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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission file number
September 7, 2004 000-22753
----------------- ---------
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-2016614
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
9300 East Central Avenue
Suite 100
Wichita, Kansas 67206
(Address of principal executive offices) (Zip code)
(316) 634-0505
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| YES |_| NO
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
|_| YES |X| NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 18, 2004
----- -------------------------------
Common Stock, $.01 par value 9,924,187 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 7, 2004 and December 30, 2003 2
Condensed Consolidated Statements of
Operations for the twelve weeks ended
September 7, 2004 and September 9, 2003 3
Condensed Consolidated Statements of
Operations for the thirty-six weeks ended
September 7, 2004 and September 9, 2003 4
Condensed Consolidated Statements of
Cash Flows for the thirty-six weeks ended
September 7, 2004 and September 9, 2003 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 12
Item 4. Procedures and Controls 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
-1-
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
September 7, 2004 December 30, 2003
------------------------- --------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,368 $813
Inventories 2,270 2,096
Prepaid income taxes - 997
Deferred income taxes 100 281
Other current assets 2,309 1,538
----------- -----------
Total current assets 6,047 5,725
Property and equipment:
Land 600 600
Buildings 2,900 703
Leasehold improvements 50,220 45,092
Equipment 28,781 25,107
Furniture and fixtures 8,640 7,514
----------- -----------
91,141 79,016
Less accumulated depreciation and amortization 26,879 22,615
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64,262 56,401
Other assets:
Goodwill, net of accumulated amortization 3,661 3,661
Advances to developer 545 842
Other assets 1,379 983
----------- -----------
Total other assets 5,585 5,486
----------- -----------
Total assets $75,894 $67,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,014 $5,510
Sales tax payable 1,207 1,187
Accrued payroll 1,330 1,674
Accrued payroll taxes 708 824
Accrued income taxes 367 -
Other accrued liabilities 3,111 2,391
------------ ------------
Total current liabilities 11,737 11,586
Notes payable 8,280 3,635
Deferred taxes 2,665 2,503
Deferred revenue 42 21
Accrued rent 708 547
Stockholders' equity:
Preferred stock - -
Common stock 99 98
Additional paid-in capital 29,214 28,553
Retained earnings 23,149 20,669
------------ ------------
Total stockholders' equity 52,462 49,320
------------ ------------
Total liabilities and stockholders' equity $75,894 $67,612
============ ============
See accompanying notes.
- 2 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(in thousands, except per share information)
(Unaudited)
Twelve weeks Twelve weeks
ended ended
September 7, 2004 September 9, 2003
----------------------- ------------------------
Sales:
Food and beverage $29,414 $23,273
Entertainment and other 2,047 1,995
------------ ------------
Total net sales 31,461 25,268
Costs and expenses:
Costs of sales 8,697 6,650
Restaurant operating expenses 18,495 14,353
Depreciation and amortization 1,662 1,485
Preopening costs 558 526
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Restaurant costs and expenses 29,412 23,014
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Restaurant operating income 2,049 2,254
General and administrative expenses 1,523 1,441
Loss on disposal of assets - 24
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Income from operations 526 789
Other income (expense):
Interest expense (59) (60)
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Income before income taxes 467 729
Provision for income taxes 145 249
------------ ------------
Net income 322 480
============ ============
Basic earnings per share: $ 0.03 $ 0.05
============ ============
Diluted earnings per share $ 0.03 $ 0.05
============ ============
See accompanying notes.
