UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission file number
JUNE 17, 2003 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 July 25, 2003
----- 9,751,548 SHARES
COMMON STOCK, $.01 PAR VALUE
TOTAL ENTERTAINMENT RESTAURANT CORP.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
-------------------------------
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT
JUNE 17, 2003 AND DECEMBER 31, 2002 2
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE WEEKS ENDED
JUNE 17, 2003 AND JUNE 11, 2002 3
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWENTY-FOUR WEEKS ENDED
JUNE 17, 2003 AND JUNE 11, 2002 4
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE TWENTY-FOUR WEEKS ENDED
JUNE 17, 2003 AND JUNE 11, 2002 5
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 14
ITEM 4. PROCEDURES AND CONTROLS 14
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
-1-
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 17, 2003 December 31, 2002
------------------ --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 612,020 $ 1,116,094
Inventories 1,560,992 1,603,672
Deferred income taxes 210,874 212,367
Other current assets 1,556,901 1,034,151
----------- -----------
Total current assets 3,940,787 3,966,284
Property and equipment:
Land 600,000 600,000
Buildings 702,886 702,739
Leasehold improvements 40,819,706 36,653,603
Equipment 22,493,826 20,802,285
Furniture and fixtures 6,679,457 5,845,627
----------- -----------
71,295,875 64,604,254
Less accumulated depreciation and amortization 20,146,243 17,391,742
----------- -----------
51,149,632 47,212,512
Other assets:
Goodwill, net of accumulated amortization 3,661,134 3,661,134
Advances to developer 1,102,000 570,000
Other assets 930,854 485,354
----------- -----------
Total other assets 5,693,988 4,716,488
----------- -----------
Total assets $60,784,407 $55,895,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 804,894 $ 98,413
Accounts payable 2,785,318 4,043,123
Sales tax payable 1,135,078 1,032,184
Accrued payroll 1,219,317 1,148,677
Accrued payroll taxes 520,065 751,920
Accrued income taxes 1,569,832 960,645
Lease obligation for closed store - 42,606
Other accrued liabilities 2,089,415 1,506,847
----------- -----------
Total current liabilities 10,123,919 9,584,415
Notes payable 4,340,106 2,441,587
Deferred taxes 162,276 98,633
Deferred revenue 60,029 73,875
Accrued rent 483,378 413,167
Stockholders' equity:
Preferred stock - -
Common stock 97,345 98,663
Additional paid-in capital 27,883,804 29,054,438
Retained earnings 17,633,550 14,130,506
----------- -----------
Total stockholders' equity 45,614,699 43,283,607
----------- -----------
Total liabilities and stockholders' equity $60,784,407 $55,895,284
=========== ===========
See accompanying notes.
- 2 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twelve weeks Twelve weeks
ended ended
June 17, 2003 June 11, 2002
--------------- ---------------
Sales:
Food and beverage $23,264,177 $19,500,517
Entertainment and other 1,984,812 1,908,331
------------ ------------
Total net sales 25,248,989 21,408,848
Costs and expenses:
Costs of sales 6,565,241 5,596,385
Restaurant operating expenses 13,504,360 11,272,784
Depreciation and amortization 1,403,025 1,054,611
Preopening costs 372,012 361,180
------------ ------------
Restaurant costs and expenses 21,844,638 18,284,960
------------ ------------
Restaurant operating income 3,404,351 3,123,888
General and administrative expenses 1,429,109 1,170,409
Loss on disposal of assets 16,726 -
------------ ------------
Income from operations 1,958,516 1,953,479
Other income (expense):
Other income/(expense) - 4
Interest expense (45,161) (118,745)
------------ ------------
Income from continuing operations
before income taxes 1,913,355 1,834,738
Provision for income taxes 677,896 689,831
------------ ------------
Income from continuing operations 1,235,459 1,144,907
Income(loss) from discontinued operations - (19,279)
------------ ------------
Net income $ 1,235,459 $ 1,125,628
============ ============
Basic earnings per share:
Income from continuing operations $ 0.13 $ 0.13
Loss on discontinued operations - -
------------ ------------
Basic earnings per share $ 0.13 $ 0.13
============ ============
Diluted earnings per share
Income from continuing operations $ 0.12 $ 0.12
Loss on discontinued operations - -
------------ ------------
Diluted earnings per share $ 0.12 $ 0.12
============ ============
See accompanying notes.
