteen weeks ended December 25, 2001:
Number of Shares
Description of Sold/Issued/Subject Offering/Exercise
Date of Sale/Issuance Securities Issued to Options or Warrants Price Per Share
--------------------- ----------------- ---------------------- ---------------
September 27, 2001 Common Stock Options 5,000 $2.50
September 27, 2001 Common Stock Options 5,000 $2.50
September 27, 2001 Common Stock Options 5,000 $2.50
September 27, 2001 Common Stock Options 5,000 $2.50
September 27, 2001 Common Stock Options 5,000 $2.50
September 27, 2001 Common Stock Options 5,000 $2.50
October 24, 2001 Common Stock Options 7,500 $2.75
All of the above options were granted to certain key employees pursuant
to the 1997 Incentive and Nonqualified Stock Option Plan or to
non-employee directors pursuant to the Directors Stock Option Plan. The
options for employees have a vesting period of five years and a life of
ten years and the options for non-employee directors have a vesting
period of three years and a life of five years.
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.
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 the Company for the 52 weeks ended December 25, 2001,
December 26, 2000, December 28, 1999 and December 29, 1998 and period from
February 7, 1997 through December 30, 1997, the historical income statement data
for F&H Restaurant Corp. ("FHRC") for the period from January 1, 1997 through
February 20, 1997, the balance sheet data for the Company as of December 25,
2001, December 26, 2000, December 28, 1999, December 29, 1998 and December 30,
1997 are derived from the Company's and its predecessors' audited financial
statements. The table also sets forth the pro forma income statement data for
the Company as if the Exchange had occurred on January 1, 1997. 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, 1997, or which may
be expected to occur in the future.
-18-
Historical
---------------------------------------------------------------------------
The Company
---------------------------------------------------------------------------
52 Weeks Ended 46 weeks and
------------------------------------------------------------- 5 days ended
DEC. 25, 2001 DEC. 26, 2000 DEC. 28, 1999 DEC. 29, 1998 Dec. 30, 1997
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Net sales $70,952 $55,990 $55,930 $34,114 $16,163
Costs and expenses:
Cost of sales 19,213 14,790 15,349 9,429 4,287
Operating expenses 35,741 28,395 28,632 15,586 7,142
Depreciation and amortization 3,706 3,592 3,697 2,875 939
Preopening costs 1,218 501 488 -- --
Provision for asset impairment
and store closing 575 2,362 1,087 -- --
------ ------- ------- ------- -------
Entertainment and restaurant costs
and expenses 60,453 49,640 49,253 27,890 12,368
------ ------- ------- ------- -------
Entertainment and restaurant
operating income 10,499 6,350 6,677 6,224 3,795
General and administrative expenses 3,991 3,768 3,900 2,609 1,794
Goodwill amortization 244 244 244 244 210
------ ------- ------- ------- -------
Income from operations 6,264 2,338 2,533 3,371 1,791
Other income (expense) (997) (1,148) (1,298) (70) 266
------ ------- ------- ------- -------
Income before provision for
income taxes 5,267 1,190 1,235 3,301 1,525
Provision for income taxes 1,938 342 418 1,221 545
Minority interest -- -- -- -- --
------ ------- ------- ------- -------
Income before cumulative effect
of a change in accounting
principle 3,329 848 817 2,080 980
Cumulative effect of change in
accounting principle -- -- (1,128) -- --
------ ------- ------- ------- -------
Net income (loss) $3,329 $ 848 $ (311) $ 2,080 $ 980
====== ======= ======= ======= =======
Basic and diluted net income (loss)
per share $ .38 $ .09 $ (.03) $ .20 $ .11
====== ======= ======= ======= =======
Weighted number of shares
outstanding 8,670 9,323 10,348 10,415 9,182
====== ======= ======= ======= =======
CONT'D
The Company
Pro Forma
FHRC -----------
------------- Year ended
51 days ended DEC. 30,
FEB. 20, 1997 1997
------------- ------------
INCOME STATEMENT DATA:
Net sales $ 858 $ 18,557
Costs and expenses:
Cost of sales 245 4,912
Operating expenses 393 8,281
Depreciation and amortization 35 1,052
Preopening costs -- --
Provision for asset impairment
and store closing -- --
----- --------
Entertainment and restaurant costs
and expenses 673 14,245
----- --------
Entertainment and restaurant
operating income 185 4,312
General and administrative expenses 36 2,014
Goodwill amortization 24 242
----- --------
Income from operations 125 2,056
Other income (expense) 63 370
----- --------
Income before provision for
income taxes 62 1,686
Provision for income taxes 11 605
Minority interest 34 --
----- --------
Income before cumulative effect
of a change in accounting
principle 17 1,081
Cumulative effect of change in
accounting principle -- --
----- --------
Net income (loss) $ 17 $ 1,081
===== ========
Basic and diluted net income (loss)
per share $ .12
========
Weighted number of shares
outstanding 9,062
=====
The Company
-------------------------------------------------------------------------
December 25, December 26, December 28, December 29, December 30,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(In thousands)
BALANCE SHEET DATA:
Working capital (deficit) $ (5,160) $ (3,435) $ (489) $ (947) $ 4,579
Total assets 43,150 40,128 41,352 41,284 23,224
Notes payable, including current portion 10,350 11,980 14,395 11,815 ---
Stockholders' equity 24,149 20,987 22,232 23,736 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 and Hound and
eight Bailey's entertainment restaurant locations, and opened three Fox and
Hound and two Bailey's entertainment restaurant locations during the year ended
December 30, 1997, opened thirteen Fox and Hound and three Bailey's
entertainment restaurant locations during the year ended December 29, 1998,
opened five Fox and Hound entertainment restaurant locations and closed one Fox
and Hound and one Bailey's entertainment restaurant location during the year
ended December 28, 1999, and opened two Fox and Hound and one Bailey's
entertainment restaurant locations during the year ended
-19-
December 26, 2000, and opened four Fox and Hound and one Bailey's entertainment
restaurant locations during the year ended December 25, 2001.
Prior to December 30, 1998, pre-opening costs which include labor costs,
costs of hiring and training personnel and certain other costs relating to
opening new restaurants, were capitalized and amortized over a 12 month period,
beginning in the period that the restaurant opened. Effective December 30, 1998,
pre-opening costs are expensed as incurred.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which certain items included in the Condensed Consolidated Statement of Income
bear to net sales and other selected operating data.
