UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission file number
September 3, 2002 000-22753
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TOTAL ENTERTAINMENT RESTAURANT CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-2016614
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
9300 East Central Avenue
Suite 100
Wichita, Kansas 67206
(Address of principal executive offices) (Zip code)
(316) 634-0505
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 1, 2002
----- ------------------------------
Common Stock, $.01 par value 10,277,874 shares
TOTAL ENTERTAINMENT RESTAURANT CORP.
Index
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
September 3, 2002 and December 25, 2001 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
September 3, 2002 and September 4, 2001 3
Condensed Consolidated Statements of
Operations for the thirty-six weeks ended
September 3, 2002 and September 4, 2001 4
Condensed Consolidated Statements of
Cash Flows for the thirty-six weeks ended
September 3, 2002 and September 4, 2001 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 14
Item 4. Procedures and Controls 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
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TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Balance Sheets
(Unaudited)
September 3, 2002 December 25, 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,028,316 $ 1,346,495
Inventories 1,376,882 1,230,636
Deferred income taxes 203,528 223,742
Other current assets 1,471,477 586,967
----------- -----------
Total current assets 4,080,203 3,387,840
Property and equipment:
Land 600,000 600,000
Buildings 670,629 670,629
Leasehold improvements 34,036,169 26,336,678
Equipment 19,580,848 15,284,124
Furniture and fixtures 5,199,093 3,890,170
----------- -----------
60,086,739 46,781,601
Less accumulated depreciation and amortization 15,494,101 12,249,339
----------- -----------
44,592,638 34,532,262
Other assets:
Goodwill, net of accumulated amortization 3,661,134 3,661,134
Deferred income taxes 474,241 982,875
Other assets 601,128 586,048
----------- -----------
Total other assets 4,736,503 5,230,057
----------- -----------
Total assets $53,409,344 $43,150,159
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,841,330 $ 3,741,281
Sales tax payable 845,268 529,852
Accrued payroll 1,024,406 873,765
Accrued payroll taxes 470,605 23,258
Accrued income taxes 1,623,380 2,155,170
Lease obligation for closed store 105,551 158,342
Other accrued liabilities 1,874,455 1,065,734
----------- -----------
Total current liabilities 9,784,995 8,547,402
Notes payable 835,000 10,350,000
Deferred revenue 83,106 103,875
Stockholders' equity:
Preferred stock -- --
Common stock 102,775 86,656
Additional paid-in capital 32,177,730 17,134,953
Retained earnings 10,425,738 6,927,273
----------- -----------
Total stockholders' equity 42,706,243 24,148,882
----------- -----------
Total liabilities and stockholders' equity $53,409,344 $43,150,159
=========== ===========
See accompanying notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Twelve weeks Twelve weeks
ended ended
September 3, 2002 September 4, 2001
------------------- ------------------
Sales:
Food and beverage $ 19,234,931 $ 12,986,753
Entertainment and other 1,776,977 1,409,001
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Total net sales 21,011,908 14,395,754
Costs and expenses:
Costs of sales 5,533,257 3,897,325
Restaurant operating expenses 11,824,762 7,777,479
Depreciation and amortization 1,188,059 857,836
Preopening costs 470,215 298,595
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Restaurant costs and expenses 19,016,293 12,831,235
------------ ------------
Restaurant operating income 1,995,615 1,564,519
General and administrative expenses 1,169,462 897,368
Goodwill amortization -- 56,346
------------ ------------
Income from operations 826,153 610,805
Other income (expense):
Loss on disposal of assets -- (38,768)
Other income, principally interest 23 1,263
Interest expense (61,770) (186,870)
------------ ------------
Income from continuing operations
before income taxes 764,406 386,430
Provision for income taxes 289,032 131,636
------------ ------------
Income from continuing operations 475,374 254,794
Income(loss) from discontinued operations -- (34,811)
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Net income $ 475,374 $ 219,983
============ ============
Basic earnings per share:
Income from continuing operations $ 0.05 $ 0.03
Loss on discontinued operations -- --
------------ ------------
Basic earnings per share $ 0.05 $ 0.03
============ ============
Diluted earnings per share
Income from continuing operations $ 0.05 $ 0.03