- 3 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Operations
(in thousands, except per share information)
(Unaudited)
Thirty-six weeks Thirty-six weeks
ended ended
September 7, 2004 September 9, 2003
----------------------- ------------------------
Sales:
Food and beverage $89,856 $71,403
Entertainment and other 6,593 6,155
------------ ------------
Total net sales 96,449 77,558
Costs and expenses:
Costs of sales 26,429 20,164
Restaurant operating expenses 52,465 41,372
Depreciation and amortization 4,720 4,244
Preopening costs 1,628 1,185
Asset impairment 2,365 -
------------ ------------
Restaurant costs and expenses 87,607 66,965
------------ ------------
Restaurant operating income 8,842 10,593
General and administrative expenses 5,017 4,237
Loss on disposal of assets - 41
------------ ------------
Income from operations 3,825 6,315
Other income (expense):
Other income (expense) 3 -
Interest expense (121) (130)
------------ ------------
Income before income taxes 3,707 6,185
Provision for income taxes 1,227 2,202
------------ ------------
Net income 2,480 3,983
============ ============
Basic earnings per share $ 0.25 $ 0.41
============ ============
Diluted earnings per share $ 0.24 $ 0.39
============ ============
See accompanying notes.
- 4 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Thirty-six weeks Thirty-six weeks
ended ended
September 7, 2004 September 9, 2003
------------------ -----------------
Cash flows from operating activities:
Net income $2,480 $3,983
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset impairment 2,365 -
Loss on disposal of assets - 41
Depreciation and amortization 4,787 4,302
Deferred income taxes 343 1,717
Net change in operating assets and liabilities:
Change in operating assets (170) (2,110)
Change in operating liabilities 320 (1,049)
----------- -----------
Net cash provided by operating activities 10,125 6,884
Cash flows from investing activities:
Purchases of property and equipment (14,924) (10,955)
Advances to developer 297 (272)
Proceeds from disposal of assets - 31
----------- -----------
Net cash used in investing activities (14,627) (11,196)
Cash flows from financing activities:
Proceeds from revolving note payable to bank 30,920 22,525
Payments of revolving note payable to bank (26,275) (17,610)
Proceeds from exercise of stock options 412 217
Purchase of common stock - (1,266)
----------- -----------
Net cash provided by financing activities 5,057 3,866
----------- -----------
Net increase (decrease) in cash and cash equivalents 555 (446)
Cash and cash equivalents at beginning of period 813 1,116
----------- -----------
Cash and cash equivalents at end of period $1,368 $670
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest 123 124
Cash paid for income taxes, net of refunds received (729) 2,277
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts payable 13 261
Tax benefit related to stock options exercised 250 41
See accompanying notes.
- 5 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
Notes to Condensed Consolidated FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. Basis of Presentation and Description of Business
The unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements in its 2003 Form
10-K. The results of the twelve weeks ended September 7, 2004 are not
necessarily indicative of the results to be expected for the full year ending
December 28, 2004.
2. Impairment of Long-Lived Assets
Long-lived assets and certain intangibles, including goodwill, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company reviews
applicable intangible assets and long-lived assets related to each restaurant on
a periodic basis. When events or changes in circumstances indicate an asset may
not be recoverable, the Company estimates the future cash flows expected to
result from the use of the asset. If the sum of the expected undiscounted cash
flows is less than the carrying value of the asset, an impairment loss is
recognized. The impairment loss is recognized by measuring the difference
between the carrying value of the assets and the fair value of the assets. The
Company's estimates of fair values are based on the best information available
and require the use of estimates, judgments and projections as considered
necessary. The actual results may vary significantly. A provision for impairment
was recorded for two stores for the thirty-six weeks ended September 7, 2004.
This impairment totaled $2,365 ($1,514 net of income tax effect of $851).
The Company does not intend to close the related restaurants.
3. Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, the Company uses the intrinsic
value-based method for measuring stock-based compensation cost which measures
compensation cost as the excess, if any, of the quoted market price of the
Company's common stock at the grant date over the amount the employee must pay
for the stock. The Company's policy is to grant stock options with grant prices
equal to the fair value of the Company's common stock at the date of grant.