- 3 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Twenty-four weeks Twenty-four weeks
ended ended
June 17, 2003 June 11, 2002
------------------ ------------------
Sales:
Food and beverage $48,130,388 $39,376,430
Entertainment and other 4,159,512 3,857,152
------------ ------------
Total net sales 52,289,900 43,233,582
Costs and expenses:
Costs of sales 13,514,268 11,327,872
Restaurant operating expenses 27,019,097 21,672,858
Depreciation and amortization 2,758,693 2,064,229
Preopening costs 658,855 851,821
------------ ------------
Restaurant costs and expenses 43,950,913 35,916,780
------------ ------------
Restaurant operating income 8,338,987 7,316,802
General and administrative expenses 2,796,067 2,325,674
Loss on disposal of assets 16,726 18,239
------------ ------------
Income from operations 5,526,194 4,972,889
Other income (expense):
Other income/(expense) 304 10
Interest expense (70,042) (225,410)
------------ ------------
Income from continuing operations
before income taxes 5,456,456 4,747,489
Provision for income taxes 1,953,412 1,737,230
------------ ------------
Income from continuing operations 3,503,044 3,010,259
Income(loss) from discontinued operations - 12,832
------------ ------------
Net income $ 3,503,044 $ 3,023,091
============ ============
Basic earnings per share:
Income from continuing operations $ 0.36 $ 0.35
Loss on discontinued operations - -
------------ ------------
Basic earnings per share $ 0.36 $ 0.35
============ ============
Diluted earnings per share
Income from continuing operations $ 0.34 $ 0.33
Loss on discontinued operations - -
------------ ------------
Diluted earnings per share $ 0.34 $ 0.33
============ ============
See accompanying notes.
- 4 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Twenty-four weeks Twenty-four weeks
ended June 17, 2003 ended June 11, 2002
------------------- -------------------
Cash flows from operating activities:
Net income $ 3,503,044 $ 3,023,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of assets 16,726 15,739
Depreciation and amortization 2,790,644 2,093,378
Deferred income taxes 65,136 45,556
Net change in operating assets and liabilities:
Change in operating assets (952,924) (911,872)
Change in operating liabilities (223,194) 702,173
----------- -----------
Net cash provided by operating activities 5,199,432 4,968,065
Cash flows from investing activities:
Purchases of property and equipment (6,604,554) (8,069,683)
Advances to developer (532,000) -
Proceeds from disposal of assets - 8,895
----------- -----------
Net cash used in investing activities (7,136,554) (8,060,788)
Cash flows from financing activities:
Proceeds from revolving note payable to bank 15,610,000 12,825,000
Payments of revolving note payable to bank (13,005,000) (12,045,000)
Proceeds from exercise of stock options 94,438 1,695,635
Purchase of common stock (1,266,390) -
----------- -----------
Net cash provided by financing activities 1,433,048 2,475,635
----------- -----------
Net decrease in cash and cash equivalents (504,074) (617,088)
Cash and cash equivalents at beginning of period 1,116,094 1,346,495
----------- -----------
Cash and cash equivalents at end of period $ 612,020 $ 729,407
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 77,207 $ 243,166
Cash paid for income taxes 1,279,089 1,726,808
Supplemental disclosure of non cash activity:
Additions to property and equipment in accounts
payable 112,582 893,763
Tax benefit related to stock options exercised - 243,409
See accompanying notes.
