Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of our Common Stock during the fourth quarter of the Company’s fiscal year ended December 28, 2004.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Market Information
Our common stock has traded on the Nasdaq National Market under the symbol “TENT” since our initial public offering on July 17, 1997. The following table sets forth, for the periods indicated, the high and low closing prices per share of our common stock, as reported by the Nasdaq National Market. These quotations reflect the inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Equity Compensation Plan Information
Holders
As of March 25, 2005, there were 39 holders of record our common stock.
Dividends
We have not paid any cash dividends on our common stock and do not intend to pay cash dividends on our common stock for the foreseeable future. We intend to retain future earnings to finance future development.
Item 6.
Item 6. Selected Financial Data
The following information has been restated to reflect adjustments to previous filings as further discussed in Note 2, “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K. The selected financial data set forth below should be read in conjunction with the financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The historical income statement data for the 52 weeks ended December 28, 2004, December 30, 2003, the 53 weeks ended December 31, 2002, and for the 52 weeks ended December 25, 2001, and December 26, 2000, the balance sheet data as of December 28, 2004, December 30, 2003, December 31, 2002, December 25, 2001, and December 26, 2000 are derived from our audited financial statements.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the information set forth under “Selected Financial Data” and the Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Restatement
Following a review of the accounting adjustments cited in several recent Form 8-K filings by other restaurant and retail companies, and in consultation with our independent registered public accounting firm, KPMG LLP, we determined that the adjustments in those filings relating to the treatment of lease accounting and leasehold amortization applied to the Company, and that it was appropriate to adjust certain of our prior financial statements. As a result, we have restated our consolidated financial statements for fiscal years 1997 through 2003 and for the first three quarters of 2004. Historically, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing on the initial date of the lease agreement. We also used only the initial non-cancelable lease term in the determination of capital leases. We amortized our leasehold improvements and other long-lived assets on those properties over a period that included both the initial non-cancelable lease term and all option periods provided for in the lease (or the useful life of the assets, if shorter). Additionally, tenant allowances received from the lessor were recorded as a reduction of the related leasehold improvements. We previously believed that these longstanding accounting treatments were appropriate under generally accepted accounting principles. We now have restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, not to exceed fifteen years (unless the initial lease term is in excess of fifteen years). The expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, not to exceed fifteen years (unless the initial lease term is in excess of fifteen years), is also being utilized in the determination of capital leases. Additionally, the estimated useful life of leasehold improvements for amortization purposes was reduced from twenty years to fifteen years, or the remaining life of the lease, whichever is less. The lease term commences on the date when we have full access to the property. Lease expenses from the date we have full access to the property to the completion of construction are capitalized as leasehold improvements. Tenant allowances are being recorded as accrued rent when received and included as a reduction in the straight-line rent calculation described above. We also had one lease reclassified from operating to capital as a result of these adjustments. These adjustments were not attributable to any material non-compliance by us with any financial reporting requirements under the securities laws, or as a result of any misconduct. The Restatement is further discussed in Note 2, “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
The cumulative effect of the Restatement through fiscal 2003 as well as the impact of these adjustments on the consolidated income statements for 2002 and 2003 is shown in the tables below. The Restatement decreased reported diluted net earnings per share by $0.08 and $0.06 in fiscal years 2003 and 2002, respectively. The Restatement did not have any impact on our previously reported cash balances, sales or same-restaurant sales or on our compliance with any covenant under our credit facility or other debt instruments. Further information on the nature and impact of these adjustments is provided in Note 2, “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
Net Adjustments Related to Restatement
(in thousands, except per share data)
General
We began operations February 20, 1997 with three Fox and Hound and eight Bailey’s restaurants. We have opened and closed restaurants since that date as follows:
The components of our net sales are food and non-alcoholic beverages, alcoholic beverages, and entertainment and other (principally billiard table rental fees). For fiscal years 2004 and 2003, the components of net sales were as follows: (i) food and non-alcoholic beverages: 36.9% and 34.2%, respectively; (ii) alcoholic beverages: 56.8% and 58.3%, respectively; and (iii) entertainment and other: 6.3% and 7.5%, respectively. The trend of declining entertainment and other sales as a percentage of total sales is expected to continue as newer units generally have fewer billiard tables than older units and new menu conversions are expected to increase food sales as a percentage of total sales.
The components of our 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 our 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.
The provision for asset impairment reflects the charges made for the write down of certain underperforming restaurant assets. We periodically review our long lived assets that are held and used in our restaurant operations for indications of impairment. The provision for restaurant closing primarily includes the remaining lease obligation for closed 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 in this category.
In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 18 full months. As of March 25, 2005, there were 60 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 discussion of results of operations should be read in conjunction with the information under the caption “Selected Financial Data,” our Consolidated Financial Statements and related Notes thereto and the other financial data included elsewhere in this Form 10-K. We operate on a 52 or 53 week fiscal year ending the last Tuesday in December. Fiscal years 2004 and 2003 each consisted of 52 weeks and fiscal year 2002 consisted of 53 weeks. Our fiscal quarters consist of three accounting periods of 12 weeks each and a final period of 16 or 17 weeks.
The following table sets forth for the periods indicated the percentages which certain items included in the Condensed Consolidated Statement of Income bear to net sales and other selected operating data.
(1)
The Company operates on a 52 or 53 week fiscal year ending the last Tuesday in December. The fiscal quarters for the Company consist of accounting periods of 12, 12, 12 and 16 or 17 weeks, respectively.