Proceeds from the exercise of common stock options issued to officers, directors
and key employees under the Company's stock option plans are credited to common
stock to the extent of par value and to additional paid-in capital for the
excess.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires the information be determined
as if the Company has accounted for its employee stock options granted under the
fair value of that Statement. The fair value method for these options were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate ranging from
2.9% to 5.3%; no dividend yields; volatility factor ranging from 0.281 to 0.853;
and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
-6-
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
Twelve Weeks Ended Thirty-six weeks Ended
------------------ ----------------------
September 7, September 9, September 7, September 9,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 322 $ 480 $ 2,480 $ 3,983
Pro forma stock-based employee
compensation cost, net of tax 145 157 463 385
---------- ----------- ---------- -----------
Pro forma net income $ 177 $ 323 $ 2,017 $ 3,598
Earnings per share:
Basic, as reported $ 0.03 $ 0.05 $ 0.25 $ 0.41
Basic, pro forma 0.02 0.03 0.20 0.37
Diluted, as reported 0.03 0.05 0.24 0.39
Diluted, pro forma 0.02 0.03 0.19 0.35
Weighted average fair value of options
granted during the period $ 5.45 $ 5.66 $ 5.19 $ 5.36
3. Stock Options
During the twelve week period ended September 7, 2004, options to purchase
4,975 shares were exercised at a weighted-average exercise price of $3.27 per
share pursuant to its 1997 Incentive and Nonqualified Stock Option Plan. Options
to purchase 10,000 shares were granted at a weighted-average exercise price of
$13.62 per share and options to purchase 8,334 shares were exercised at a
weighted-average exercise price of $2.59 per share pursuant to its 1997
Directors Stock Option Plan.
4. Earnings Per Share
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. The number of weighted average
shares outstanding for the twelve week periods ended September 7, 2004 and
September 9, 2003 were 9,909,473 and 9,753,883, respectively; the number of
weighted average shares outstanding for the thirty-six week periods ended
September 7, 2004 and September 9, 2003 were 9,882,832 and 9,785,127,
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 7, 2004 and September 9, 2003
were 10,369,314 and 10,212,946, respectively, and for the thirty-six week
periods ended September 7, 2004 and September 9, 2003 were 10,432,922 and
10,183,126, respectively.
5. Legal Proceedings
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position and results of operations.
Recent litigation against restaurant chains has resulted in significant
judgments, including punitive damages, under dram shop statutes. A judgment
significantly in excess of our insurance coverage or involving punitive damages,
which may not be covered by insurance, could materially adversely affect our
financial condition or results of operations. Further, adverse publicity
resulting from these allegations may materially adversely affect us and our
restaurants.
-7-
Item 2. Management's Discussion and Anaysis of Financial Condition and Results
of Operations
General
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere in this Form
10-Q.
As of September 7, 2004, the Company owned and operated 72 restaurants
under the Fox and Hound Smokehouse & Tavern, Fox and Hound English Pub & Grille,
and Fox and Hound Pub & Grille ("Fox and Hound"), Bailey's Smokehouse & Tavern,
Bailey's Sports Grille and Bailey's Pub & Grille ("Bailey's") brand names. The
Company's restaurants offer a broad menu of mid-priced appetizers, entrees, and
desserts served in generous portions. Beginning in fiscal 2004, all new
restaurants were opened with a new food menu featuring an expanded selection of
new appetizers, salads and entrees. In addition, ten existing units have
converted to the new menu. As of September 7, 2004, a total of 18 units have
incorporated the new menu. 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. Most have multiple
billiard tables combined with satellite and cable coverage of a variety of
sporting events and music videos. In addition to our food, the Company believes
that customers are attracted to the elegant yet comfortable atmosphere of dark
wood interiors, polished brass, embroidered chairs and booths, and etched glass.
The Fox and Hound and Bailey's restaurants share identical operational
principles. As of September 7, 2004, the Company owned and operated 55 Fox and
Hound restaurants and 17 Bailey's restaurants located in Alabama, Arizona,
Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan,
Missouri, Nebraska, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Texas and Virginia. As of September 9,
2003, the Company owned and operated 45 Fox and Hound restaurants and 15
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 7, 2004, food
and non-alcoholic beverages were 37.9% of total sales, alcoholic beverages were
55.6% of total sales and entertainment and other were 6.5% of total sales. For
the twelve weeks ended September 9, 2003, food and non-alcoholic beverages were
35.0% of total sales, alcoholic beverages were 57.1% of total sales and
entertainment and other were 7.9% of total sales.