- 5 -
TOTAL ENTERTAINMENT RESTAURANT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally presented in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements in its 2002 Form
10-K. The results of the twelve weeks ended June 17, 2003 are not necessarily
indicative of the results to be expected for the full year ending December 30,
2003.
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
In accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, the Company uses the intrinsic
value-based method for measuring stock-based compensation cost which measures
compensation cost as the excess, if any, of the quoted market price of Company's
common stock at the grant date over the amount the employee must pay for the
stock. The Company's policy is to grant stock options with grant prices equal to
the fair value of the Company's common stock at the date of grant. Proceeds from
the exercise of common stock options issued to officers, directors and key
employees under the Company's stock option plans are credited to common stock to
the extent of par value and to additional paid-in capital for the excess.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires the information be determined
as if the Company has accounted for its employee stock options granted under the
fair value of that Statement. The fair value method for these options were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate ranging from
2.9% 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:
- 6 -
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------ -----------------------
JUNE 17, JUNE 11, JUNE 17, JUNE 11,
2003 2002 2003 2002
---------- ----------- ---------- -----------
Net income, as reported $1,235,459 $1,125,628 $3,503,044 $3,023,091
Pro forma stock-based employee
compensation cost, net of tax 137,912 118,611 227,770 178,654
---------- ----------- ---------- -----------
Pro forma net income $1,097,547 $1,007,017 $3,275,274 $2,844,437
Earnings per share:
Basic, as reported $ 0.13 $ 0.13 $ 0.36 $ 0.35
Basic, pro forma 0.11 0.11 0.33 0.33
Diluted, as reported 0.12 0.12 0.34 0.33
Diluted, pro forma 0.11 0.11 0.32 0.31
Weighted average fair value of options
granted during the period $ 5.21 $ 6.09 $ 5.34 $ 6.09
3. STOCK OPTIONS
During the twelve week period ended June 17, 2003, the Company granted to
certain key employees stock options for 112,130 shares of Common Stock at an
exercise price of $7.75 per share and options to purchase 19,000 shares were
exercised at a weighted-average exercise price of $3.00 per share pursuant to
its 1997 Incentive and Nonqualified Stock Option Plan. Options to purchase
70,968 shares were granted at an exercise price of $7.75 per share pursuant to
its 1997 Directors Stock Option Plan.
4. EARNINGS PER SHARE
Basic earnings per share amounts are computed based on the weighted average
number of shares actually outstanding. The number of weighted averaged shares
outstanding for the twelve week periods ended June 17, 2003 and June 11, 2002
were 9,736,841 and 8,787,019, respectively; the number of weighted average
shares outstanding for the twenty-four week periods ended June 17, 2003 and June
11, 2002 were 9,800,749 and 8,726,315, respectively.
Diluted earnings per share are computed similar to basic earnings per share
except that the weighted average shares outsanding are increased to include
additional shares for the assumed exercise of stock options, if dilutive. The
number of additional shares is calculated by assuming that outstanding stock
options were exercised and the proceeds from such exercises were used to acquire
common shares at an average price during the reporting period. The number of
shares resulting from this computation of diluted earnings per share for the
twelve weeks ended June 17, 2003 and June 11, 2002 were 10,088,751 and
9,366,333, respectively, and for the twenty-four week periods ended June 17,
2003 and June 11, 2002 were 10,168,216 and 9,180,649, respectively.
- 7 -
5. NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses significant issues
relating to the implementation of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and develops a
single accounting method under which long-lived assets that are to be disposed
of by sale are measured at the lower of book value or fair value less cost to
sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
the provisions of SFAS No. 144 effective December 26, 2001. The Company closed
and abandoned one restaurant on March 31, 2002. Pursuant to SFAS No. 144, each
restaurant is a component of the entity, and the operations of the closed
restaurant can be distinguished from the rest of the entity and will be
eliminated from the ongoing operations of the Company. Accordingly, the
operations of the closed restaurant, net of applicable income tax effect, have
been presented as discontinued operations.