Year Ended(1)
---------------------------------------
Dec. 25, Dec. 26, Dec. 28,
2001 2000 1999
--------- --------- ---------
INCOME STATEMENT DATA:
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 27.1 26.4 27.4
Operating expenses 50.4 50.7 51.2
Depreciation and amortization 5.2 6.4 6.6
Preopening costs 1.7 1.0 1.0
Provision for asset impairment
and store closing 0.8 4.2 1.9
------- ------- ------
Restaurant costs and expenses 85.2 88.7 88.1
------- ------- ------
Restaurant operating income 14.8 11.3 11.9
General and administrative 5.6 6.7 7.0
Goodwill amortization 0.4 0.4 0.4
------- ------- ------
Income from operations 8.8 4.2 4.5
Loss on disposal of assets (0.2) (0.1) (0.2)
Other income, principally interest --- --- ---
Interest expense (1.2) (2.0) (2.1)
------- ------- ------
Income before provision for income taxes 7.4 2.1 2.2
Provision for income taxes 2.7 0.6 0.7
------- ------- ------
Income before cumulative effect of a
change in accounting principle 4.7 1.5 1.5
Cumulative effect of change in
accounting principle --- --- (2.0)
------- ------- ------
Net income (loss) 4.7% 1.5% (0.5)%
======= ======= =======
RESTAURANT OPERATING DATA:
Number of locations at end of period 43 38 35
Number of store operating weeks (2) 2,071 1,831 1,843
Annualized average weekly sales per location (3) $1,780 $1,590 $1,578
- --------------------------------------
(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) Store operating weeks represents the number of weeks all locations
were open during the period.
(3) Annualized average weekly sales per location are computed by dividing
net sales during the period by the number of store operating weeks and
multiplying the result by fifty-two.
-20-
THE COMPANY
FIFTY-TWO WEEKS ENDED DECEMBER 25, 2001 COMPARED TO FIFTY-TWO WEEKS ENDED
DECEMBER 26, 2000
Net sales increased $14,962,000 (26.7%) for the fifty-two weeks ended
December 25, 2001 to $70,952,000 from $55,990,000 in the fifty-two weeks ended
December 26, 2000, which is attributable to a 11.9% increase in average unit
volumes ($1,780,000 versus $1,590,000) and a 13.1% increase in store operating
weeks (2,071 versus 1,831). Same store sales increased 7.4% for the fifty-two
weeks ended December 25, 2001.
Costs of sales, primarily food and beverages, increased $4,423,000 (29.9%)
for the fifty-two weeks ended December 25, 2001 to $19,213,000 from $14,790,000
in the fifty-two weeks ended December 26, 2000, and such expenses increased as a
percentage of sales to 27.1% from 26.4%. This increase as a percentage of sales
is principally attributable to higher food costs associated with a new menu
implemented in the first quarter of 2001 and an increase in certain raw product
costs.
Restaurant operating expenses for the fifty-two weeks ended December 25,
2001 increased $7,346,000 (25.9%) to $35,741,000 from $28,395,000 in the
fifty-two weeks ended December 26, 2000, and such expenses decreased as a
percentage of net sales to 50.4% from 50.7%. This decrease as a percentage of
sales is principally attributable to the effect of leveraging fixed expenses
against higher unit volumes.
Depreciation and amortization increased $114,000 (3.2%) for the fifty-two
weeks ended December 25, 2001 to $3,706,000 from $3,592,000 in the fifty-two
weeks ended December 26, 2000, and such expenses decreased as a percentage of
net sales to 5.2% from 6.4%. This net increase is due principally to
depreciation incurred during 2001 on eight units opened since September 5, 2000
offset by depreciation in 2000 on assets in two units for which an impairment
charge was taken in the fourth quarter of 2000 and depreciation in 2000 on
certain assets with a two-year life which were added in 1998. No depreciation
charge was incurred on these assets in 2001.
Preopening costs increased $716,000 (142.9%) for the fifty-two weeks ended
December 25, 2001 to $1,217,000 from $501,000 in the fifty-two weeks ended
December 26, 2000, and such expenses increased as a percentage of net sales to
1.7% from 1.0%. Preopening costs for 2001 were related to the opening of five
units in 2001 and costs related to units which will open in 2002. Preopening
costs for 2000 were related to the opening of three units in 2000 and costs
related to units which opened in 2001.
Provision for asset impairment and store closing decreased $1,787,000
(75.7%) for the fifty-two weeks ended December 25, 2001 to $575,000 from
$2,362,000 in the fifty-two weeks ended December 26, 2000, and such expenses
decreased as a percentage of net sales to 0.8% from 4.2%. The provision in 2001
and 2000 reflects the charge made in the fourth quarter of 2001 and 2000 for the
write down of certain under-performing restaurant assets. The Company
periodically reviews its long lived assets which are held and used in its
entertainment restaurant operations for indications of impairment (see Note 1 of
Notes to Consolidated Financial Statements).
General and administrative expenses increased $222,000 (5.9%) for the
fifty-two weeks ended December 25, 2001 to $3,991,000 from $3,769,000 in the
fifty-two weeks ended December 26, 2000, and such expenses decreased as a
percentage of net sales to 5.6% from 6.7%. The increase reflects the addition of
multi-unit supervisory positions and corporate-level positions to accommodate
future unit growth.
-21-
Loss on disposal of assets was $134,000 for the fifty-two weeks ended
December 25, 2001 and $67,000 for the fifty-two weeks ended December 26, 2000.
The losses reflect the disposal of certain video games for several units in both
years.
Interest expense decreased $217,000 (20.1%) for the fifty-two weeks ended
December 25, 2001 to $864,000 from $1,081,000. This decrease is due to a lower
interest rate applicable to the revolving note payable in the current year
compared with the prior year offset by a higher average balance on the revolving
note payable during the current year compared with the prior year.
The effective income tax rate on income was 36.8% for the fifty-two weeks
ended December 25, 2001 as compared to 28.7% for the fifty-two weeks ended
December 26, 2000. This increase was primarily due 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.
FIFTY-TWO WEEKS ENDED DECEMBER 26, 2000 COMPARED TO FIFTY-TWO WEEKS ENDED
DECEMBER 28, 1999
Net sales increased $60,000 (0.1%) for the fifty-two weeks ended December
26, 2000 to $55,990,000 from $55,930,000 in the fifty-two weeks ended December
28, 1999, which is attributable to a 0.8% increase in average unit volumes
($1,590,000 versus $1,578,000) offset by a 0.7% decrease in store operating
weeks (1,831 versus 1,843). Same store sales increased 3.8% for the fifty-two
weeks ended December 26, 2000.