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 7, 2004, there were 55 restaurants in the
comparable restaurant base. Annualized average weekly sales are computed by
dividing net sales during the period by the number of store operating weeks and
multiplying the result by 52.
Results of Operations
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Operations bear to net sales, and (ii) other selected operating data. The
Company operates on a 52 or 53 week fiscal year ending the last Tuesday in
December. Fiscal years 2003 and 2004 each consists of 52 weeks. Fiscal quarters
consist of three accounting periods of 12 weeks each and a final period of 16 or
17 weeks.
-8-
Twelve Weeks Ended Thirty-six weeks Ended
------------------ ----------------------
September 7, September 9, September 7, September 9,
2004 2003 2004 2003
---- ---- ---- ----
Operating Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales....................................... 27.6 26.3 27.4 26.0
Restaurant operating expenses........................ 58.8 56.8 54.4 53.3
Depreciation and amortization........................ 5.3 5.9 4.9 5.5
Preopening costs..................................... 1.8 2.1 1.7 1.5
Asset impairment..................................... -- -- 2.4 --
----- ----- ----- ------
Restaurant costs and expenses.................... 93.5 91.1 90.8 86.3
----- ----- ----- ------
Restaurant operating income.............................. 6.5 8.9 9.2 13.7
General and administrative expenses...................... 4.8 5.7 5.2 5.5
Loss on disposal of assets............................... -- 0.1 -- 0.1
----- ----- ----- ------
Income from operations................................... 1.7 3.1 4.0 8.1
Interest expense 0.2 0.2 0.1 0.2
----- ----- ----- ------
Income before income taxes............................... 1.5 2.9 3.9 7.9
Income tax expense (benefit) (0.5) 1.0 1.3 2.8
----- ----- ----- ------
Net income .............................................. 1.0% 1.9% 2.6% 5.1%
===== ===== ===== ======
Restaurant Operating Data (dollars in thousands):
Annualized average weekly sales per location $ 1,920 $ 1,840 $2,061 $1,965
Number of restaurants at end of the period 72 60 72 60
Twelve Weeks Ended September 7, 2004 Compared to Twelve Weeks Ended September 9,
2003
Net sales increased $6,193,000 (24.5%) for the twelve weeks ended September
7, 2004 to $31,461,000 from $25,268,000 for the twelve weeks ended September 9,
2003. This increase was due to a 19.3% increase in store weeks (852 versus 714)
as a result of twelve restaurants opened since September 9, 2003 and a 4.3%
increase in annualized average weekly sales per location. Comparable restaurant
sales increased 1.3% for the quarter ended September 7, 2004.
Costs of sales increased $2,047,000 (30.8%) for the twelve weeks ended
September 7, 2004 to $8,697,000 from $6,650,000 in the twelve weeks ended
September 9, 2003, and increased as a percentage of sales to 27.6% from 26.3%.
This increase as a percentage of sales is principally attributable to an
increase in the cost of certain raw products and higher food mix.
Restaurant operating expenses increased $4,142,000 (28.9%) for the twelve
weeks ended September 7, 2004 to $18,495,000 from $14,353,000 in the twelve
weeks ended September 9, 2003, and increased as a percentage of net sales to
58.8% from 56.8%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units and higher labor and
benefits expense. The increase in labor and benefits expense is partially
attributable to additional training in stores converting to the new menu during
the quarter.