Loss on discontinued operations -- --
------------ ------------
Diluted earnings per share $ 0.05 $ 0.03
============ ============
See accompanying notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Thirty-six weeks Thirty-six weeks
ended ended
September 3,2002 September 4, 2001
----------------- -----------------
Sales:
Food and beverage $ 58,611,361 $ 40,860,097
Entertainment and other 5,634,129 4,236,436
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Total net sales 64,245,490 45,096,533
Costs and expenses:
Costs of sales 16,861,129 12,253,686
Restaurant operating expenses 33,497,620 23,218,215
Depreciation and amortization 3,252,288 2,483,182
Preopening costs 1,322,036 669,066
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Restaurant costs and expenses 54,933,073 38,624,149
------------ ------------
Restaurant operating income 9,312,417 6,472,384
General and administrative expenses 3,495,136 2,674,861
Goodwill amortization -- 169,036
------------ ------------
Income from operations 5,817,281 3,628,487
Other income (expense):
Loss on disposal of assets (18,239) (90,596)
Other income, principally interest 33 1,457
Interest expense (287,180) (664,708)
------------ ------------
Income from continuing operations
before income taxes 5,511,895 2,874,640
Provision for income taxes 2,026,262 1,038,625
------------ ------------
Income from continuing operations 3,485,633 1,836,015
Income(loss) from discontinued operations 12,832 (62,771)
------------ ------------
Net income $ 3,498,465 $ 1,773,244
============ ============
Basic earnings per share:
Income from continuing operations $ 0.39 $ 0.21
Loss on discontinued operations -- (0.01)
------------ ------------
Basic earnings per share $ 0.39 $ 0.20
============ ============
Diluted earnings per share
Income from continuing operations $ 0.37 $ 0.21
Loss on discontinued operations -- (0.01)
------------ ------------
Diluted earnings per share $ 0.37 $ 0.20
============ ============
See accompanying notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Thirty-six weeks Thirty-six weeks
ended ended
Sept. 3, 2002 Sept. 4, 2001
---------------- ----------------
Cash flows from operating activities:
Net income $ 3,498,465 $ 1,773,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of assets 15,739 90,596
Depreciation and amortization 3,287,140 2,749,979
Deferred income taxes 528,848 123,649
Net change in operating assets and liabilities:
Change in operating assets (1,063,580) (582,051)
Change in operating liabilities 1,129,523 (1,220,005)
------------ ------------
Net cash provided by operating activities 7,396,135 2,935,412
Cash flows from investing activities:
Purchases of property and equipment (12,950,973) (3,705,670)
Proceeds from disposal of assets 8,722 33,300
------------ ------------
Net cash used in investing activities (12,942,251) (3,672,370)
Cash flows from financing activities:
Proceeds from revolving note payable to bank 18,760,000 32,530,000
Payments of revolving note payable to bank (28,275,000) (31,545,000)
Proceeds from exercise of stock options 1,887,329 --
Sale of common stock 12,855,608 --
Purchases of common stock -- (167,316)
------------ ------------
Net cash provided by financing activities 5,227,937 817,684
------------ ------------
Net (decrease) increase in cash and cash equivalents (318,179) 80,726
Cash and cash equivalents at beginning of period 1,346,495 2,244,606
------------ ------------
Cash and cash equivalents at end of period $ 1,028,316 $ 2,325,332
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 288,463 $ 571,373
Cash paid for income taxes 1,721,349 756,000
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts payable $ 403,259 $ 328,890
Tax benefit related to stock options exercised 315,958 --
See accompanying notes.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Description of Business
The unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements in its 2001 Form
10-K. The results of the twelve weeks ended September 3, 2002 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2002.
2. Stock Options
During the twelve week period ended September 3, 2002, options to purchase
22,981 shares were exercised at a weighted-average exercise price of $2.99 per
share pursuant to its 1997 Incentive and Nonqualified Stock Option Plan and
options to purchase 35,000 shares were exercised at a weighted-average exercise
price of $3.51 per share pursuant to its 1997 Directors Stock Option Plan.
Options for 60,000 shares originally awarded pursuant to the 1997 Directors
Stock Option Plan have been rescinded and declared void by the Company's Board
of Directors as a result of a mistake of fact as to the proper accounting for
such options and other factors.