6. LEGAL PROCEEDINGS
Certain former employees have filed a complaint on their own behalf and on
the behalf of similarly situated persons alleging the Company violated certain
provisions of the Fair Labor Standards Act. 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 will not have a material adverse effect on the Company's financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this Form 10-Q.
As of June 17, 2003, the Company owned and operated 58 restaurants under
the Fox and Hound Smokehouse & Tavern and Fox and Hound English Pub & Grille
("Fox and Hound"), Bailey's Smokehouse & Tavern, Bailey's Sports Grille and
Bailey's Pub & Grille ("Bailey's") brand names. The Company's restaurants offer
a broad menu of mid-priced appetizers, entrees, and desserts served in generous
portions. In addition, each location features a full-service bar and offers a
wide selection of major domestic, imported and specialty beers. Each restaurant
emphasizes a high energy environment with multiple billiard tables and satellite
and cable coverage of a variety of sporting events and music videos. In addition
to its food, the Company believes that customers are attracted to the elegant
yet comfortable atmosphere of polished brass, embroidered chairs and booths,
hunter green and burgundy walls, and etched glass. The Fox and Hound and
Bailey's restaurants share identical design and operational principles and
menus. As of June 17, 2003, the Company owned and operated 44 Fox and Hound
restaurants and 14 Bailey's restaurants located in Alabama, Arizona, Arkansas,
Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Missouri,
Nebraska, North Carolina, Ohio, Pennsylvania, South
- 8 -
Carolina, Tennessee, Texas and Virginia. As of June 11, 2002, the Company owned
and operated 34 Fox and Hound restaurants and 14 Bailey's restaurants.
The components of the Company's net sales are food and non-alcoholic
beverages, alcoholic beverages, and entertainment and other (principally
billiard table rental fees). For the twelve weeks ended June 17, 2003, food and
non-alcoholic beverages were 33.0% of total sales, alcoholic beverages were
59.1% of total sales and entertainment and other were 7.9% of total sales. For
the twelve weeks ended June 11, 2002, food and non-alcoholic beverages were
33.2% of total sales, alcoholic beverages were 57.9% of total sales and
entertainment and other were 8.9% of total sales.
The components of the Company's cost of sales primarily include direct
costs of food, non-alcoholic beverages and alcoholic beverages. These costs are
generally variable and will fluctuate with changes in sales volume and sales
mix.
Components of restaurant operating expenses include operating payroll and
fringe benefits, and occupancy, maintenance and utilities. All but one of the
Company's locations are leased and provide for a minimum annual rent, with some
leases calling for additional rent based on sales volume at the particular
location in excess of specified minimum sales levels.
Depreciation and amortization costs primarily include depreciation and
amortization of capital expenditures for restaurants.
Preopening costs include labor costs, costs of hiring and training
personnel and certain other costs relating to opening new restaurants.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide an
infrastructure to support future growth. Management, supervisory and staff
salaries, employee benefits, travel, information systems, training, rent and
office supplies as well as accounting services fees are major items of costs in
this category.
In calculating comparable restaurant sales, the Company includes a
restaurant in the comparable restaurant base after it has been in operation for
18 full months. As of June 17, 2003, there were 41 restaurants in the comparable
restaurant base. Annualized average weekly sales are computed by dividing net
sales during the period by the number of store operating weeks and multiplying
the result by 52. These calculations include sales and store operating weeks for
the one unit included in discontinued operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated (i) the
percentages which certain items included in the Condensed Consolidated Statement
of Operations bear to net sales, and (ii) other selected operating data. The
Company operates on a 52 or 53 week fiscal year ending the last Tuesday in
December. Fiscal year 2002 consisted of 53 weeks and fiscal year 2003 consists
of 52 weeks. Fiscal quarters consist of three accounting periods of 12 weeks
each and a final period of 16 or 17 weeks.