(2)
Store operating weeks represents the number of weeks all locations were open during the period.
(3)
Annualized average weekly sales per location are computed by dividing net sales during the period by the number of store operating weeks and multiplying the result by fifty-two.
Fifty-two Weeks Ended December 28, 2004 Compared to Fifty-two Weeks Ended December 30, 2003
Net sales increased $27,456,000 (22.6%) for the 52 weeks ended December 28, 2004 to $149,164,000 from $121,708,000 for the 52 weeks ended December 30, 2003, which was attributable to a 3.3% increase in annualized average weekly sales ($2,142,000 versus $2,073,000) and a 18.6% increase in store operating weeks (3,620 versus 3,052). Same store sales increased 1.1% for the 52 weeks ended December 28, 2004.
Costs of sales increased $8,613,000 (26.9%) for the 52 weeks ended December 28, 2004 to $40,619,000 from $32,006,000 for the 52 weeks ended December 30, 2003, and increased as a percentage of net sales to 27.2% from 26.3%. This increase as a percentage of net sales was principally attributable to an increase in the cost of certain raw products and promotional costs offset by the impact of a price increase taken in the second quarter of 2004.
Restaurant operating expenses increased $15,303,000 (24.0%) for the 52 weeks ended December 28, 2004 to $79,038,000 from $63,735,000 for the 52 weeks ended December 30, 2003, and increased as a percentage of net sales to 53.0% from 52.4%. This increase as a percentage of net sales was principally attributable to an increase in occupancy costs of new units and hourly wages offset by a decrease in the cost of liability insurance premiums and claims expense. The increase in hourly wages is related to higher labor costs associated with training on new menu conversions in 18 units during 2004.
Depreciation and amortization increased $1,447,000 (20.8%) for the 52 weeks ended December 28, 2004 to $8,392,000 from $6,945,000 for the 52 weeks ended December 30, 2003, and remained consistent as a percentage of net sales at 5.7%.
Preopening costs increased $164,000 (9.0%) for the 52 weeks ended December 28, 2004 to $1,986,000 from $1,822,000 for the 52 weeks ended December 30, 2003, and decreased to 1.3% from 1.5% as a percentage of net sales. Preopening costs for fiscal year 2004 were related to the opening of eleven restaurants in fiscal year 2004 and partial preopening costs related
to restaurants that will open in fiscal year 2005. Preopening costs for fiscal year 2003 were related to the opening of ten restaurants in fiscal year 2003 and costs related to restaurants that opened in fiscal year 2004.
The provision for asset impairment of $2,523,000 for the 52 weeks ended December 28, 2004, reflects the charges made for the write down of restaurant assets related to two underperforming units in the second quarter of fiscal 2004. The provision for asset impairment of $2,009,000 for the 52 weeks ended December 30, 2003, reflects the charges made for the write down of restaurant assets related to two underperforming units in the fourth quarter of fiscal 2003. We periodically review our long-lived assets that are held and used in our restaurant operations for indications of impairment. We generally do not include units less than 18-months old in this review as the first six months of operations reflect certain inefficiencies associated with start-up activities. The two units impaired in the second quarter of fiscal 2004 had been open less than 18 months as of December 30, 2003. As of December 28, 2004, we have no plans to close any of these units.
General and administrative expenses increased $1,227,000 (19.5%) for the 52 weeks ended December 28, 2004 to $7,520,000 from $6,293,000 for the 52 weeks ended December 30, 2003, due to an increase in corporate infrastructure to support our expansion. General and administrative expenses decreased as a percentage of net sales to 5.0% from 5.2%.
Other income was $4,000 for the 52 weeks ended December 28, 2004 compared to $1,000 for the 52 weeks ended December 30, 2003.
Gain on disposal of assets was $1,000 for the 52 weeks ended December 28, 2004 compared to a loss on disposal of assets of $57,000 for the 52 weeks ended December 30, 2003. The loss in 2003 reflect the disposal of certain video games.
Interest expense decreased $97,000 for the 52 weeks ended December 28, 2004 to $243,000 from $340,000 for the 52 weeks ended December 30, 2003. This decrease is due to a lower average balance applicable to our line of credit in the current fiscal year compared with the prior fiscal year partially offset by an increase in the interest rate on those borrowings during the current fiscal year.
The effective income tax rate on income was 30.3% for the 52 weeks ended December 28, 2004 as compared to 32.4% for the 52 weeks ended December 30, 2003. This decrease was primarily due to the impact of the credit for social security taxes paid on tips in excess of minimum wage relative to the amount of income before taxes and a decrease in the effective state tax rate.
Fifty-two Weeks Ended December 30, 2003 Compared to Fifty-three Weeks Ended December 31, 2002
Net sales increased $19,244,000 (18.8%) for the 52 weeks ended December 30, 2003 to $121,708,000 from $102,464,000 for the 53 weeks ended December 31, 2002, which was attributable to a 0.8% increase in annualized average weekly sales ($2,073,000 versus $2,056,000) and a 17.4% increase in store operating weeks (3,052 versus 2,599). Same store sales decreased 2.2% for the 52 weeks ended December 30, 2003.
Costs of sales increased $5,191,000 (19.4%) for the 52 weeks ended December 30, 2003 to $32,006,000 from $26,815,000 for the 53 weeks ended December 31, 2002, and increased as a percentage of net sales to 26.3% from 26.2%. This increase as a percentage of net sales was principally attributable to an increase in the cost of certain raw products offset by the impact of a price increase taken in the first quarter of 2003.