Depreciation and amortization increased $177,000 (11.9%) for the twelve
weeks ended September 7, 2004 to $1,662,000 from $1,485,000 in the twelve weeks
ended September 9, 2003, and decreased as a percentage of sales to 5.3% from
5.9%. This decrease in expense as a percentage of sales is due to additional
depreciation on twelve restaurants opened since September 9, 2003 offset by
lower depreciation on assets impaired in the fourth quarter of fiscal 2003 and
the second quarter of fiscal 2004 as well as assets which became fully
depreciated in the past year.
Preopening costs increased $32,000 (6.1%) for the twelve weeks ended
September 7, 2004 to $558,000 from $526,000 in the twelve weeks ended September
9, 2003. These costs are attributable to three units that opened during the
twelve weeks ended September 7, 2004 and partial preopening expenses for three
restaurants which have yet to open. Two restaurants were opened in the twelve
weeks ended September 9, 2003. Preopening expense for the twelve weeks ended
September 9, 2003 included partial preopening expenses for five units that had
not yet opened.
General and administrative expenses increased $82,000 (5.7%) for the twelve
weeks ended September 7, 2004 to $1,523,000 from $1,441,000 in the twelve weeks
ended September 9, 2003, due to an increase in corporate
-9-
infrastucture to support the Company's expansion. General and administrative
expenses decreased as a percentage of net sales to 4.8% from 5.7% due to higher
sales volume and lower bonus expense.
Loss on disposal of assets was $24,000 for the twelve weeks ended September
9, 2003. The loss reflects the disposal of certain point of sale equipment.
Interest expense was $59,000 for the twelve weeks ended September 7, 2004
and $60,000 for the twelve weeks ended September 9, 2003.
The effective income tax rate was 31.0% for the twelve weeks ended
September 7, 2004 and 34.2% for the twelve weeks ended September 9, 2003. This
decrease is due primarily to the impact of the credit for social security taxes
paid on tips in excess of minimum wage relative to the amount of income before
taxes.
Thirty-six weeks Ended September 7, 2004 Compared to Thirty-six weeks Ended
September 9, 2003
Net sales increased $18,891,000 (24.4%) for the thirty-six weeks ended
September 7, 2004 to $96,449,000 from $77,558,000 for the thirty-six weeks ended
September 9, 2003. This increase was due to a 18.5% increase in store weeks
(2,433 versus 2,053) as a result of eleven restaurants opened since September 9,
2003 and a 4.9% increase in annualized average weekly sales per location.
Comparable restaurant sales increased 1.0% for the thirty-six weeks ended
September 7, 2004.
Costs of sales increased $6,265,000 (31.1%) for the thirty-six weeks ended
September 7, 2004 to $26,429,000 from $20,164,000 in the thirty-six weeks ended
September 9, 2003, and increased as a percentage of sales to 27.4% from 26.0%.
This increase as a percentage of sales is principally attributable to an
increase in the cost of certain raw products, increased promotional activities
and higher food mix.
Restaurant operating expenses increased $11,093,000 (26.8%) for the
thirty-six weeks ended September 7, 2004 to $52,465,000 from $41,372,000 in the
thirty-six weeks ended September 9, 2003, and increased as a percentage of net
sales to 54.4% from 53.3%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units and higher labor and
benefits expense.
Depreciation and amortization increased $476,000 (11.2%) for the thirty-six
weeks ended September 7, 2004 to $4,720,000 from $4,244,000 in the thirty-six
weeks ended September 9, 2003, and decreased as a percentage of sales to 4.9%
from 5.5%. This decrease in expense as a percentage of sales is due to
additional depreciation on twelve restaurants opened since September 9, 2003
offset by lower depreciation on assets impaired in the fourth quarter of fiscal
2003 and the second quarter of fiscal 2004 as well as assets which became fully
depreciated in the past year.
Preopening costs increased $443,000 (37.4%) for the thirty-six weeks ended
September 7, 2004 to $1,628,000 from $1,185,000 in the thirty-six weeks ended
September 9, 2003. These costs are attributable to nine units that opened during
the thirty-six weeks ended September 7, 2004 and partial preopening expenses for
three restaurants which have yet to open. Six restaurants were opened in the
thirty-six weeks ended September 9, 2003.