3. Earnings Per Share
Basic earnings per share amounts are computed based on the weighted average
number of shares actually outstanding. The number of weighted averaged shares
outstanding for the twelve week periods ended September 3, 2002 and September 4,
2001 were 9,573,356 and 8,666,111, respectively; the number of weighted average
shares outstanding for the thirty-six week periods ended September 3, 2002 and
September 4, 2001 were 9,007,756 and 8,671,697, respectively.
Diluted earnings per share are computed similar to basic earnings per share
except that the weighted average shares outsanding are increased to include
additional shares for the assumed exercise of stock options, if dilutive. The
number of additional shares is calculated by assuming that outstanding stock
options were exercised and the proceeds from such exercises were used to acquire
common shares at an average price during the reporting period. The number of
shares resulting from this computation of diluted earnings per share for the
twelve weeks ended September 3, 2002 and September 4, 2001 were 10,140,017 and
8,701,496, respectively, and for the thirty-six week periods ended September 3,
2002 and September 4, 2001 were 9,500,124 and 8,696,688, respectively.
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4. Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective
December 26, 2001. SFAS No. 142 requires that an intangible asset that is
acquired shall be initially recognized and measured based on its fair value.
SFAS No. 142 also provides that goodwill shall not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment through a comparison of fair value to its carrying value.
No impairment losses were recorded upon the initial adoption of SFAS No. 142.
The effect of the adoption of SFAS No. 142 on net income and earnings per
share is as follows:
Twelve Twelve Thirty-six Thirty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Sept. 3, 2002 Sept. 4, 2001 Sept. 3, 2002 Sept. 4, 2001
------------- ------------- ------------- -------------
Net income, as reported $ 475,374 $ 219,984 $3,498,465 $1,773,244
Goodwill amortization (net of income taxes) -- 42,135 -- 126,427
Net income, as adjusted $ 475,374 $ 262,019 $3,498,465 $1,899,671
Basic earnings per share, as reported $ 0.05 $ 0.03 $ 0.39 $ 0.20
Goodwill amortization (net of income taxes) -- -- -- 0.02
Basic earnings per share, as adjusted $ 0.05 $ 0.03 $ 0.39 $ 0.22
Diluted earnings per share, as reported $ 0.05 $ 0.03 $ 0.37 $ 0.20
Goodwill amortization (net of income taxes) -- -- -- 0.02
Diluted earnings per share, as adjusted $ 0.05 $ 0.03 $ 0.37 $ 0.22
5. New Accounting Standards
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and develops a
single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
the provisions of SFAS No. 144 effective December 26, 2001. The Company closed
and abandoned one restaurant on March 31, 2002. Pursuant to SFAS No. 144, each
restaurant is a component of the entity, and the operations of the closed
restaurant can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of
- 7 -
the Company. Accordingly, the operations of the closed restaurant, net of
applicable income tax effect, have been presented as discontinued operations and
prior period statements of income have been reclassified accordingly.
6. Legal Proceedings
Certain former employees have filed a complaint on their own behalf and on
the behalf of similarly situated persons alleging the Company violated certain
provisions of the Fair Labor Standards Act. It is not possible at this time for
the Company to evaluate the merits of this claim, the Company's likelihood of
success or the range of potential loss.
7. Public Offering
On July 24, 2002 the Company issued 1,350,000 shares of stock at $10.50 per
share in a public offering of its stock. Net proceeds from the offering were
$12.9 million, including underwriters' fees and other related public offering
costs.
Item 2. Management's Discussion and Anaysis of Financial Condition and Results
of Operations
General
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this Form 10-Q.