Costs of sales, primarily food and beverages, decreased $559,000 (3.6%) for
the fifty-two weeks ended December 26, 2000 to $14,790,000 from $15,349,000 in
the fifty-two weeks ended December 28, 1999, and such expenses decreased as a
percentage of sales from 27.4% to 26.4%. This decrease is attributable to better
food and beverage controls.
Restaurant operating expenses for the fifty-two weeks ended December 26,
2000 decreased $237,000 (0.8%) to $28,395,000 from $28,632,000 in the fifty-two
weeks ended December 28, 1999, and such expenses decreased as a percentage of
net sales to 50.7% from 51.2%. This decrease is primarily attributable to lower
hourly labor costs (1.7%) resulting from better labor controls, offset by higher
other operating expenses including maintenance costs (0.6%) and live music costs
(0.6%).
Depreciation and amortization decreased $105,000 (2.8%) for the fifty-two
weeks ended December 26, 2000 to $3,592,000 from $3,697,000 in the fifty-two
weeks ended December 28, 1999, and such expenses decreased as a percentage of
net sales to 6.4% from 6.6%. This decrease is due to the closing of two units in
1999 offset by three new units opened in the fourth quarter of 2000.
Preopening costs increased $14,000 (2.9%) for the fifty-two weeks ended
December 26, 2000 to $501,000 from $487,000 in the fifty-two weeks ended
December 28, 1999, and such expenses were 1.0% of net sales for both periods.
Preopening costs for 2000 were related to the opening of three units in 2000 and
costs related to units which will open in 2001. Preopening costs for 1999 were
related to the opening of five units in 1999.
Provision for asset impairment and store closing increased $1,275,000
(117.3%) for the fifty-two weeks ended December 26, 2000 to $2,362,000 from
$1,087,000 in the fifty-two weeks ended December 28, 1999, and such expenses
increased as a percentage of net sales to 4.2% from 1.9%. The provision in 2000
reflects the charge made in the fourth quarter of 2000 for the write down of
certain under-performing restaurant assets. The Company periodically reviews its
long lived assets which are held and used in its entertainment restaurant
operations for indications of impairment (see Note 1 of Notes to Consolidated
Financial Statements). The provision in 1999 represents the estimated costs
associated with closing the Fox and Hound
-22-
location in Davenport, Iowa. The provision included $394,000 of future lease
costs, $640,000 in abandoned leasehold improvements and $53,000 in abandoned
furniture, fixtures and equipment. This unit was opened in June 1998 and closed
in October 1999. The unit had been experiencing consistent negative cash flows
due to low sales volumes.
General and administrative expenses decreased $132,000 (3.4%) for the
fifty-two weeks ended December 26, 2000 to $3,768,000 from $3,900,000 in the
fifty-two weeks ended December 28, 1999, and such expenses decreased as a
percentage of net sales to 6.7% from 7.0%. The decrease reflects the realignment
of certain executive positions during 2000.
The loss on disposal of assets in 2000 consisted mainly of the disposal of
certain video games in several units. The loss on disposal of assets in 1999
consisted mainly of the disposal of POS equipment in six units which was
replaced with POS systems consistent with the systems used in each of the other
units.
Interest expense decreased $94,000 (8.0%) for the fifty-two weeks ended
December 26, 2000 to $1,081,000 from $1,175,000. This decrease reflects a
decrease in the average debt balance offset by an increase in the average
interest rate.
The effective income tax rate on income was 28.7% for the fifty-two weeks
ended December 26, 2000 as compared to 44.0% for the fifty-two weeks ended
December 28, 1999. This decrease was primarily due 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
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 are likely to 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 then-existing Fox and 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 and Hound financed its
expansion primarily with partners' equity contributions and loans from related
parties.
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.
-23-
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Facility") which provides for a line of credit of $20,000,000
subject to certain limitations based on earnings before interest, income taxes,
depreciation and amortization of the past fifty-two weeks. The Facility requires
monthly payments of interest only until November 1, 2003, 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 a rate of 1/2% below the prime rate as
published in THE WALL STREET JOURNAL. Proceeds from the Facility were used for
restaurant development, common stock repurchases, and general corporate
purposes. As of December 25, 2001, the Company had borrowed $10,350,000 under
the Facility. The Company is in compliance with all debt covenants.
Cash flows from operations were $10,388,000 in the fifty-two weeks ended
December 25, 2001 compared to $7,131,000 in the fifty-two weeks ended December
28, 1999. This increase is attributable to an increase in net income before the
provision for asset impairment to $3,904,000 in the fifty-two weeks ended
December 25, 2001 compared to net income before the provision for asset
impairment to $3,210,000 in the fifty-two weeks ended December 26, 2000.
Purchases of property and equipment were $9,540,000 for the fifty-two weeks
ended December 25, 2001 compared to $3,005,000 for the fifty-two weeks ended
December 26, 2000. Net payments of the revolving note payable to bank was
$1,630,000 for the fifty-two weeks December 25, 2001 compared to net payments of
$2,415,000 for the fifty-two week period ending December 26, 2000. The Company
spent $167,000 to repurchase 75,800 shares of common stock in 2001 compared to
$2,093,000 of common stock repurchases in 2000. At December 25, 2001, the
Company had $1,346,000 in cash and cash equivalents.
The Company intends to open ten to twelve entertainment restaurant
locations in 2002 and between seven to ten locations in 2003. Four units have
been opened in fiscal 2002, two units are currently under construction and an
additional five leases have been executed. 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 $12.0 to $18.0 million to open new
locations over the next 12 months.
The Company believes the funds available from the Facility and its cash
flow from operations 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
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.
A summary of the Company's obligations and commitments to make future
payments under contracts, including debt and lease agreements is presented
below. The long-term debt payments represent principal payments only. The
Company must also make monthly interest payments on the outstanding debt balance
at a rate of 1/2% below the prime rate as published in THE WALL STREET JOURNAL
(4.50% at December 25, 2001).