The provision for asset impairment of $2,365,000 for the thirty-six weeks
ended September 7, 2004, reflects the charges made for the write down of
restaurant assets related to two underperforming units in the second quarter of
fiscal 2004. We periodically review our long-lived assets that are held and used
in our restaurant operations for indications of impairment. As of September 7,
2004, we have no plans to close either of these units.
General and administrative expenses increased $780,000 (18.4%) for the
thirty-six weeks ended September 7, 2004 to $5,017,000 from $4,237,000 in the
thirty-six weeks ended September 9, 2003 and decreased to 5.2% as a percentage
of sales from 5.5% due to higher sales volume and lower bonus expense.
Loss on disposal of assets was $41,000 for the thirty-six weeks ended
September 9, 2003. The loss reflects the disposal of certain point of sale
equipment.
Interest expense was $121,000 for the thirty-six weeks ended September 7,
2004 and $130,000 for the thirty-six weeks ended September 9, 2003. This
decrease is due mainly to a lower average balance applicable to the revolving
note payable in the current fiscal year compared with the prior fiscal year as
well as a lower interest rate.
The effective income tax rate was 33.1% for the thirty-six weeks ended
September 7, 2004 and 35.6% for the thirty-six weeks ended September 9, 2003.
This decrease is due primarily to the impact of the credit for social security
taxes paid on tips in excess of minimum wage relative to the amount of income
before taxes.
Quarterly Fluctuations, Seasonality and Inflation
The timing of new unit openings will result in significant fluctuations
in quarterly results. The Company expects seasonality to continue to be a factor
in the results of its business in the future due to expected lower second and
third quarter revenues due to the summer season. The primary inflationary
factors affecting the Company's operations include food, liquor and labor costs.
A large number of the Company's restaurant personnel are tipped employees who
are paid at the federal subminimum wage level; therefore, future subminimum wage
changes will
-10-
have a significant effect on labor costs. Historically, inflation has not had a
material impact on operating margins. As costs of food and labor have increased,
the Company has previously been able to offset these increases through economies
of scale, improved operating procedures and menu price changes. However, during
fiscal 2004, the Company has experienced significant increases in certain
commodity prices above historical levels which has negatively impacted costs of
food and operating margins. Additionally, competitive pressures may limit the
Company's ability to fully recover cost increases with the implementation of
menu price increases. To the extent that the Company continues to experience
significant increases in commodity prices, it may have a material negative
impact on operating margins.
Liquidity and Capital Resources
As is customary in the restaurant industry, the Company operates with
negative working capital. Negative working capital decreased $171,000 to
$5,690,000 as of September 7, 2004 from $5,861,000 as of December 30, 2003. This
decrease is attributable to cash provided by operations and net proceeds from
the line of credit in excess of the costs of purchasing property and equipment.
Cash increased $555,000 to $1,368,000 at September 7, 2004 compared to the
balance of $813,000 at December 30, 2003. The Company does not have significant
receivables or inventory and receives trade credit based upon negotiated terms
in purchasing food and supplies. Because funds available from cash sales are not
needed immediately to pay for food and supplies, or to finance inventory, they
may be considered as a source of financing for noncurrent capital expenditures.
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Line of Credit") which provides for a line of credit of
$20,000,000 subject to certain limitations based on earnings before interest,
taxes, depreciation and amortization of the past fifty-two weeks and the amount
of capital lease obligations on personal property. The Line of Credit is secured
by substantially all of the Company's assets. The Line of Credit requires
monthly payments of interest only until November 1, 2006, at which time equal
monthly installments of principal and interest are required as necessary to
fully amortize the outstanding indebtedness plus future interest over a period
of four years. Interest is accrued at 1/2% below the prime rate as published in
The Wall Street Journal. As of September 7, 2004 the Company had borrowed
$8,280,000 under the Line of Credit. The Company is in compliance with all debt
covenants.