- 9 -
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
------------------------ --------------------------
JUNE 17, JUNE 11, JUNE 17, JUNE 11,
2003 2002 2003 2002
------- --------- ---------- ----------
OPERATING STATEMENT DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of sales....................................... 26.0 26.1 25.8 26.2
Restaurant operating expenses........................ 53.5 52.7 51.7 50.1
Depreciation and amortization........................ 5.5 4.8 5.3 4.8
Preopening costs..................................... 1.5 1.7 1.3 2.0
----- ----- ----- ------
Restaurant costs and expenses.................... 86.5 85.3 84.1 83.1
----- ----- ----- ------
Restaurant operating income.............................. 13.5 14.7 15.9 16.9
General and administrative expenses...................... 5.6 5.5 5.4 5.4
Loss on disposal of assets............................... 0.1 -- -- --
----- ----- ----- ------
Income from operations................................... 7.8 9.2 10.5 11.5
Interest expense 0.2 0.5 0.1 0.5
----- ----- ----- ------
Income from continuing operations before income taxes.... 7.6 8.7 10.4 11.0
Provision for income taxes 2.7 3.3 3.7 4.0
----- ----- ----- ------
Income from continuing operations........................ 4.9 5.4 6.7 7.0
Loss from discontinued operations -- (0.1) -- --
----- ----- ----- ------
Net income............................................... 4.9% 5.3% 6.7% 7.0%
===== ===== ===== ======
RESTAURANT OPERATING DATA (DOLLARS IN THOUSANDS):
Annualized average weekly sales per location $1,928 $1,976 $2,031 $2,052
Number of restaurants at end of the period 58 48 58 48
TWELVE WEEKS ENDED JUNE 17, 2003 COMPARED TO TWELVE WEEKS ENDED JUNE 11, 2002
Net sales increased $3,840,000 (17.9%) for the twelve weeks ended June 17,
2003 to $25,249,000 from $21,409,000 for the twelve weeks ended June 11, 2002.
This increase was due to a 20.7% increase in store weeks (681 versus 564) as a
result of eleven restaurants opened since June 11, 2002 and a 2.4% decrease in
annualized average weekly sales per location. Comparable restaurant sales
decreased 0.4% for the quarter ended June 17, 2003.
Costs of sales increased $969,000 (17.3%) for the twelve weeks ended June
17, 2003 to $6,565,000 from $5,596,000 in the twelve weeks ended June 11, 2002,
and decreased as a percentage of sales to 26.0% from 26.1%. This decrease as a
percentage of sales is principally attributable to price increases implemented
in the first quarter of fiscal year 2003.
Restaurant operating expenses increased $2,231,000 (19.8%) for the twelve
weeks ended June 17, 2003 to $13,504,000 from $11,273,000 in the twelve weeks
ended June 11, 2002, and increased as a percentage of net sales to 53.5% from
52.7%. This increase as a percentage of sales is principally attributable to
higher occupancy costs on new units, higher utility costs, and higher liability
insurance and claims expense offset by lower advertising and premium TV costs.
Depreciation and amortization increased $348,000 (33.0%) for the twelve
weeks ended June 17, 2003 to $1,403,000 from $1,055,000 in the twelve weeks
ended June 11, 2002, and increased as a percentage of sales to 5.5% from 4.8%.
This increase in expense is due to additional depreciation on eleven restaurants
opened since June 11, 2002.
Preopening costs increased $11,000 (3.0%) for the twelve weeks ended June
17, 2003 to $372,000 from $361,000 in the twelve weeks ended June 11, 2002.
These costs are attributable to two units that opened during the twelve weeks
ended June 17, 2003 and partial preopening expenses for three restaurants which
have yet to open. Two restaurants were opened in the twelve weeks ended June 11,
2002.