Restaurant operating expenses increased $11,435,000 (21.9%) for the 52 weeks ended December 30, 2003 to $63,735,000 from $52,300,000 for the 53 weeks ended December 31, 2002, and increased as a percentage of net sales to 52.4% from 51.0%. This increase as a percentage of net sales was principally attributable to an increase in occupancy costs of new units and an increase in the cost of liability insurance premiums and claims expense.
Depreciation and amortization increased $1,057,000 (18.0%) for the 52 weeks ended December 30, 2003 to $6,945,000 from $5,888,000 for the 53 weeks ended December 31, 2002, and decreased as a percentage of net sales to 5.7% from 5.8%. This increase in expense is due to additional depreciation on ten restaurants opened since December 31, 2002, net of older restaurants with fully depreciated equipment during the year.
Preopening costs increased $168,000 (10.2%) for the 52 weeks ended December 30, 2003 to $1,822,000 from $1,654,000 for the 53 weeks ended December 31, 2002, and decreased to 1.5% from 1.6% as a percentage of net sales. Preopening costs for fiscal year 2003 were related to the opening of ten restaurants in fiscal year 2003 and partial preopening costs related to restaurants that opened in fiscal year 2004. Preopening costs for fiscal year 2002 were related to the opening of twelve restaurants in fiscal year 2002 and costs related to restaurants that opened in fiscal year 2003.
The provision for asset impairment of $2,009,000 for the 52 weeks ended December 30, 2003, reflects the charges made for the write down of restaurant assets related to two underperforming units in the fourth quarter of fiscal 2003. We periodically review our long-lived assets that are held and used in our restaurant operations for indications of impairment. We generally do not include units less than 18-months old in this review as the first six months of operations reflect certain inefficiencies associated with start-up activities.
General and administrative expenses increased $1,112,000 (21.5%) for the 52 weeks ended December 30, 2003 to $6,293,000 from $5,181,000 for the 53 weeks ended December 31, 2002, due to an increase in corporate infrastructure to support our expansion. General and administrative expenses increased as a percentage of net sales to 5.2% from 5.1%.
Other income was $1,000 for the 52 weeks ended December 30, 2003 compared to other expense of $46,000 for the 53 weeks ended December 31, 2002. This expense in 2002 was related to the write-off of an interest in a limited partnership investment.
Loss on disposal of assets was $57,000 for the 52 weeks ended December 30, 2003 and $31,000 for the 53 weeks ended December 31, 2002. The losses reflect the disposal of certain video games for both years.
Interest expense decreased $70,000 for the 52 weeks ended December 30, 2003 to $340,000 from $410,000 for the 53 weeks ended December 31, 2002. This decrease is due to both a lower interest rate and lower average balance applicable to our line of credit in the current fiscal year compared with the prior fiscal year.
The effective income tax rate on income was 32.4% for the 52 weeks ended December 30, 2003 as compared to 35.8% for the 53 weeks ended December 30, 2002. This decrease was primarily due to the impact of the credit for social security taxes paid on tips in excess of minimum wage relative to the amount of income before taxes and a decrease in the effective state tax rate.
Income from discontinued operations was $13,000 for the 53 weeks ended December 31, 2002 due to income applicable to the restaurant closed on March 31, 2002.
Quarterly Fluctuations, Seasonality and Inflation
Our operating results may fluctuate significantly from period to period and the results for one period may not be indicative of results for other periods. Our operating results may also fluctuate significantly because of several factors, including the timing of new restaurant openings and related expenses, seasonality, profitability of new restaurants, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors and weather conditions.
The timing of new restaurant openings may result in significant fluctuations in quarterly results as a result of the revenues and expenses associated with each new restaurant location. We typically incur most preopening costs for a new restaurant within the two months immediately preceding, and the month of, the restaurant’s opening. In addition, the labor and operating costs for a newly opened restaurant during the first three to six months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Our growth, operating results and profitability will depend to a large degree on our ability to increase the number of our restaurants.
We expect seasonality to continue to be a factor in our results of operations. Historically, our revenues have been moderately higher in the first and fourth quarters due to weather conditions, major sporting events and the year-end holidays. Our revenues in most of our restaurants have been lower during the summer months of each year, and we expect lower second and third quarter revenues to continue in the future. In addition, for accounting purposes, the first, second and third quarters of each fiscal year consist of 12 weeks and fourth quarter consists of 16 or 17 weeks. As a result, some of the variations in our operating results may be attributable to the different lengths of the fiscal quarters. These quarterly fluctuations may cause our operating results to fall below the expectations of securities analysts and investors, which could cause our stock price to fall.
The primary inflationary factors affecting our operations include food, liquor and labor costs. Significant numbers of our personnel are paid at rates related to the federal minimum wage which is currently $5.15 per hour. Accordingly, increases in the minimum wage will increase our labor costs. As costs of food and labor have increased, we have historically been able to offset these increases through economies of scale and improved operating procedures. To date, inflation has not had a material impact on operating margins.
Liquidity and Capital Resources
As is customary in the restaurant industry, we operate with negative working capital. Negative working capital increased $367,000 to $6,236,000 as of December 28, 2004 from $5,869,000 as of December 30, 2003. This increase is attributable primarily to the cost of purchases of property and equipment in excess of working capital provided by operations and net proceeds from the line of credit. Cash decreased $1,000 to $812,000 as of December 28, 2004 from $813,000 as of December 30, 2003. We do not have significant receivables or inventory and receive 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 we 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. On October 1, 2003, this line of credit was amended to extend the original term of the agreement by two years. All other terms of the agreement remained unchanged. The Line of Credit is secured by substantially all of our 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. Proceeds from the Line of Credit are
being used for restaurant development. As of December 28, 2004, we had borrowed $3,680,000 under the Line of Credit. We are in compliance with all debt covenants.