As of September 3, 2002, the Company owned and operated 51 restaurants
under the Fox and Hound Smokehouse & Tavern and Fox and Hound English Pub &
Grille ("Fox and Hound"), Bailey's Smokehouse & Tavern, Bailey's Sports Grille
and Bailey's Pub & Grille ("Bailey's") brand names. The Company's restaurants
offer a broad menu of mid-priced appetizers, entrees, and desserts served in
generous portions. In addition, each location features a full-service bar and
offers a wide selection of major domestic, imported and specialty beers. Each
restaurant emphasizes a high energy environment with multiple billiard tables
and satellite and cable coverage of a variety of sporting events and music
videos. In addition to our food, the Company believes that customers are
attracted to the elegant yet comfortable atmosphere of polished brass,
embroidered chairs and booths, hunter green and burgundy walls, and etched
glass. The Fox and Hound and Bailey's restaurants share identical design and
operational principles and menus. As of September 3, 2002, the Company owned and
operated 36 Fox and Hound restaurants and 15 Bailey's restaurants located in
Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas,
Louisiana, Michigan, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Texas and Virginia. As of September 4, 2001, the
Company owned and operated 27 Fox and Hound restaurants and 14 Bailey's
restaurants.
The components of the Company's net sales are food and non-alcoholic
beverages, alcoholic beverages, and entertainment and other (principally
billiard table rental fees). For the twelve weeks ended September 3, 2002, food
and non-alcoholic beverages were 33.5% of total sales, alcoholic beverages were
57.7% of total sales and entertainment and other were 8.8% of total
- 8 -
sales. For the twelve weeks ended September 4, 2001, food and non-alcoholic
beverages were 31.7% of total sales, alcoholic beverages were 58.5% of total
sales and entertainment and other were 9.8% of total sales.
The components of the Company's cost of sales primarily include direct
costs of food, non-alcoholic beverages and alcoholic beverages. These costs are
generally variable and will fluctuate with changes in sales volume and sales
mix.
Components of restaurant operating expenses include operating payroll and
fringe benefits, and occupancy, maintenance and utilities. All but one of the
Company's locations are leased and provide for a minimum annual rent, with some
leases calling for additional rent based on sales volume at the particular
location in excess of specified minimum sales levels.
Depreciation and amortization costs primarily include depreciation and
amortization of capital expenditures for restaurants.
Preopening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide an
infrastructure to support future growth. Management, supervisory and staff
salaries, employee benefits, travel, information systems, training, rent and
office supplies as well as accounting services fees are major items of costs in
this category.
In calculating comparable restaurant sales, the Company includes a
restaurant in the comparable restaurant base after it has been in operation for
18 full months. As of September 3, 2002, there were 38 restaurants in the
comparable restaurant base. Annualized average weekly sales are computed by
dividing net sales during the period by the number of store operating weeks and
multiplying the result by 52. These calculations include sales and store
operating weeks for the one unit included in discontinued operations.
Results of Operations
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Operations bear to net sales, and (ii) other selected operating data. The
Company operates on a 52 or 53 week fiscal year ending the last Tuesday in
December. Fiscal year 2001 consisted of 52 weeks and fiscal year 2002 consists
of 53 weeks. Fiscal quarters consist of three accounting periods of 12 weeks
each and a final period of 16 or 17 weeks.
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------ ------------------------
Sept. 3, Sept. 4, Sept. 3, Sept. 4,
2002 2001 2002 2001
-------- -------- -------- --------
Operating Statement Data:
Net sales .............................................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales ..................................... 26.3 27.1 26.2 27.2
Restaurant operating expenses ...................... 56.3 54.0 52.1 51.5
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Depreciation and amortization ...................... 5.6 6.0 5.0 5.5
Preopening costs ................................... 2.2 2.0 2.1 1.5
-------- -------- -------- --------
Restaurant costs and expenses .................... 90.4 89.1 85.4 85.7
-------- -------- -------- --------
Restaurant operating income ............................ 9.6 10.9 14.6 14.3
General and administrative expenses .................... 5.6 6.2 5.4 5.9
Goodwill amortization .................................. -- 0.4 -- 0.4
-------- -------- -------- --------
Income from operations ................................. 4.0 4.3 9.2 8.0
Loss on disposal of assets ............................. -- 0.3 0.1 0.2
Interest expense ....................................... 0.2 1.3 0.4 1.4
Income from continuing operations before income taxes .. 3.8 2.7 8.7 6.4
Provision for income taxes ............................. 1.5 0.9 3.2 2.3
Income from continuing operations ...................... 2.3 1.8 5.5 4.1
Loss from discontinued operations ...................... -- (0.3) -- (0.2)
-------- -------- -------- --------
Net income ............................................. 2.3% 1.5% 5.5% 3.9%
-------- -------- -------- --------
Restaurant Operating Data (dollars in thousands):
Annualized average weekly sales per location ........... $ 1,822 $ 1,567 $ 1,972 $ 1,686
Number of restaurants at end of the period ............. 51 41 51 41
Twelve Weeks Ended September 3, 2002 Compared to Twelve Weeks Ended
September 4, 2001
Net sales increased $6,616,000 (46.0%) for the twelve weeks ended September
3, 2002 to $21,012,000 from $14,396,000 for the twelve weeks ended September 4,
2001. This increase was due to a 27.9% increase in store weeks (600 versus 469)
as a result of eleven restaurants opened since September 4, 2001 and a 14.3%
increase in annualized average weekly sales for units open during the entire
period primarily as a result of increased customer traffic. Comparable
restaurant sales increased 4.4% for the quarter ended September 3, 2002.