- 10 -
General and administrative expenses increased $259,000 (22.1%) for the
twelve weeks ended June 17, 2003 to $1,429,000 from $1,170,000 in the twelve
weeks ended June 11, 2002, due to an increase in corporate infrastucture to
support the Company's expansion. General and administrative expenses increased
as a percentage of net sales to 5.6% from 5.5%.
Loss on disposal of assets was $17,000 for the twelve weeks ended June 17,
2003. The losses reflect the disposal of certain point of sale equipment.
Interest expense was $45,000 for the twelve weeks ended June 17, 2003 and
$119,000 for the twelve weeks ended June 11, 2002. This decrease is due mainly
to a lower average balance applicable to the revolving note payable in the
current fiscal year compared with the prior fiscal year as well as a lower
interest rate.
The effective income tax rate was 35.4% for the twelve weeks ended June 17,
2003 and 37.6% for the twelve weeks ended June 11, 2002. This decrease is due
primarily to the impact of the credit for social security taxes paid on tips in
excess of minimum wage relative to the amount of income before taxes.
Loss from discontinued operations was $19,000 for the twelve weeks ended
June 11, 2002 applicable to the restaurant closed on March 31, 2002.
TWENTY-FOUR WEEKS ENDED JUNE 17, 2003 COMPARED TO TWENTY-FOUR WEEKS ENDED JUNE
11, 2002
Net sales increased $9,056,000 (20.9%) for the twenty-four weeks ended June
17, 2003 to $52,290,000 from $43,234,000 for the twenty-four weeks ended June
11, 2002. This increase was due to a 21.3% increase in store weeks (1,339 versus
1,103) as a result of eleven restaurants opened since June 11, 2002 and a 1.0%
decrease in annualized average weekly sales per location. Comparable restaurant
sales decreased 1.4% for the twenty-four weeks ended June 17, 2003.
Costs of sales increased $2,186,000 (19.3%) for the twenty-four weeks ended
June 17, 2003 to $13,514,000 from $11,328,000 in the twenty-four weeks ended
June 11, 2002, and decreased as a percentage of sales to 25.8% from 26.2%. This
decrease as a percentage of sales is principally attributable to price increases
implemented in the first quarter of fiscal year 2003.
Restaurant operating expenses increased $5,346,000 (24.7%) for the
twenty-four weeks ended June 17, 2003 to $27,019,000 from $21,673,000 in the
twenty-four weeks ended June 11, 2002, and increased as a percentage of net
sales to 51.7% from 50.1%. This increase as a percentage of sales is principally
attributable to higher occupancy costs on new units, higher utility costs, and
higher liability insurance and claims.
Depreciation and amortization increased $695,000 (33.7%) for the
twenty-four weeks ended June 17, 2003 to $2,759,000 from $2,064,000 in the
twenty-four weeks ended June 11, 2002, and increased as a percentage of sales to
5.3% from 4.8%. This increase in expense is due to additional depreciation on
eleven restaurants opened since June 11, 2002.
Preopening costs decreased $193,000 (22.7%) for the twenty-four weeks ended
June 17, 2003 to $659,000 from $852,000 in the twenty-four weeks ended June 11,
2002. These costs are attributable to four units that opened during the
twenty-four weeks ended June 17, 2003 and partial preopening expenses for three
restaurants which have yet to open. Six restaurants were opened in the
twenty-four weeks ended June 11, 2002.
General and administrative expenses increased $470,000 (20.2%) for the
twenty-four weeks ended June 17, 2003 to $2,796,000 from $2,326,000 in the
twenty-four weeks ended June 11, 2002 and remained at 5.4% as a percentage of
sales. This increase is a result of additional corporate infrastucture to
support the Company's expansion.
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Loss on disposal of assets was $17,000 for the twenty-four weeks ended June
17, 2003 and $18,000 for the twenty-four weeks ended June 11, 2002. The losses
reflect the disposal of certain point of sale equipment in the current fiscal
year and video games in the prior fiscal year.