Cash flows from operations were $22,216,000 for the 52 weeks ended December 28, 2004 compared to $17,495,000 for the 52 weeks ended December 30, 2003. Purchases of property and equipment were $22,023,000 in the 52 weeks ended December 28, 2004 compared to $17,614,000 in the 52 weeks ended December 30, 2003. Net proceeds from the revolving note payable to bank were $45,000 for the 52 week period ending December 28, 2004 compared to net proceeds on the revolving note payable to bank of $1,095,000 for the 52 weeks ending December 30, 2003.
We intend to open ten to twelve new locations in fiscal year 2005 and twelve to fifteen in fiscal year 2006. At March 25, 2005, two restaurants had been opened in fiscal 2005, five restaurants were under construction and an additional four contracts had been executed. We are currently evaluating locations in markets familiar to our management team. However, the number of locations actually opened and the timing thereof may vary depending upon our ability to locate suitable sites and negotiate favorable leases. We expect to expend approximately $22 to $25 million to open new locations over the next twelve months.
We believe the funds available from the Line of Credit and cash flow from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next twelve months. There can be no assurance, however, that changes in our operating plans, the acceleration or modification of our expansion plans, lower than anticipated revenues, increased expenses, stock repurchases, potential acquisitions or other events will not cause the us to seek additional financing sooner than anticipated, prevent us from achieving the goals of our 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 us or at all.
A summary of our obligations and commitments to make future payments under contracts, including debt, lease agreements and the administrative services agreement is presented below. The long-term debt payments represent principal payments only. The Company must also make monthly interest payments on the outstanding debt balance at a rate of 1/2% below the prime rate as published in The Wall Street Journal (4.75% at December 28, 2004).
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and operating results, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Land, Buildings, and Equipment
Land, buildings, leasehold improvements and equipment are recorded at cost less accumulated depreciation. Buildings are depreciated over 30 years using the straight-line method. Leasehold improvements are amortized over the lesser of the expected lease term, including cancelable option periods, up to fifteen years, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from two to seven years, also using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes.
Our accounting policies regarding land, buildings, and equipment, including leasehold improvements, include our judgments regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated or amortized, and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of reported depreciation and amortization expense if
different assumptions were used. As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.
Impairment of Long-Lived Assets
The Company reviews all units for impairment on a semi-annual basis at the end of the second and fourth fiscal quarters of each year, or at other times during the year when events have occurred that may be indicators of potential impairment. New units are not included in this review until they have been open 18 months as the initial six months of operations reflect inefficiencies associated with start-up operations. The impairment review is performed by comparing the carrying value of the related assets to the expected undiscounted cash flows of each unit. A unit is deemed to be impaired if the carrying value of the related assets is more than the expected undiscounted cash flows for the unit. The amount of the impairment loss is calculated as the difference between the carrying value of the assets and the fair value of the assets. Store assets typically consist of leasehold improvements, equipment, and furniture and fixtures.
The judgments we make related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in usage or operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to realize a material impairment charge.
Self-Insurance Accruals
As we have relatively high deductibles for expected losses under our workers’ compensation, employee medical, and general liability programs, we are effectively self insured for potential claims. Accrued liabilities have been recorded based on our estimates of the ultimate costs to settle incurred claims, both reported and not yet reported.
Our accounting policies regarding self-insurance programs include our judgments and independent actuarial assumptions regarding economic conditions, the frequency or severity of claims and claim development patterns, and claim reserve, management, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of reported expense under these programs.
New accounting standards
In December 2004, the FASB issued Statement No.123(R), Share-Based Payment, effective third quarter 2005 for the Company, which is a revision of FASB Statement No.123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on our results of operations.
The Company expects to adopt Statement 123(R) during the third quarter 2005 using the modified-retrospective method restating prior periods. Had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the pro forma disclosures in the summary of significant accounting policies note to the consolidated financial statements.
Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and increase net financing cash flow.
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 we believe 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. 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 us or any other person that our objectives and plans will be achieved.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our 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 3.76% for the year ended December 28, 2004. The following table presents the quantitative interest rate risks at December 28, 2004:
Item 8.
Item 8. Financial Statements and Supplementary Data
See the Consolidated Financial Statements listed in the accompanying Index to Financial Statements on Page herein. Information required for financial schedules under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
Disclosure controls and procedures
As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). In performing this evaluation, management reviewed the Company’s policies and procedures for lease accounting. In conjunction with this review, management concluded that the Company’s previously established policies and procedures for lease accounting were not in accordance with generally accounting principles in the United States. As a result, management determined that certain expenses, primarily restaurant operating expenses and depreciation and amortization expenses, were understated in prior periods. Accordingly, the Company has restated its previously issued financial statements to reflect the correction of the errors noted in the Company’s lease accounting practices. These errors resulted from an error in the Company’s interpretation of generally accepted accounting principles in the United States, similar to other restaurant and retail companies. Based on the aforementioned evaluation, the CEO and CFO each concluded that the related ineffective controls over the selection, monitoring, and review of assumptions and factors affecting lease accounting represented a material weakness in internal control over financial reporting as of December 28, 2004. Accordingly, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this annual report.