Less than 1-3 4-5 After
Contractual Obligations Total 1 Year Years Years 5 Years
- ----------------------- ----- ------ ----- ----- -------
Long-term debt $10,350,000 $ -- $ 2,829,166 $ 5,208,631 $ 2,312,203
Operating leases 29,258,798 4,950,171 7,578,008 5,028,837 11,647,782
----------- ---------- ----------- ----------- -----------
Totals $39,608,798 $4,950,171 $10,407,174 $10,291,468 $13,959,985
Critical Accounting Policies
The Company considers determination of impairment of long-lived assets as a
critical accounting policy because determination as to whether the long-lived
assets of a restaurant are impaired and, if impaired, the fair value of such
assets requires the use of judgment, particularly as it relates to projecting
whether the sum of expected undiscounted future cash flows for the restaurant
over an extended period of time will equal or exceed the carrying value of such
assets. Management uses the best information available to make the
determination; however, actual future cash flows for the restaurant may vary
significantly from the cash flows projected in conjunction with the impairment
assessment. The potential impact on the financial statements of incorrect
judgments regarding impairment of long-lived assets is that a provision for
impairment could be needlessly recorded if projected future cash flows for a
restaurant are significantly under estimated or a provision for impairment could
be deferred until later determined necessary in a future period if initial
projected cash flows are over estimated. See Note 1 of Notes to Consolidated
Financial Statements for a description of the Company's accounting policy for
impairment of long-lived assets.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. In addition, SFAS No. 142 requires the Company to perform an assessment of
whether its recorded goodwill is impaired as of the date of adoption.
-24-
SFAS No. 142 is effective for the Company's fiscal year 2002. The Company
currently records annual goodwill amortization of approximately $244,000.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). 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.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and its provisions are to be applied
prospectively. Management believes that the adoption of SFAS No. 144 will not
have a significant impact on the financial statements.
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, 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 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.
-25-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
INTEREST RATE RISK
The Company's Facility has a variable rate which is directly affected by
changes in U.S. interest rates. The average interest rate of the Facility was
6.73% for the year ended December 25, 2001. The following table presents the
quantitative interest rate risks at December 25, 2001:
PRINCIPAL AMOUNT BY EXPECTED MATURITY
--------------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2002 2003 2004 2005 2006 After Total 12/25/01
---------------------- ---- ---- ---- ---- ---- ----- ----- --------
Variable rate debt --- $395 $2,434 $2,546 $2,663 $2,312 $10,350 $10,350
Average Interest Rate --
1/2% below prime 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
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.
-26-
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.
-27-
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 Entertain-
ment, 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.
*10.2 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.
*10.8 Non-Competition, Confidentiality and Non-Solicitation Agree-
ment between the Registrant and Dennis L. Thompson, dated
February 20, 1997.
-28-
*10.9 Non-Competition, Confidentiality and Non-Solicitation
Agree- ment 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 Subsidiaries of Registrant.
**24.1 Powers of Attorney (included on the signature page of this
Form 10-K).
- -----------------------------------
(b) Reports on Form 8-K filed in the fourth quarter of 2001:
None
* Incorporated by reference to the Company's Registration Statement
on Form S-1, as amended (Commission File No. 333-23343).
** Filed herewith.
-29-
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 20th day of March 2002.
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Registrant)
/s/ James K. Zielke
----------------------------------------------
James K. Zielke
Chief Financial Officer,
Treasurer, Secretary and Director
(principal accounting officer)
-30-
SIGNATORIES
Know all men by these presents, that each person whose signature appears below
hereby constitutes and appoints 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/ Dennis L. Thompson Co-Chairman of the Board March 20, 2002
----------------------------------------
Dennis L. Thompson
/s/ Stephen P. Hartnett Co-Chairman of the Board March 20, 2002
----------------------------------------
Stephen P. Hartnett
/s/ Steven M. Johnson Chief Executive Officer and March 20, 2002
---------------------------------------- Director
Steven M. Johnson (principal executive officer)
/s/ Gary M. Judd President and Director March 20, 2002
----------------------------------------
Gary M. Judd
/s/ James K. Zielke Chief Financial Officer, March 20, 2002
---------------------------------------- Treasurer, Secretary
James K. Zielke and Director
(principal accounting officer)
-31-
/s/ Thomas A. Hager Director March 20, 2002
----------------------------------------
Thomas A. Hager
/s/ C. Wells Hall, III Director March 20, 2002
----------------------------------------
C. Wells Hall, III
/s/ E. Gene Street Director March 20, 2002
----------------------------------------
E. Gene Street
/s/ John D. Harkey, Jr. Director March 20, 2002
----------------------------------------
John D. Harkey, Jr.
-32-
SUBSIDIARIES OF TOTAL ENTERTAINMENT RESTAURANT CORP.
----------------------------------------------------
AS OF MARCH 13, 2002
--------------------
F & H RESTAURANT CORP. BRYANT BEVERAGE CORPORATION
TENT FINANCE, INC. CAMPBELL BEVERAGE CORP.
TENT MANAGEMENT, INC. DOWNTOWN BEVERAGE CORP.
BAILEY'S SPORTS GRILL FOX & HOUND CLUB
BAILEY'S SPORTS GRILLE, INC. GUADALUPE BEVERAGE CORP.
FOX & HOUND, INC. JACKSON BEVERAGE CORPORATION
FOX & HOUND II, INC. LEWISVILLE BEVERAGE CORP.
F & H RESTAURANTS OF TEXAS, INC. RAIDER BEVERAGE CORPORATION
ALABAMA FOX & HOUND, INC. ROCKET BEVERAGE CORPORATION
FOX & HOUND OF ARIZONA, INC. SKILLMAN BEVERAGE CORP.
FOX & HOUND OF COLORADO, INC. MIDWAY ENTERTAINMENT, LTD.
F & H RESTAURANT OF GEORGIA, INC. N. COLLINS ENTERTAINMENT, LTD.
FOX & HOUND OF ILLINOIS, INC. 505 ENTERTAINMENT, LTD.
FOX & HOUND OF INDIANA, INC. FOX & HOUND OF SAN ANTONIO, LTD.
F & H OF IOWA, INC. FOX & HOUND OF AUSTIN, LTD.
FOX & HOUND OF KANSAS, INC. FOX & HOUND OF DALLAS, LTD.
F & H OF KENNESAW, INC. FOX & HOUND OF DALLAS #3, LTD.
FOX & HOUND OF LOUISIANA, INC. FOX & HOUND OF LUBBOCK, LTD.