Costs of sales increased $1,636,000 (42.0%) for the twelve weeks ended
September 3, 2002 to $5,533,000 from $3,897,000 in the twelve weeks ended
September 4, 2001, and decreased as a percentage of sales to 26.3% from 27.1%.
This decrease as a percentage of sales is principally attributable to lower food
costs associated with new barbecue menu items and price increases on selected
menu items implemented in the fourth quarter of fiscal year 2001.
Restaurant operating expenses increased $4,048,000 (52.1%) for the twelve
weeks ended September 3, 2002 to $11,825,000 from $7,777,000 in the twelve weeks
ended September 4, 2001, and increased as a percentage of net sales to 56.3%
from 54.0%. This increase as a percentage of sales is principally attributable
to higher hourly labor costs on new units during the initial months after
opening, increases in group insurance costs and workers compensation premiums
and higher advertising costs as a result of radio advertising in several
markets.
Depreciation and amortization increased $330,000 (38.5%) for the twelve
weeks ended September 3, 2002 to $1,188,000 from $858,000 in the twelve weeks
ended September 4, 2001, and decreased as a percentage of sales to 5.6% from
6.0%. This increase in expense is due to additional depreciation on eleven
restaurants opened net of one restaurant closed since September 4, 2001.
Preopening costs increased $171,000 (57.2%) for the twelve weeks ended
September 3, 2002 to $470,000 from $299,000 in the twelve weeks ended September
4, 2001. This increase is attributable to the costs incurred for three units
that opened during the twelve weeks ended September 3, 2002 and partial
preopening expenses for three restaurants which have yet to open. One restaurant
were opened in the twelve weeks ended September 4, 2001.
- 10 -
General and administrative expenses increased $272,000 (30.3%) for the
twelve weeks ended September 3, 2002 to $1,169,000 from $897,000 in the twelve
weeks ended September 4, 2001, due to an increase in corporate infrastucture to
support the Company's expansion. General and administrative expenses decreased
as a percentage of net sales to 5.6% from 6.2%, due to the leverage of
infrastructure expense against a higher sales volume.
Loss on disposal of assets was $39,000 for the twelve weeks ended September
4, 2001. The losses reflect the disposal of certain video games.
Interest expense was $62,000 for the twelve weeks ended September 3, 2002
and $187,000 for the twelve weeks ended September 4, 2001. This decrease is due
to both a lower interest rate and lower average balance applicable to the
revolving note payable in the current fiscal year compared with the prior fiscal
year.
The effective income tax rate was 37.8% for the twelve weeks ended
September 3, 2002 and 34.1% for the twelve weeks ended September 4, 2001.
Thirty-six Weeks Ended September 3, 2002 Compared to Thirty-six Weeks Ended
September 4, 2001
Net sales increased $19,148,000 (42.5%) for the 36 weeks ended September 3,
2002 to $64,245,000 from $45,097,000 for the 36 weeks ended September 4, 2001.
This increase was due to an 23.3% increase in store weeks (1,692 versus 1,372)
as a result of eleven restaurants opened since September 4, 2001 and a 15.4%
increase in annualized average weekly sales for units open during the entire
period primarily as a result of increased customer traffic. Comparable
restaurant sales increased 8.1% for the 36 weeks ended September 3, 2002.