Management’s report
Management’s Annual Report on Internal Control Over Financial Reporting as required by Item 308(a) of Regulation S-K and the related Attestation Report of the Registered Public Accounting Firm, required by Item 308(b) of Regulation S-K will be filed in an amendment to this Form 10-K within 45 days of the Company’s initial 75-day filing period for the Company’s Form 10-K as permitted by the Securities and Exchange Commission Release No. 50754, Order Under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified Provision of Exchange Act Rules 13a-1 and 15d-1.
Remediation of material weakness
To remediate the material weakness in the Company’s internal control over financial reporting, subsequent to year end, the Company has implemented additional review procedures over the selection and monitoring of appropriate assumptions and factors affecting lease accounting and leasehold depreciation practices. No other material weaknesses have been identified as a result of management’s assessment.
Internal control over financial reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as amended, that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
On October 4, 2004, the Company’s Board of Directors approved salary adjustments, stock option grants, and a bonus plan for the Company’s executive officers. Each of these officers’ base salary was increased as outlined in the following table. Each of these officers was granted an option to purchase 50,000 shares of the Company’s common stock effective November 1, 2004, and additional options to purchase 50,000 shares of the Company’s common stock on November 1 of each of the next two years. The bonus plan established would pay each of these officers a cash bonus up to twenty percent of the officer’s base salary depending on comparable store sales and the Company’s EBITDA and EPS financial performance for fiscal year 2005.
Additionally, on October 4, 2004, the Company’s Board of Directors modified the compensation to be paid members of the Board of Directors and members of the committees of the Board of Directors for fiscal year 2005. Directors who are not employees of the Company (“Eligible Directors”) will receive an annual fee of $10,000, and the chairpersons of the Stock Option Committee and Compensation Committee will receive an additional annual fee of $5,000 and the chairperson of the Audit Committee will receive an additional annual fee of $8,500. Additionally, each Eligible Director will receive a fee of $1,250 for each regularly scheduled Board of Directors meeting attended, a fee of $750 for each regularly scheduled Board of Director meeting held via conference call, a fee of $1,000 for each Audit Committee meeting attended that is scheduled in conjunction with a regularly scheduled Board of Directors meeting, a fee of $1,000 for each committee meeting attended not in conjunction with a regularly scheduled Board of Directors meeting, and a fee of $500 for each committee meeting held via conference call not in conjunction with a regularly scheduled Board of Directors meeting. The chairperson of the Audit Committee will receive a fee of $1,500 for each Audit Committee meeting attended in conjunction with a regularly schedule Board of Directors meeting, each chairperson of a committee of the Board will receive a fee of $1,500 for each meeting attended or $750 for each meeting held by telephone conference not held in conjunction with a regularly scheduled Board of Directors meeting. Each Director is reimbursed for his expenses. Employees who are Directors are not entitled to any compensation for their service as a Director. The Board of Directors modified the amount of shares that each Eligible Director will be entitled to receive under annual grants of options under the Company’s 1997 Directors Stock Option Plan (the “Directors Plan”) to 10,000 shares on April 30 of each year.
The compensation reflected above does not reflect all compensation and other perquisites paid to the Company’s executive officers or directors. Such information for the fiscal year ended December 28, 2004, will be included under the caption “Executive Compensation” in the Company’s definitive proxy statement for its 2005 Annual Meeting of Stockholders.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 will be in our definitive proxy materials to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report on Form 10-K by this reference.
Item 11.
Item 11. Executive Compensation
The information required by this Item 11 will be in our definitive proxy materials to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report on Form 10-K by this reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be in our definitive proxy materials to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report on Form 10-K by this reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 will be in our definitive proxy materials to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report on Form 10-K by this reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be in our definitive proxy materials to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report on Form 10-K by this reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements.
See Index to Financial Statements which appears on page herein.
(2) Exhibits
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wichita, State of Kansas, on this 25th day of March, 2005.
TOTAL ENTERTAINMENT RESTAURANT CORP.
(Registrant)
/s/ James K. Zielke
James K. Zielke
Chief Financial Officer,
Treasurer, Secretary and Director
(principal accounting officer)
SIGNATORIES
Know all men by these presents, that each person whose signature appears below hereby constitutes and appoints James K. Zielke his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Total Entertainment Restaurant Corp.
Page
Report of Independent Registered Public Accounting Firm
The Board of Directors
Total Entertainment Restaurant Corp.:
We have audited the accompanying consolidated balance sheets of Total Entertainment Restaurant Corp. and subsidiaries as of December 28, 2004 and December 30, 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for the years ended December 28, 2004, December 30, 2003 and December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Total Entertainment Restaurant Corp. and subsidiaries as of December 28, 2004 and December 30, 2003, and the results of their operations and their cash flows for the years ended December 28, 2004, December 30, 2003 and December 31, 2002, in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective December 26, 2001.
As discussed in note 2 to the consolidated financial statements, the consolidated financial statements for the years ended December 30, 2003 and December 31, 2002 have been restated.
(signed) KPMG LLP
Wichita, Kansas
March 25, 2005
Total Entertainment Restaurant Corp.
Consolidated Balance Sheets
(In Thousands, except share and per share information)
See notes to consolidated financial statements
Total Entertainment Restaurant Corp.
Consolidated Statements of Income
(In Thousands, except per share information)
See notes to consolidated financial statements.
Total Entertainment Restaurant Corp.
Consolidated Statements of Stockholders’ Equity
(In Thousands, except share information)
See notes to consolidated financial statements.
Total Entertainment Restaurant Corp.