Interest expense was $70,000 for the twenty-four weeks ended June 17, 2003
and $225,000 for the twenty-four weeks ended June 11, 2002. This decrease is due
mainly to a lower average balance applicable to the revolving note payable in
the current fiscal year compared with the prior fiscal year as well as a lower
interest rate.
The effective income tax rate was 35.8% for the twenty-four weeks ended
June 17, 2003 and 36.6% for the twenty-four weeks ended June 11, 2002. This
decrease is due primarily to the impact of the credit for social security taxes
paid on tips in excess of minimum wage relative to the amount of income before
taxes.
Income from discontinued operations was $13,000 for the twenty-four weeks
ended June 11, 2002 applicable to the restaurant closed on March 31, 2002.
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
The timing of new unit openings will result in significant fluctuations in
quarterly results. The Company expects seasonality to be a factor in the results
of its business in the future due to expected lower second and third quarter
revenues due to the summer season. The primary inflationary factors affecting
the Company's operations include food, liquor and labor costs. A large number of
the Company's restaurant personnel are tipped employees who are paid at the
federal subminimum wage level; therefore, future subminimum wage changes will
have a significant effect on labor costs. As costs of food and labor have
increased, the Company has historically been able to offset these increases
through economies of scale, improved operating procedures and menu price
changes; however, short-term fluctuations in raw product pricing may have an
impact on the Company's costs of food. To date, inflation has not had a material
impact on operating margins.
LIQUIDITY AND CAPITAL RESOURCES
As is customary in the restaurant industry, the Company operates with
negative working capital. Negative working capital increased $565,000 to
$6,183,000 as of June 17, 2003 from $5,618,000 as of December 31, 2002. This
increase is attributable primarily to the increase in current portion of notes
payable of $706,000 offset by the excess of working capital provided by
operations and net proceeds from the line of credit in excess of the cost of
purchases of property and equipment and repurchases of common. Cash decreased
$504,000 to $612,000 at June 17, 2003 compared to the balance of $1,116,000 at
December 31, 2002. The Company does not have significant receivables or
inventory and receives trade credit based upon negotiated terms in purchasing
food and supplies. Because funds available from cash sales are not needed
immediately to pay for food and supplies, or to finance inventory, they may be
considered as a source of financing for noncurrent capital expenditures.
On September 1, 1998 the Company entered into a loan agreement with Intrust
Bank, N.A. (the "Line of Credit") which provides for a line of credit of
$20,000,000 subject to certain limitations based on earnings before interest,
taxes, depreciation and amortization of the past fifty-two weeks and the amount
of capital lease obligations on personal property. The Line of Credit is secured
by substantially all of the Company's assets. The Line of Credit 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
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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 June 17, 2003 the Company had borrowed $5,145,000 under the Line of Credit.
The Company is in compliance with all debt covenants.
Cash flows from operations were $5,199,000 in the twenty-four weeks ended
June 17, 2003 compared to $4,968,000 in the twenty-four weeks ended June 11,
2002. Purchases of property and equipment were $6,605,000 in the twenty-four
weeks ended June 17, 2003 compared to $8,070,000 in the twenty-four weeks ended
June 11, 2002. Advances made to the developer of two build-to-suit locations
were $532,000 in the twenty-four weeks ended June 17, 2003. Net proceeds from
the revolving note payable to bank was $2,605,000 for the twenty-four week
period ending June 17, 2003 compared to $780,000 for the twenty-four weeks
ending June 11, 2002. At June 17, 2003, the Company had $612,000 in cash and
cash equivalents.