Cash flows from operations were $10,125,000 in the thirty-six weeks ended
September 7, 2004 compared to $6,884,000 in the thirty-six weeks ended September
9, 2003. Purchases of property and equipment were $14,924,000 in the thirty-six
weeks ended September 7, 2004 compared to $10,955,000 in the thirty-six weeks
ended September 9, 2003. Advances made to the developer of two build-to-suit
locations were $272,000 in the thirty-six weeks ended September 9, 2003. Net
proceeds from the revolving note payable to bank was $4,645,000 for the
thirty-six week period ending September 7, 2004 compared to $4,915,000 for the
thirty-six weeks ending September 9, 2003. At September 7, 2004, the Company had
$1,368,000 in cash and cash equivalents.
The Company intends to open eleven to twelve new locations in fiscal year
2004 and ten to twelve new locations in fiscal year 2005. At September 7, 2004,
eight units had been opened in fiscal 2004, three units were under construction,
leases had been executed on five additional sites, and lease negotiations had
begun on seven additional sites. The Company is currently evaluating locations
in markets familiar to its management team. However, the number of locations
actually opened and the timing thereof may vary depending upon the ability of
the Company to locate suitable sites and negotiate favorable leases. The Company
expects to expend approximately $20.0 to $25.0 million to open new locations
over the next twelve months.
The Company believes the funds available from the Line of Credit and its
cash flow from operations will be sufficient to satisfy its working capital and
capital expenditure requirements for at least the next twelve months. There can
be no assurance, however, that changes in the Company's operating plans, the
acceleration or modification of the Company's expansion plans, lower than
anticipated revenues, increased expenses, stock repurchases, potential
acquisitions or other events will not cause the Company to seek additional
financing sooner than anticipated, prevent the Company from achieving the goals
of its expansion strategy or prevent any newly opened locations from operating
profitably. There can be no assurance that additional financing will be
available on terms acceptable to the Company or at all.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and,
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therefore, there can be no assurance that the forward-looking statements
included in this report will prove to be accurate. Our actual results may differ
materially from the forward-looking statements contained herein. Factors that
could cause actual results to differ from the results discussed in the
forward-looking statements include, but are not limited to, potential increases
in food, alcohol, labor, and other operating costs, changes in competition, the
inability to find suitable new locations, changes in consumer preferences or
spending patterns, changes in demographic trends, the effectiveness of our
operating and growth initiatives and promotional efforts, and changes in
government regulation. Further information about the factors that might affect
the Company's financial and other results are included in the Company's 10-K,
filed with the Securities and Exchange Commission. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's Line of Credit has a variable rate which is directly affected
by changes in U.S. interest rates. The average interest rate of the Line of
Credit was 3.75% for the twelve weeks ended September 7, 2004. The interest rate
at September 7, 2004 was 4.00%. The following table presents the quantitative
interest rate risks at September 7, 2004:
Principal Amount by Expected Maturity
-------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2004 2005 2006 2007 2008 after Total 9/7/04
---------------------- ---- ---- ---- ---- ---- ----- ----- ------
Variable rate debt $ - $ - $ 319 $1,961 $2,041 $3,959 $8,280 $8,280
Average Interest Rate--
1/2% below prime 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Item 4. Procedures and Controls
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 31.1 - Certification by Steven M. Johnson pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification by James K. Zielke pursuant to Rule
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification by Steven M. Johnson pursuant to Rule
13a-14(b) and 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification by James K. Zielke pursuant to Rule
13a-14(b) and 15d-14(b) 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
A Current Report on Form 8-K (Item 5) dated June 30, 2004, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
A Current Report on Form 8-K (Item 5) dated July 2, 2004, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
A Current Report on Form 8-K (Item 12) dated July 6, 2004, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
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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 21, 2004 /s/ James K. Zielke
------------------ ---------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
(Duly Authorized Officer)
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