Consolidated Statements of Cash Flows
(In Thousands)
See notes to consolidated financial statements.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
1. Background and Significant Accounting Policies
Total Entertainment Restaurant Corp. (the Company) owns and operates a chain of restaurant locations under the Fox and Hound English Pub & Grille, Fox and Hound Pub & Grille, and Fox and Hound Smokehouse & Tavern (Fox & Hound), Bailey’s Sports Grille, Bailey’s Pub & Grille, and Bailey’s Smokehouse & Tavern (Bailey’s) brand names. As of December 28, 2004, the Company owned and operated 57 Fox & Hounds and 18 Bailey’s 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. The Company operates in one business segment.
The company has a 52/53 week fiscal year ending on the last Tuesday in December. Fiscal years 2004 and 2003 each consisted of 52 weeks. Fiscal year 2002 consisted of 53 weeks.
• Principles of Consolidation
The accompanying financial statements include the accounts of Total Entertainment Restaurant Corp. and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated.
• Cash and Cash Equivalents
The Company considers cash and cash equivalents to include currency on hand, demand deposits with banks or financial institutions, and short-term investments with maturities of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair value.
• Concentration of Credit Risk
The Company’s financial instruments exposed to credit risk consist primarily of cash. The Company places its cash with high credit financial institutions and, at times, such cash may be in excess of the Federal Depository insurance limit.
Inventories consist of food and beverages and are stated at the lower of cost (first-in, first-out) or market.
• Pre-opening Costs
Costs related to pre-opening activities are expensed as incurred.
• Property and Equipment
Property and equipment are stated at cost. Maintenance repairs and renewals which do not enhance the value of or increase the life of the assets are expensed as incurred.
Buildings are depreciated using the straight-line method over the estimated useful life of the asset, which is 30 years. Leasehold improvements are amortized on the straight-line method over the lesser of the life of the lease, including renewal options, or the estimated useful lives of the assets, which is 15 years. Equipment and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from two to seven years.
Costs of straight-line rent obligations and interest during the construction period are capitalized as leasehold improvements and amortized on the straight-line method over a period of 15 years.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
1. Background and Significant Accounting Policies (continued)
• Liquor Licenses
The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized. Such licenses are amortized using the straight-line method over ten years. Annual liquor license renewal fees are expensed.
Effective December 26, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Goodwill is no longer amortized, but instead tested for impairment annually, or more frequently if circumstances indicate potential impairment through a comparison of fair value to its carrying value. No goodwill impairment charges have been recorded through December 28, 2004.
• Impairment of Long-Lived Assets
The Company reviews all units for impairment on a semi-annual basis at the end of the second and fourth fiscal quarters of each year, or at other times during the year when events have occurred that may be indicators of potential impairment. New units are generally not included in this review until they have been open 18 months as the initial six months of operations reflect inefficiencies associated with start-up operations. The impairment review is performed by comparing the carrying value of the related assets to the projected undiscounted net cash flows of each unit. A unit is deemed to be impaired if the carrying value of the related assets is more than the expected undiscounted cash flows for the unit. The amount of the impairment loss is calculated as the difference between the carrying value of the assets and the fair value of the assets. Store assets typically consist of leasehold improvements, equipment, and furniture and fixtures. The impairment charge of $2,009 recorded in the fourth quarter of 2003 was related to two units having a current-period operating cash flow loss combined with a history of deteriorating cash flows. The impairment charge of $2,523 in the second quarter of 2004 was related to two units which had been open less than 18 months at December 30, 2003. These units had either a current period operating cash flow loss or nominal cash flow. Projected cash flows for these units did not demonstrate any improvement in future operating results. In both cases, the carrying value of the assets exceeded management’s expectations of future undiscounted cash flows.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
• Deferred Revenue
During 1999, the Company received an upfront payment of $150 from its soft drink provider. The Company recognized the upfront payment evenly over the five-year life of the soft drink contract.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
1. Background and Significant Accounting Policies (continued)
• Revenue Recognition
Revenues from restaurant sales are recognized at the point food and beverages are delivered to the customer. Entertainment and other revenues principally include billiard table fees. The revenues from these fees are recognized when the tables are used by the customer. The sales of gift cards are recorded as unearned revenue until the gift cards are redeemed for food and beverages at which point revenue is recognized.
• Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December 28, 2004, December 30, 2003, and December 31, 2002 was $1,523, $1,181, and $1,203, respectively.
• Accounting for Stock-Based Compensation
The Company maintains stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to the terms established at the grant date.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, because the grant price is equal to or is above the market price on the date of grant for options issued by the Company, no compensation expense is generally recognized for stock options initially issued to employees. Proceeds from the exercise of common stock options issued to directors and 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.
On December 31, 2002, The Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation.
Pro forma information regarding net income and earnings per share is required by Statement No. 123, as amended by SFAS No. 148, 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.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
1. Background and Significant Accounting Policies (continued)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option’s vesting period. The Company’s pro forma information is as follows:
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment, effective third quarter 2005 for the Company, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on our results of operations.
The Company expects to adopt Statement 123(R) during the third quarter 2005 using the modified-retrospective method restating prior periods. Had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the table above.
Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current rules. This requirement will reduce net operating cash flow and increase net financing cash flow.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from estimates.