The Company intends to open ten to twelve new locations in fiscal year 2003
and twelve to fifteen new locations in fiscal year 2004. At June 17, 2003, four
units had been opened in fiscal 2003, four units were under construction, leases
had been executed on four additional sites, and lease negotiations had begun on
two additional sites. The Company is currently evaluating locations in markets
familiar to its management team. However, the number of locations actually
opened and the timing thereof may vary depending upon the ability of the Company
to locate suitable sites and negotiate favorable leases. The Company expects to
expend approximately $15.0 to $20.0 million to open new locations over the next
twelve months.
The Company believes the funds available from the Line of Credit and its
cash flow from operations will be sufficient to satisfy its working capital and
capital expenditure requirements for at least the next twelve months. There can
be no assurance, however, that changes in the Company's operating plans, the
acceleration or modification of the Company's expansion plans, lower than
anticipated revenues, increased expenses, stock repurchases, potential
acquisitions or other events will not cause the Company to seek additional
financing sooner than anticipated, prevent the Company from achieving the goals
of its expansion strategy or prevent any newly opened locations from operating
profitably. There can be no assurance that additional financing will be
available on terms acceptable to the Company or at all.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore, there
can be no assurance that the forward-looking statements included in this report
will prove to be accurate. Our actual results may differ materially from the
forward-looking statements contained herein. Factors that could cause actual
results to differ from the results discussed in the forward-looking statements
include, but are not limited to, potential increases in food, alcohol, labor,
and other operating costs, changes in competition, the inability to find
suitable new locations, changes in consumer preferences or spending patterns,
changes in demographic trends, the effectiveness of our operating and growth
initiatives and promotional efforts, and changes in 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.
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 June 17, 2003. The interest rate at
June 17, 2003 was 3.75%. The following table presents the quantitative interest
rate risks at June 17, 2003:
Principal Amount by Expected Maturity
---------------------------------------------------------------
(In thousands)
Fair
There- Value
(dollars in thousands) 2003 2004 2005 2006 2007 after Total 6/17/03
---------------------- ---- ---- ---- ---- ---- ----- ----- -------
Variable rate debt $199 $1,223 $1,269 $1,318 $1,136 $ - $5,145 $5,145
Average Interest Rate--
1/2% below prime - 3.75% 3.75% 3.75% 3.75% 3.75%
ITEM 4. PROCEDURES AND CONTROLS
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
On May 14, 2003, the Company held its Annual Meeting of Stockholders (the
"Meeting"). At the Meeting, the stockholders elected James K. Zielke, C. Wells
Hall III and E. Gene Street to the Board of Directors to serve until the 2006
Annual Meeting of Stockholders and until their successors have been duly elected
and qualified. As to the new elected Directors, there were 5,483,662 votes "For"
and 411,040 votes "Withheld" for James K. Zielke, 5,861,584 votes "For" and
33,118 votes "Withheld" for C. Wells Hall III, and 5,483,862 votes "For" and
410,840 votes "Withheld" for E. Gene Street. The continuing directors and the
expiration of their current terms as directors are as follows:
Dennis L. Thompson........................................2004
Stephen P. Hartnett.......................................2004
Thomas A. Hager...........................................2004
Steven M. Johnson.........................................2005
Gary M. Judd..............................................2005
John D. Harkey, Jr........................................2005
The stockholders also ratified the appointment of KPMG LLP as the Company's
independent auditors for the year ending December 30, 2003. As to the
ratification of auditors, there were 5,893,602 votes "For," 900 votes "Against,"
and 200 votes "Abstained."
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
A Current Report on Form 8-K (Item 5) dated April 11, 2003, reporting the
filing of Exhibit 99.1-Press release of Total Entertainment Restaurant Corp.
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TOTAL ENTERTAINMENT RESTAURANT CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Registrant)
Date July 25, 2003 /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 July 25, 2003 /s/ James K. Zielke
-------------- ---------------------
James K. Zielke
Chief Financial Officer,
Secretary and Treasurer
- 17 -
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 July 25, 2003 /s/ Steven M. Johnson
--------------------------- -------------------------------
Steven M. Johnson
Chief Executive Officer
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