FOX & HOUND OF MICHIGAN, INC. FOX & HOUND OF HOUSTON, LTD.
FOX & HOUND OF MISSOURI, INC. FOX & HOUND OF HOUSTON #2, LTD.
FOX & HOUND OF NEBRASKA, INC. FOX & HOUND OF HOUSTON #3, LTD.
FOX & HOUND OF NORTH CAROLINA, INC. FOX & HOUND OF LEWISVILLE, LTD.
FOX & HOUND OF OHIO, INC. FOX & HOUND OF FT. WORTH, LTD.
PENNSYLVANIA FOX & HOUND, INC. FOX & HOUND OF RICHARDSON, LTD.
FOX & HOUND OF TENNESSEE, INC.
FOX & HOUND OF TEXAS, INC.
FOX & HOUND OF VIRGINIA, INC.
-33-
TOTAL ENTERTAINMENT RESTAURANT CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
TOTAL ENTERTAINMENT RESTAURANT CORP.
Independent Auditors' Report -------------------------------------------------------------------------F-2
Report of Independent Certified Public Accountants ---------------------------------------------------F-3
Consolidated Balance Sheets as of December 25, 2001 and December 26, 2000-----------------------------F-4
Consolidated Statements of Income for the years ended December 25, 2001,
December 26, 2000, and December 28, 1999---------------------------------------------------------F-6
Consolidated Statements of Stockholders' Equity for the years ended December 25, 2001,
December 26, 2000, and December 28, 1999---------------------------------------------------------F-7
Consolidated Statements of Cash Flows for the years ended December 25, 2001,
December 26, 2000, and December 28, 1999---------------------------------------------------------F-8
Notes to Consolidated Financial Statements-----------------------------------------------------------F-10
F-1
Independent Auditors' Report
The Stockholders
Total Entertainment Restaurant Corp.
We have audited the accompanying consolidated balance sheets of Total
Entertainment Restaurant Corp. and subsidiaries as of December 25, 2001 and
December 26, 2000 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Total Entertainment
Restaurant Corp. and subsidiaries as of December 25, 2001 and December 26, 2000,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Wichita, Kansas
February 1, 2002
F-2
Report of Independent Certified Public Accountants
The Stockholders
Total Entertainment Restaurant Corp.
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Total Entertainment Restaurant Corp. for
the year ended December 28, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of Total Entertainment Restaurant Corp. for the year ended December
28, 1999, in conformity with accounting principles generally accepted in the
United States of America.
As described in Note 1 to the financial statements, on December 30, 1998, the
Company changed its method of accounting for pre-opening costs.
/s/ Grant Thornton LLP
Wichita, Kansas
January 28, 2000
F-3
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 25, DECEMBER 26,
2001 2000
------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,346,495 $ 2,244,606
Inventories 1,230,636 1,028,975
Deferred income taxes 223,742 161,206
Other current assets 586,967 579,594
------------------------------------------
Total current assets 3,387,840 4,014,381
Property and equipment:
Land 600,000 600,000
Buildings 670,629 670,629
Leasehold improvements 26,336,678 21,851,941
Equipment 15,284,124 13,397,524
Furniture and fixtures 3,890,170 3,265,386
------------------------------------------
46,781,601 39,785,480
Less accumulated depreciation and amortization 12,249,339 9,022,781
------------------------------------------
Net property and equipment 34,532,262 30,762,699
Other assets:
Goodwill, net of accumulated amortization of $1,222,121
($977,959 at December 26, 2000) 3,661,134 3,905,296
Deferred income taxes 982,875 1,059,839
Other assets 586,048 385,385
------------------------------------------
Total other assets 5,230,057 5,350,520
------------------------------------------
Total assets $ 43,150,159 $ 40,127,600
==========================================
F-4
DECEMBER 25, DECEMBER 26,
2001 2000
------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current portion notes payable $ - $ 418,108
Accounts payable 3,741,281 3,520,542
Sales tax payable 529,852 442,297
Accrued payroll 873,765 775,012
Accrued payroll taxes 23,258 242,134
Accrued income taxes 2,155,170 1,009,592
Lease obligation for closed store 158,342 263,924
Other accrued liabilities 1,065,734 777,504
------------------------------------------
Total current liabilities 8,547,402 7,449,113
Notes payable 10,350,000 11,561,892
Deferred revenue 103,875 129,549
Stockholders' equity:
Preferred stock, $.10 par value, 2,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 20,000,000 shares authorized;
8,665,611 shares issued and
outstanding (8,741,411 at December 26, 2000) 86,656 87,414
Additional paid-in capital 17,134,953 17,301,511
Retained earnings 6,927,273 3,598,121
------------------------------------------
Total stockholders' equity 24,148,882 20,987,046
------------------------------------------
Commitments
Total liabilities and stockholders' equity $ 43,150,159 $ 40,127,600
==========================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, 2001 DECEMBER 26, 2000 DECEMBER 28, 1999
--------------------------------------------------------------
Sales:
Food and beverage $64,504,884 $50,837,163 $50,525,221
Entertainment and other 6,447,603 5,152,660 5,404,628
--------------------------------------------------------------
Total net sales 70,952,487 55,989,823 55,929,849
Cost and expenses:
Cost of sales 19,213,441 14,789,948 15,349,274
Entertainment and restaurant operating expenses 35,741,386 28,394,610 28,631,590
Depreciation and amortization 3,706,054 3,592,299 3,697,083
Preopening costs 1,217,455 500,739 487,475
Provision for asset impairment and store closing 575,098 2,361,840 1,086,785
--------------------------------------------------------------
Entertainment and restaurant costs and expenses 60,453,434 49,639,436 49,252,207
--------------------------------------------------------------
Entertainment and restaurant operating income 10,499,053 6,350,387 6,677,642
General and administrative expenses:
Related parties - - 60,563
Other 3,990,827 3,768,774 3,839,623
Goodwill amortization 244,163 244,163 244,163
--------------------------------------------------------------
Income from operations 6,264,063 2,337,450 2,533,293
Other income (expense):
Loss on disposal of assets (133,825) (66,902) (123,648)
Other income (principally interest income) 1,484 404 126
Interest expense (864,375) (1,080,919) (1,174,739)
--------------------------------------------------------------
Income before provision for income taxes 5,267,347 1,190,033 1,235,032
Provision for income taxes 1,938,195 341,646 418,211
--------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 3,329,152 848,387 816,821
Cumulative effect of a change in accounting principle - - (1,127,536)
--------------------------------------------------------------
Net income (loss) $ 3,329,152 $ 848,387 $ (310,715)
==============================================================
Basic and diluted earnings (loss) per share:
Earnings before cumulative effect of a
change in accounting principle $ 0.38 $ 0.09 $ 0.08
Cumulative effect of a change in accounting principle - - (0.11)