• Earnings per Share
Basic earnings per common share is calculated by dividing net income by the average number of common shares outstanding during the year. Diluted earnings per common share is calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
2. Restatement of Financial Statements
Following a review of lease accounting and leasehold amortization polices, we determined that it was appropriate to adjust certain of our prior financial statements. As a result, we have restated all of our historical consolidated financial statements. Historically, when accounting for leases with renewal options, we recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing on the initial date of the lease agreement. We also used only the initial non-cancelable lease term in the determination of capital leases. We amortized our leasehold improvements and other long-lived assets on those properties over a period that included both the initial non-cancelable lease term and all option periods provided for in the lease (or the useful life of the assets, if shorter). Additionally, tenant allowances received from the lessor were recorded as a reduction of the related leasehold improvements. We now have restated our financial statements to recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, not to exceed fifteen years (unless the initial lease term is in excess of fifteen years). The expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, not to exceed fifteen years (unless the initial lease term is in excess of fifteen years), is also being utilized in the determination of capital leases. Additionally, the estimated useful life of leasehold improvements for amortization purposes was reduced from twenty years to fifteen years, or the remaining life of the lease, whichever is less. The lease term commences on the date when we have full access to the property. Lease expenses from the date we have full access to the property to the completion of construction are capitalized as leasehold improvements. Tenant allowances are being recorded as accrued rent when received and included as a reduction in the straight-line rent calculation described above. We also had one lease reclassified from operating to capital as a result of these adjustments.
The cumulative effect of the Restatement through fiscal 2003 as well as the impact of these adjustments on the consolidated income statements for 2003 and 2002 is shown in the tables below. The Restatement decreased reported diluted net earnings per share by $0.08 and $0.06 in fiscal years 2003 and 2002, respectively. The Restatement did not have any impact on our previously reported cash balances, sales or same-restaurant sales or on our compliance with any covenant under our credit facility or other debt instruments.
Balance Sheet Net Adjustments Related to Restatement
(in thousands)
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
2. Restatement of Financial Statements (continued)
Net Income Adjustments Related to Restatement
(in thousands, except per share data)
Cash Flow Adjustments Related to Restatement
(in thousands, except per share data)
3. Advances to Developer
Advances to developer represent monies advanced to the developer of two build-to-suit locations at December 31, 2002. Additional monies were advanced to the same developer on two additional locations during 2003 totaling $547. Also during 2003, the developer repaid the advance on one location in the amount of $275. The advances to developer totaled $842 at December 30, 2003. The advances on the remaining three locations were repaid by the developer in 2004.
4. Preferred Stock
The Company’s Board of Directors has the authority to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and the number of shares constituting any series or the designation of such series.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
5. Note Payable
On September 1, 1998 the Company entered into a line of credit agreement with Intrust Bank, N.A. (the line of credit) which provides for a line of credit of $20,000 subject to certain limitations based on earnings before interest, income taxes, depreciation and amortization of the past 52 weeks. On October 1, 2003, this line of credit was amended to extend the original term of the agreement by two years. All other terms of the agreement remained unchanged.
The line of credit is secured by substantially all assets of the Company. The line of credit restricts the ability of the Company to pay dividends. 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 a rate of 0.5% below the prime rate as published in The Wall Street Journal (4.5% and 3.5% at December 28, 2004 and December 30, 2003, respectively). Proceeds from the line of credit were used for restaurant development and acquisition of treasury stock. As of December 28, 2004 and December 30, 2003, the Company had borrowed $3,680 and $3,635, respectively, under the line of credit. The Company had additional borrowings available at December 28, 2004 under the line of credit of $16,320.
The following represents future maturities of the note:
6. Stock Options
The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company’s stock option plans are as follows:
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
6. Stock Options (continued)
A summary of the Company’s stock option activity and related information for the years ended December 28, 2004, December 30, 2003, and December 31, 2002 follows:
As of December 28, 2004, the Company’s outstanding options have a weighted average remaining contract life of 6.47 years and exercise prices ranging from $1.69 to $14.11. There were 711,377 options exercisable at December 28, 2004 and 588,948 options exercisable at December 30, 2003.
For options outstanding as of December 28, 2004, the number of options, weighted-average exercise price and weighted-average remaining contract life for each group of options are as follows:
The number of shares and weighted-average exercise price of options exercisable at December 28, 2004 are as follows:
7. Leases
The Company leases many of its facilities under noncancelable operating leases having terms expiring between 2005 and 2024. The leases have renewal clauses of 3 to 5 years, exercisable at the option of the Company. In addition, certain leases contain escalation clauses based on a fixed percentage increase and provisions for contingent rentals based on a percentage of gross revenues, as defined by the lease. The difference between the actual lease payments and the amount of rent expense recorded on a straight-line basis is recorded as accrued rent over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, not to exceed fifteen years (unless the
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
7. Leases (continued)
initial lease term is in excess of fifteen years). The lease term commences on the date when we have full access to the property. Tenant allowances are being recorded as accrued rent when received and included as a reduction in the straight-line rent calculation described above.
Total rental expense for the years ended December 28, 2004, December 30, 2003, and December 31, 2002 was $9,307, $7,483, and $6,029, respectively. Contingent rentals for the years ended December 28, 2004, December 30, 2003, and December 31, 2002 were $29, $9, and $86, respectively.
The following presents the future minimum lease payments under noncancelable leases with initial terms in excess of one year for each of the next five years and thereafter as of December 28, 2004:
The balance of property under capital lease was $740 and $801 December 28, 2004 and December 30, 2003, respectively, net of accumulated amortization of $178 and $117 at December 28, 2004 and December 30, 2003, respectively. Amortization is calculated on a straight-line basis over shorter of the estimated useful life of the assets or respective lease term.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
8. Earnings Per Share (continued)
Employee stock options of 174,617; 61,046; and 37,554 for the years ended December 28, 2004, December 30, 2003, and December 31, 2002, respectively, are not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented. Such options could potentially dilute basic earnings per share in the future.