Costs of sales increased $4,607,000 (37.6%) for the 36 weeks ended
September 3, 2002 to $16,861,000 from $12,254,000 in the 36 weeks ended
September 4, 2001, and decreased as a percentage of sales to 26.2% from 27.2%.
This decrease as a percentage of sales is principally attributable to lower food
costs associated with new barbecue menu items and price increases on selected
menu items implemented in the fourth quarter of fiscal year 2001.
Restaurant operating expenses increased $10,279,000 (44.3%) for the 36
weeks ended September 3, 2002 to $33,498,000 from $23,218,000 in the 36 weeks
ended September 4, 2001, and increased as a percentage of net sales to 52.1%
from 51.5%. This increase as a percentage of sales is principally attributable
to higher hourly labor costs on new units during the initial months after
opening, increases in group insurance costs and workers compensation premiums
and higher advertising costs as a result of radio advertising in several
markets, offset by leveraging fixed expenses against a higher sales volume.
Depreciation and amortization increased $769,000 (31.0%) for the 36 weeks
ended September 3, 2002 to $3,252,000 from $2,483,000 in the 36 weeks ended
September 4, 2001, and decreased as a percentage of sales to 5.0% from 5.5%.
This increase in expense is due to additional depreciation on eleven restaurants
opened net of one restaurant closed since September 4, 2001.
Preopening costs increased $653,000 (97.6%) for the 36 weeks ended
September 3, 2002 to $1,322,000 from $669,000 in the 36 weeks ended September 4,
2001. This increase is attributable to the costs incurred for nine units that
opened during the 36 weeks ended September 3, 2002 and partial preopening
expenses for three restaurants which have yet to open. Three restaurants were
opened in the 36 weeks ended September 4, 2001.
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General and administrative expenses increased $820,000 (30.7%) for the 36
weeks ended September 3, 2002 to $3,495,000 from $2,675,000 in the 36 weeks
ended September 4, 2001, due to an increase in corporate infrastucture to
support the Company's expansion. General and administrative expenses decreased
as a percentage of net sales to 5.4% from 5.9%, due to the leverage of
infrastructure expense against a higher sales volume.
Loss on disposal of assets was $18,000 for the 36 weeks ended September 3,
2002 and $91,000 for the 36 weeks ended September 4, 2001. The losses reflect
the disposal of certain video games.
Interest expense was $287,000 for the 36 weeks ended September 3, 2002 and
$665,000 for the 36 weeks ended September 4, 2001. This decrease is due to both
a lower interest rate and lower average balance applicable to the revolving note
payable in the current fiscal year compared with the prior fiscal year.
The effective income tax rate was 36.8% for the 36 weeks ended September 3,
2002 and 36.1% for the 36 weeks ended September 4, 2001.
Quarterly Fluctuations, Seasonality and Inflation
The timing of new unit openings will result in significant fluctuations in
quarterly results. The Company expects seasonality to be a factor in the results
of its business in the future due to expected lower second and third quarter
revenues due to the summer season. The primary inflationary factors affecting
the Company's operations include food, liquor and labor costs. A large number of
the Company's restaurant personnel are tipped employees who are paid at the
federal subminimum wage level; therefore, future subminimum wage changes will
have a significant effect on labor costs. As costs of food and labor have
increased, the Company has historically been able to offset these increases
through economies of scale, improved operating procedures and menu price
changes; however, short-term fluctuations in raw product pricing may have an
impact on the Company's costs of food. To date, inflation has not had a material
impact on operating margins.
Liquidity and Capital Resources
As is customary in the restaurant industry, the Company operates with
negative working capital. Negative working capital increased $545,000 to
$5,705,000 as of September 3, 2002 from $5,160,000 as of December 25, 2001. This
increase is attributable primarily to the excess of cost of purchases of
property and equipment in excess of working capital provided by operations, net
proceeds from the line of credit and net proceeds from the sale of stock. Cash
decreased $318,000 at September 3, 2002 compared to the balance at December 25,
2001. The Company does not have significant receivables or inventory and
receives trade credit based upon negotiated terms in purchasing food and
supplies. Because funds available from cash sales are not needed immediately to
pay for food and supplies, or to finance inventory, they may be considered as a
source of financing for noncurrent capital expenditures.