--------------------------------------------------------------
Basic and diluted earnings (loss) per share $ 0.38 $ 0.09 $ (0.03)
==============================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------------- ADDITIONAL
PAID-IN RETAINED
NUMBER AMOUNT CAPITAL EARNINGS TOTAL
------------------------------------------------------------------------------
Balance at December 29, 1998 10,415,000 $104,150 $20,571,178 $3,060,449 $23,735,777
Purchase and retirement of shares of common stock (733,729) (7,337) (1,185,949) - (1,193,286)
Net loss - - - (310,715) (310,715)
------------------------------------------------------------------------------
Balance at December 28, 1999 9,681,271 96,813 19,385,229 2,749,734 22,231,776
Purchase and retirement of shares of common stock (939,860) (9,399) (2,083,718) - (2,093,117)
Net income - - - 848,387 848,387
------------------------------------------------------------------------------
Balance at December 26, 2000 8,741,411 87,414 17,301,511 3,598,121 20,987,046
Purchase and retirement of shares of common stock (75,800) (758) (166,558) - (167,316)
Net income - - - 3,329,152 3,329,152
------------------------------------------------------------------------------
Balance at December 25, 2001 8,665,611 $ 86,656 $17,134,953 $6,927,273 $24,148,882
==============================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, DECEMBER 26, DECEMBER 28,
2001 2000 1999
----------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 3,329,152 $ 848,387 $ (310,715)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of a change in accounting
principle - - 1,127,536
Write off of property and equipment related
to asset impairment and store closure 575,098 2,361,840 692,746
Loss on disposal of assets 133,825 66,902 123,648
Depreciation 3,725,337 3,611,878 3,725,240
Amortization 272,952 269,413 287,744
Deferred taxes 14,428 (593,759) (286,212)
Net change in operating assets and liabilities:
Inventories (201,661) (55,819) (118,470)
Other current assets (7,373) (143,955) 227,108
Other assets (229,453) (122,368) 14,514
Accounts payable 1,505,297 934,011 (2,005,717)
Accounts payable - affiliates - - (11,451)
Accrued liabilities 1,401,240 70,639 927,396
Deferred revenue (25,674) (11,220) 140,769
Lease obligation for closed store (105,582) (104,552) 368,476
----------------------------------------------------------
Net cash provided by operating activities 10,387,586 7,131,397 4,902,612
INVESTING ACTIVITIES
Purchases of property and equipment (9,540,231) (3,005,492) (4,694,718)
Proceeds from disposal of assets 51,850 76,349 10,000
----------------------------------------------------------
Net cash used in investing activities (9,488,381) (2,929,143) (4,684,718)
FINANCING ACTIVITIES
Proceeds from revolving note payable to bank 41,945,000 38,480,000 41,200,000
Payments of revolving note payable to bank (43,575,000) (40,895,000) (38,620,000)
Purchase of common stock (167,316) (2,093,117) (1,193,286)
----------------------------------------------------------
Net cash (used in) provided by financing activities (1,797,316) (4,508,117) 1,386,714
Net (decrease) increase in cash and cash equivalents (898,111) (305,863) 1,604,608
Cash and cash equivalents at beginning of year 2,244,606 2,550,469 945,861
----------------------------------------------------------
Cash and cash equivalents at end of year $ 1,346,495 $ 2,244,606 $ 2,550,469
==========================================================
F-8
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, DECEMBER 26, DECEMBER 28,
2001 2000 1999
----------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 885,206 $ 1,208,313 $ 1,171,349
Cash paid for income taxes 778,189 802,650 190,668
SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITY
Additions to property and equipment in accounts
payable at year end $ 261,525 $ 1,546,083 $ -
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
o BACKGROUND
Total Entertainment Restaurant Corp. (the Company) owns and operates a chain of
entertainment and restaurant locations under the Fox and Hound English Pub &
Grille and Fox and Hound Smokehouse & Tavern (Fox & Hound), Bailey's Sports
Grille, Bailey's Pub & Grille, and Bailey's Smokehouse & Tavern (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. As of December 25, 2001, the Company owned and
operated 29 Fox & Hounds and 14 Bailey's in Alabama, Arkansas, Georgia,
Illinois, Indiana, Kansas, Louisiana, Michigan, Missouri, Nebraska, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee and Texas. The Company
operates in one business segment.
The company has a 52/53 week fiscal year ending on the last Tuesday in December.
o 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.
o 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 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. 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.
o INVENTORIES
Inventories consist of food and beverages and are stated at the lower of cost
(first-in, first-out) or market.
F-10
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o PRE-OPENING COSTS
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES, which requires costs
related to pre-opening activities be expensed as incurred. Prior to fiscal year
1999, the Company capitalized substantially all costs incurred prior to the
opening of new restaurants, excluding those costs capitalized as property and
equipment, and amortized such pre-opening costs over a one-year period. The
Company adopted the provisions of SOP 98-5 effective December 30, 1998. The
effect of adoption of SOP 98-5 was to increase income from continuing operations
in 1999 by $1,064,401 ($0.10 per share), net of tax expense of $625,125, and to
record a charge for the cumulative effect of an accounting change of $1,127,536,
net of tax benefits of $662,204, to expense costs that had been capitalized
prior to 1999.
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 two to seven years.
o 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.
o 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
F-11
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $575,098 and $2,361,840 has been
recorded for the years ended December 25, 2001 and December 26, 2000,
respectively.
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 deferred
tax assets to the amounts expected to be realized. Deferred tax assets and
liabilities are measured using enacted tax rates. 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.
o ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 25, 2001, December 26, 2000, and December 28, 1999 were $536,342,
$696,364, and $622,555, respectively.
o 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 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.
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 4.
o USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
F-12
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income by the
average number of common shares outstanding during the year. Diluted earnings
per common share is calculated by adjusting outstanding shares, assuming
conversion of all potentially dilutive stock options.
2. 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.