9. Income Taxes
The Company’s provision for income taxes consists of the following:
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
9. Income Taxes (continued)
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities at December 28, 2004 and December 30, 2003 are as follows:
A reconciliation between the reported provision for income taxes and tax determined by applying the applicable U.S. Federal Statutory income tax rate to income before taxes follows:
(1)
The tax credits represent the credit for FICA taxes paid on tips in excess of minimum wage
10. Fair Values of Financial Instruments
The carrying amount reported in the balance sheet for all financial instruments, including cash and cash equivalents, certain payables, and debt instruments, approximates its fair value.
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
11. Quarterly Financial Summaries (Unaudited)
The following table summarizes the unaudited consolidated quarterly results of operations for fiscal 2004 and 2003:
(a) The second quarter of fiscal 2004 includes a charge to earnings of $2,523 ($1,766 net of income tax) related to the provision for asset impairment in the quarter.
(b) As described in Note 2, we have restated our consolidated statement of net income related to the calculation of straight-line rent expense and the related deferred rent liability and depreciation expense. The effect of the Restatement on reported restaurant operating income was $(242), $(403), and $(292) for the quarters ended March 23, 2004, June 15, 2004, and September 7, 2004, respectively. The effect of the Restatement on reported net income was $(33), $(339), and $(212) for the quarters ended March 23, 2004, June 15, 2004, and September 7, 2004, respectively. The effect of the Restatement on reported basic earnings per share and diluted earnings per share was $(0.00), $(0.03), and $(0.02) for the quarters ended March 23, 2004, June 15, 2004, and September 7, 2004, respectively.
(c) The fourth quarter of fiscal 2003 includes a charge to earnings of $2,009 ($1,358 net of income tax) related to the provision for asset impairment in the quarter.
(d) As described in Note 2, we have restated our consolidated statement of net income related to the calculation of straight-line rent expense and the related deferred rent liability and depreciation expense. The effect of the Restatement on reported restaurant operating income was $(256), $(260), $(252), and $(386) for the quarters ended March 25, 2003, June 17, 2003, September 9, 2003, and December 30, 2003, respectively. The effect of the Restatement on reported net income was $(58), $(130), $(169), and $(436) for the quarters ended March 25, 2003, June 17, 2003, September 9, 2003, and December 30, 2003, respectively. The effect of the Restatement on reported basic earnings per share and diluted earnings per share was $(0.01), $(0.01), $(0,02), and $(0.04) for the quarters ended March 25, 2003, June 17, 2003, September 9, 2003, and December 30, 2003, respectively.
12. Commitments and Contingencies
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
Total Entertainment Restaurant Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
12. Commitments and Contingencies (continued)
condition or results of operations. Further, adverse publicity resulting from these allegations may materially adversely affect us and our restaurants.
Commitments
On March 1, 2005 the Company renewed its services agreement with Franchise Services Company for certain accounting and administrative services for a term of one year. The Company pays a per restaurant per 28-day fixed fee. At December 28, 2004, the company paid approximately $65 per 28-day period.
13. Related Party Transactions
The Company leases two of its restaurants, the College Station and Dallas #2 locations, from limited partnerships controlled by the former Co-Chairman of the Company’s board of directors. The total rental expense paid to the limited partnerships for both restaurants for the years ended December 28, 2004, December 30, 2003, and December 31, 2002 was $300, $277, and $281, respectively.
In February 2002, the Company purchased the assets of a seafood restaurant in Richmond, Virginia, from BMR Restaurants, LLC (“BMR”), which has been converted to a Bailey’s restaurant. The Company’s Chairman of the board of directors is the manager of BMR. The Chairman and his wife collectively own 82.6% of BMR, which had owned the restaurant assets for more than two years. The Company paid a total of $300 for these assets, which included a real estate lease, leasehold improvements, furniture and equipment. The transaction was unanimously approved by the disinterested members of the board of directors.
In December 2004, the Company purchased the assets of a restaurant in Cary, North Carolina, from BMR-Raleigh Restaurants, LLC (“BMRR”), which has been converted to a Fox & Hound Pub & Grille. The Company’s Chairman of the board of directors is the manager of BMRR. The Chairman and his wife collectively own 46.6% of BMRR, which had owned the restaurant assets for more than two years. The Company paid a total of $568 for these assets, which included a real estate lease, leasehold improvements, furniture and equipment. The transaction was unanimously approved by the disinterested members of the board of directors
In April 2000 and February 2001, the Company invested an aggregate of $200 for limited partnership interests in limited partnerships formed to develop and operate Cool River Restaurants. Two members of the Company’s board of directors and a former Co-Chairman are the majority owners of the managing general partner of these partnerships. In June 2002, the Company was refunded $100 of its original investment in exchange for rights to one of the related limited partnership interests.
14. Benefit plans
The Company provides employees who meet minimum service requirements with retirement benefits under a 401(k) plan (the “the Plan”). Under the Plan, eligible employees may make contributions of between 1% and 20% of their annual compensation. Effective for 2003, officers and highly compensated employees do not participate in this plan. The Company makes quarterly matching contributions in an amount equal to 50% of the first 6% of employee compensation contributed, resulting in a maximum Company contribution of 3% of employee compensation. The Company’s expense under the Plan was $64, $72, and $77 for 2004, 2003 and 2002, respectively.