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Line of Credit") which provides for a line of credit of
$20,000,000 subject to certain limitations based on earnings before interest,
taxes, depreciation and amortization of the past fifty-two weeks and the amount
of capital lease obligations on personal property. The Line of Credit is secured
by substantially all of the Company's assets. The Line of Credit requires
monthly payments of interest only until November 1, 2003, at which time equal
monthly
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installments of principal and interest are required as necessary to fully
amortize the outstanding indebtedness plus future interest over a period of four
years. Interest is accrued at 1/2% below the prime rate as published in The Wall
Street Journal. Proceeds from the Line of Credit are being used for restaurant
development. As of September 3, 2002 the Company had borrowed $835,000 under the
Line of Credit. The Company is in compliance with all debt covenants.
Cash flows from operations were $7,396,000 in the 36 weeks ended September
3, 2002 compared to $2,935,000 in the 36 weeks ended September 4, 2001.
Purchases of property and equipment were $12,951,000 in the 36 weeks ended
September 3, 2002 compared to $3,706,000 in the 36 weeks ended September 4,
2001. Net repayments of the revolving note payable to bank was $9,515,000 for
the 36 week period ending September 3, 2002 compared to net proceeds of $985,000
for the 36 weeks ending September 4, 2001. At September 3, 2002, the Company had
$1,028,000 in cash and cash equivalents.
The Company intends to open twelve new locations in fiscal year 2002 and
ten to twelve new locations in fiscal year 2003. At September 3, 2002, ten units
had been opened in fiscal 2002, four units were under construction and an
additional three leases had 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 $14.0 to $18.0 million to open new
locations over the next twelve 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 twelve months. There can
be no assurance, however, that changes in the Company's operating plans, the
acceleration or modification of the Company's expansion plans, lower than
anticipated revenues, increased expenses, stock repurchases, potential
acquisitions or other events will not cause the Company to seek additional
financing sooner than anticipated, prevent the Company from achieving the goals
of its expansion strategy or prevent any newly opened locations from operating
profitably. There can be no assurance that additional financing will be
available on terms acceptable to the Company or at all.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this report
will prove to be accurate. Our actual results may differ materially from the
forward-looking statements contained herein. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to, potential increases in food, alcohol, labor,
and other operating costs, changes in competition, the inability to find
suitable new locations, changes in consumer preferences or spending patterns,
changes in demographic trends, the effectiveness of our operating and growth
initiatives and promotional efforts, and changes in government regulation.
Further information about the factors that might affect the Company's financial
and other results are included in the Company's 10-K, filed with the Securities
and Exchange Commission. In light of the significant uncertainties inherent in
the forward-looking
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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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's Line of Credit has a variable rate which is directly affected
by changes in U.S. interest rates. The average interest rate of the Facility was
4.25% for the twelve weeks ended September 3, 2002. The interest rate at
September 3, 2002 was 4.25%. The following table presents the quantitative
interest rate risks at September 3, 2002:
Principal Amount by Expected Maturity
-----------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2002 2003 2004 2005 2006 after Total 9/3/02
- ---------------------- ---- ---- ---- ---- ---- ----- ----- ------
Variable rate debt -- $32 $197 $206 $214 $186 $835 $835
Average Interest Rate--
1/2% below prime -- 4.25% 4.25% 4.25% 4.25% 4.25%
Item 4. Procedures and Controls
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 99.1 - Certification by Steven M. Johnson pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 99.2 - Certification by James K. Zielke pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Reports on Form 8-K
None
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TOTAL ENTERTAINMENT RESTAURANT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Total Entertainment Restaurant Corp.
(Registrant)
Date October 11, 2002 /s/ James K. Zielke
--------------------------- ---------------------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
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TOTAL ENTERTAINMENT RESTAURANT CORP.
CERTIFICATIONS
I, James K. Zielke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Total Entertainment
Restaurant Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date October 11, 2002 /s/ James K. Zielke
--------------------------- ----------------------------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
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TOTAL ENTERTAINMENT RESTAURANT CORP.
CERTIFICATIONS
I, Steven M. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Total Entertainment
Restaurant Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date October 11, 2002 /s/ Steven M. Johnson
------------------------------ ----------------------------------------
Steven M. Johnson
Chief Executive Officer
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