3. REVOLVING NOTE PAYABLE
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Facility") which provides for a line of credit of $20,000,000
subject to certain limitations based on earnings before interest, income taxes,
depreciation and amortization of the past fifty-two weeks. The note is secured
by substantially all assets of the Company. The note restricts the ability of
the Company to pay dividends. The Facility requires monthly payments of interest
only until November 1, 2003, 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 a rate of 1/2% below the prime rate as published in THE
WALL STREET JOURNAL (4.50% and 9.00% at December 25, 2001 and December 26, 2000,
respectively). Proceeds from the Facility were used for restaurant development
and acquisition of treasury stock. As of December 25, 2001 and December 26,
2000, the Company had borrowed $10,350,000 and $11,980,000, respectively, under
the Facility. The Company had additional borrowings available at December 25,
2001 under the Facility of $9,650,000.
The following represents future maturities of the note:
2002 $ -
2003 395,147
2004 2,434,019
2005 2,545,838
2006 2,662,793
Thereafter 2,312,203
-----------------
Total $10,350,000
=================
F-13
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 described below, the alternative fair value accounting
provided for under FASB Statement 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 was amended in May 1999 to increase the number of authorized
shares reserved for issuance to 1,600,000 shares from 1,500,000 shares.
The Plan covers the former Chairman of the Board, certain officers and
key employees. Options granted have a vesting period of three to five
years and a life of ten years.
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
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
4.1% to 5.3%; no dividend yields; volatility factor ranging from 0.281 to 0.800;
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.
F-14
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STOCK OPTIONS (CONTINUED)
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:
DECEMBER 25, DECEMBER 26, DECEMBER 28,
2001 2000 1999
------------------ ------------------ -----------------
Pro forma net income (loss) $2,979,754 $645,479 $(524,264)
Pro forma earnings (loss) per
share--basic and diluted $0.34 $0.07 $(0.05)
Weighted average fair value of options
granted during the year $1.24 $1.23 $3.05
A summary of the Company's stock option activity and related information for the
years ended December 25, 2001, December 26, 2000, and December 28, 1999 follows:
DECEMBER 25, 2001 DECEMBER 26, 2000 DECEMBER 28, 1999
------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
----------- ------------- ----------- -------------- ----------- ------------
Outstanding beginning $ 5.60 980,069 $ 5.57 1,180,903 $ 7.19 1,129,401
of year
Granted 2.49 278,000 1.92 58,000 4.02 638,292
Exercised - - - - - -
Canceled (3.71) (114,724) (4.45) (258,834) (6.05) (586,790)
------------- -------------- ------------
Outstanding end of year $ 5.10 1,143,345 $ 5.60 980,069 $ 5.57 1,180,903
============= ============== ============
As of December 25, 2001, the Company's outstanding options have a weighted
average remaining contract life of 6.6 years and exercise prices ranging from
$1.63 to $9.00. There were 546,379 options exercisable at December 25, 2001 and
417,113 options exercisable at December 26, 2000.
For options outstanding as of December 25, 2001, the number of options,
weighted-average exercise price and weighted-average remaining contract life for
each group of options are as follows:
OPTIONS OUTSTANDING
---------------------------------------------------------------------------------
Number Weighted- Weighted-
Outstanding at Average Average
Range of December 25, Exercise Remaining
Prices 2001 Price Contract Life
---------------------------------------------------------------------------------
$1.63 to $4.00 695,248 3.04 7.40 years
$4.13 to $5.25 65,175 4.39 5.39 years
$7.00 to $9.00 382,922 8.96 5.32 years
-------
Total 1,143,345 5.10 6.59 years
F-15
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STOCK OPTIONS (CONTINUED)
The number of shares and weighted-average exercise price of options exercisable
at December 25, 2001 are as follows:
OPTIONS EXERCISABLE
----------------------------------------------------------
Number Weighted-
Exercisable at Average
Range of December 25, Exercise
PRICES 2001 PRICE
----------------------------------------------------------
$1.63 to $4.00 176,771 3.35
$4.13 to $5.25 30,036 4.41
$7.00 to $9.00 339,572 8.98
-------
Total 546,379 6.91
5. RELATED PARTY TRANSACTIONS
The Company utilized an affiliate to provide certain accounting, computer, and
administrative services during 1999. The Company incurred fees of $60,563
related to these services for the year ended December 28, 1999.
6. LEASES
The Company leases many of its facilities under noncancelable operating leases
having terms expiring between 2002 and 2017. 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 years ended December 25,
2001, December 26, 2000, and December 28, 1999 was $3,898,642, $3,246,774, and
$3,196,886, respectively, of which $267,686, $243,409, and $241,892,
respectively, was paid to a related party. Contingent rentals for the year ended
December 25, 2001 were $10,107. There were no contingent rentals during 2000 or
1999.
The following presents the 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 as of December 25, 2001:
2002 $4,950,171
2003 4,648,272
2004 2,929,736
2005 2,713,873
2006 2,368,964
Thereafter 11,647,782
----------------
Total $ 29,258,798
================
It is expected in the normal course of business that leases will be renewed as
they expire.
F-16
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
2001 2000 1999
------------------- ----------------- ------------------
NUMERATOR
Net income (loss) $3,329 $ 848 $ (311)
=================== ================= ==================
DENOMINATOR
Denominator for basic earnings (loss)
per share - weighted-average shares 8,670 9,323 10,348
Effect of dilutive securities:
Employee stock options 24 6 4
------------------- ----------------- ------------------
Dilutive potential common shares
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares and
assumed conversions 8,694 9,329 10,352
=================== ================= ==================
Basic earnings (loss) per common share $ 0.38 $ 0.09 $ (0.03)
=================== ================= ==================
Diluted earnings (loss) per common share $ 0.38 $ 0.09 $ (0.03)
=================== ================= ==================
8. INCOME TAXES
The Company's provision for income taxes consists of the following:
DECEMBER 25, DECEMBER 26, DECEMBER 28,
2001 2000 1999
---------------------------------------------------------
Current:
Federal $ 1,427,641 $ 786,663 $ 534,938
State 496,126 148,742 49,953
---------------------------------------------------------
Total Current 1,923,767 935,405 584,891
Deferred:
Federal 11,951 (546,984) (777,401)
State 2,477 (46,775) (51,483)
---------------------------------------------------------
Total Deferred 14,428 (593,759) (828,884)
---------------------------------------------------------
Total income tax expense (benefit) $ 1,938,195 $ 341,646 $ (243,993)
=========================================================
F-17
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The income tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities at December 25, 2001 and
December 26, 2000 are as follows:
DECEMBER 25, DECEMBER 26,
2001 2000
------------------- ------------------
Deferred tax assets:
Preopening and organization costs $ 545,788 $ 527,423
Store closure costs 289,370 387,452
Asset impairment costs 1,023,695 956,545
Deferred revenue 33,847 52,467
State income taxes 211,486 47,003
Vacation 39,809 43,403
Federal tax credit carryovers 426,764 913,641
Other 2,101 3,253
------------------- ------------------
Total deferred tax assets 2,572,860 2,931,187
------------------- ------------------
Deferred tax liabilities:
Property and equipment 1,209,568 1,486,054
Goodwill 154,621 167,442
Other 2,054 56,646
------------------- ------------------
Total deferred tax liabilities 1,366,243 1,710,142
------------------- ------------------
Net deferred tax asset $1,206,617 $1,221,045
=================== ==================
The federal tax credit carryovers consist of credits for social security taxes
paid on tips in excess of minimum wage of $171,242 and $658,119 at December 25,
2001 and December 26, 2000, respectively, which expire in 2021 and credits for
alternative minimum tax of $255,522 and $255,522 at December 25, 2001 and
December 26, 2000, respectively, which have no expiration date. A valuation
allowance for deferred tax assets was not considered necessary at December 25,
2001.
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:
DECEMBER 25, DECEMBER 26, DECEMBER 28,
2001 2000 1999
---------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- -------- ------------ -------- ----------- ---------
Income tax (benefit) expense at federal
statutory rate $1,790,898 34.0% $ 404,611 34.0% $ (188,601) 34.0%
State income taxes, net of
federal (provision) benefit 281,307 5.3 41,199 3.5 (15,217) 2.7
Tax credits (200,227) (3.8) (177,591) (14.9) (126,615) 22.8
Other items, net 66,217 1.3 73,427 6.1 (15.5)
86,440
---------- -------- ------------ -------- ----------- ---------
Actual income tax expense (benefit) $1,938,195 36.8% $ 341,646 28.7% $ (243,993) 44.0%
========== ======== ============ ======== =========== =========
F-18
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for all financial instruments,
including cash and cash equivalents, certain payables, and debt instruments,
approximates its fair value.
10. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results of
operations for fiscal 2001 and 2000:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(12 weeks) (12 weeks) (12 weeks) (16 weeks)
------------------------------------------------------------------
2001
Net sales $16,437,017 $14,725,028 $14,550,685 $25,239,757
Entertainment and restaurant
operating income (a) 3,073,406 1,789,149 1,508,109 4,128,389
Net income (a) 1,191,209 362,051 219,984 1,555,908
Basic and diluted earnings
per share 0.14 0.04 0.03 0.18
(a) The fourth quarter of fiscal 2001 includes a charge to earnings of
$575,098 ($354,430 net of income tax) related to the provision for asset
impairment in the quarter.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(12 weeks) (12 weeks) (12 weeks) (16 weeks)
------------------------------------------------------------------
2000
Net sales $13,649,790 $12,006,223 $11,282,667 $19,051,143
Entertainment and restaurant
operating income (a) 2,831,044 1,676,877 1,213,162 629,304
Net income (loss) (a) 971,316 294,971 20,221 (438,121)
Basic and diluted earnings (loss)
per share 0.10 0.03 0.00 (0.05)
(a) The fourth quarter of fiscal 2000 includes a charge to earnings of
$2,361,840 ($1,457,491 net of income tax) related to the provision for
asset impairment in the quarter.
11. LEGAL PROCEEDINGS
On February 28, 2001, eight former employees filed a complaint on their own
behalf and on behalf of other similarly situated persons against the Company,
Fox & Hound of Indiana, Inc., a subsidiary of the Company, and several Company
officers, in the United States District Court for the Southern District of
Indiana.
The plaintiffs alleged that the Company and the other defendants willfully and
in bad faith failed to pay the defendants overtime pay for hours worked in
excess of forty hours per week in
F-19
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
violation of the provisions of the Fair Labor Standards Act. The plaintiffs'
complaint seeks (1) declaratory judgment that the Company and other defendants
violated the plaintiffs' legal rights, (2) an accounting of compensation to
which the defendants are owed, (3) monetary damages in the form of back pay
compensation and benefits, unpaid entitlements, liquidated damages, and
pre-judgment and post-judgment interest, and (4) attorneys' fees and costs.
Defendants including the Company have filed their answer to the plaintiffs'
complaint. The court has not yet entered its order establishing this case as a
collective action. On June 27, 2001, the Magistrate Judge held an initial
pre-trial conference and entered orders establishing deadlines in this action. A
settlement conference is scheduled for June 27, 2002 and a five-day trial is
scheduled for March 3, 2003.
Although it is not possible at this time for the Company to evaluate the merits
of this claim, nor their likelihood of success, management of the Company is of
the opinion that any resulting liability should not have a material adverse
effect on the Company's financial statements.
On October 2, 2000, R&A Bailey & Company of Dublin, Ireland, filed a notice of
opposition in the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office to certain of the Company's U.S. service mark applications.
Additionally, on November 14, 2000, R&A Bailey & Company filed a petition in the
Trademark Trial and Appeal Board of the U.S. Patent and Trademark Office to
cancel certain of the Company's U.S. service mark registrations. In both
instances, the service marks involved in the actions included the word
"Bailey's".
On December 29, 2000, the Company through its trademark counsel filed an answer
to R&A Bailey & Company's notice of opposition, denying its allegations. On
February 16, 2001, the Company filed a Stipulated Motion to Extend Answer to
Petition in response to the petition to cancel by R&A Bailey & Company. The
actions have been suspended by the Trademark Trial & Appeal Board to allow the
parties time to negotiate for possible settlement of these pending actions. The
Company is actively pursuing settlement, and is of the opinion that any
resulting liability should not have a material adverse effect on the Company's
financial statements.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. In addition, SFAS No. 142 requires the Company to perform an assessment of
whether its recorded goodwill is impaired as of the date of adoption. SFAS No.
142 is effective for the Company's fiscal year 2002. The Company currently
records annual goodwill amortization of approximately $244,000.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144). 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.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and its provisions are to be applied
prospectively. Management believes that the adoption of SFAS No. 144 will not
have a significant impact on the financial statements.
F-20