<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Act of 1934 for the Quarterly Period ended September 30,
1995.
Commission File Number: 0-14968
---------------------------------------------------------
EATERIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1230348
- --------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3240 W. Britton Rd., Ste. 202,
Oklahoma City, Oklahoma 73120
- --------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
(405) 755-3607
- --------------------------------------------------------------------------------
(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. 3,732,684 common shares,
$.002 par value, were outstanding as of November 7, 1995.
<PAGE>
EATERIES, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
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Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1994 and
September 30, 1995 (unaudited) . . . . . . . . . . . 4
Condensed Consolidated Statements of
Income (unaudited)
Three months ended September 30, 1994
and 1995 . . . . . . . . . . . . . . . . . . . . . . 5
Nine months ended September 30, 1994
and 1995 . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of
Cash Flows (unaudited)
Nine months ended September 30, 1994
and 1995 . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Condensed Consolidated Financial
Statements (unaudited) . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 19
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<PAGE>
PART I
FINANCIAL INFORMATION
-3-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
EATERIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
----------- -----------
ASSETS (unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,843,951 $ 639,286
Marketable securities 514,737 -
Receivables 650,066 2,016,907
Deferred income taxes 569,000 624,105
Inventories 1,085,308 1,114,280
Other 133,807 217,981
----------- -----------
Total current assets 4,796,869 4,612,559
----------- -----------
PROPERTY AND EQUIPMENT 19,269,888 24,609,879
Less landlord finish-out allowances (8,995,732) (11,578,203)
Less accumulated depreciation and
amortization (2,964,540) (3,707,363)
----------- -----------
Net property and equipment 7,309,616 9,324,313
----------- -----------
DEFERRED INCOME TAXES 651,000 911,000
OTHER ASSETS, net 175,256 518,688
----------- -----------
$12,932,741 $15,366,560
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ - $ 1,769,686
Accounts payable 1,681,747 1,250,159
Accrued liabilities 1,791,587 1,878,960
Notes payable to vendor 330,934 62,834
Current portion of long-term
obligations 70,409 26,000
----------- -----------
Total current liabilities 3,874,677 4,987,639
----------- -----------
OTHER NONCURRENT LIABILITIES 358,141 609,786
----------- -----------
LONG-TERM OBLIGATIONS, net of
current portion 74,538 1,730,938
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, none issued - -
Common stock 7,906 8,013
Additional paid-in capital 9,047,594 9,128,395
Retained earnings 898,752 236,407
----------- -----------
9,954,252 9,372,815
Treasury stock, at cost,
272,122 shares at December 31,
1994 and 274,039 shares at
September 30, 1995 (1,328,867) (1,334,618)
----------- -----------
Total stockholders' equity 8,625,385 8,038,197
----------- -----------
$12,932,741 $15,366,560
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------
1994 1995
------------ ------------
REVENUES:
<S> <C> <C>
Food and beverage sales $ 9,777,126 $11,291,783
Franchise fees and royalties 68,578 71,796
Other income 98,917 85,837
------------ ------------
9,944,621 11,449,416
------------ ------------
COSTS AND EXPENSES:
Cost of sales 3,078,278 3,353,520
Operating expenses 5,709,511 6,749,060
Pre-opening costs 119,887 223,000
General and administrative 645,433 778,478
Provision for restaurant
closures and other disposals - 897,000
Depreciation and amortization 237,905 347,879
Interest expense 19,701 2,962
------------ ------------
9,810,715 12,351,899
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 133,906 (902,483)
PROVISION (BENEFIT) FOR INCOME
TAXES 28,000 (260,000)
------------ ------------
NET INCOME (LOSS) $ 105,906 $ (642,483)
------------ ------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,933,759 3,732,684
------------ ------------
NET INCOME (LOSS) PER SHARE $ 0.03 $ (0.17)
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1994 1995
----------- -----------
<S> <C> <C>
REVENUES:
Food and beverage sales $27,046,892 $31,970,599
Franchise fees and royalties 199,893 217,895
Other income 323,639 418,142
----------- -----------
27,570,424 32,606,636
----------- -----------
COSTS AND EXPENSES:
Cost of sales 8,361,095 9,849,966
Operating expenses 16,069,285 19,085,968
Pre-opening costs 399,187 564,000
General and administrative 1,792,523 2,167,594
Provision for restaurant
closures and other disposals - 897,000
Depreciation and amortization 631,823 955,918
Interest expense 36,059 16,537
----------- -----------
27,289,972 33,536,983
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 280,452 (930,347)
PROVISION (BENEFIT) FOR INCOME
TAXES 70,000 (268,000)
----------- ------------
NET INCOME (LOSS) $ 210,452 $ (662,347)
----------- ------------
----------- ------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,944,352 3,789,320
----------- -----------
----------- -----------
NET INCOME (LOSS) PER SHARE $ 0.05 $ (0.17)
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
1994 1995
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 210,452 $ (662,347)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation & amortization 631,823 955,918
Asset write-downs included in provision
for restaurant closures and other
disposals - 469,500
Gain on sale of assets - (134,245)
Common stock bonus 9,653 -
Deferred income taxes 70,000 (268,000)
(Increase) decrease in:
Receivables (50,561) (285,530)
Inventories (158,135) (14,071)
Other 15,275 (84,174)
Increase (decrease) in:
Accounts payable (57,819) (431,588)
Accrued liabilities 37,039 87,373
Other noncurrent liabilities 9,074 251,645
---------- ----------
Total adjustments 506,349 546,828
---------- ----------
Net cash provided by (used in) operating
activities 716,801 (115,519)
---------- ----------
Cash flows from investing activities:
Capital expenditures (4,077,676) (5,987,320)
Landlord allowances 2,076,429 1,501,160
Net cash payments for restaurant acquisitions - (529,083)
Proceeds from sale of property and equipment - 413,855
Sales of marketable securities - 514,737
Collection of notes receivable 30,000 -
Increase in other assets (63,482) (31,609)
---------- ----------
Net cash used in investing activities (2,034,729) (4,118,260)
---------- ----------
Cash flows from financing activities:
Payments on notes payable to vendor (529,279) (380,395)
Net borrowings under revolving credit
agreements 300,334 1,675,000
Payments on long-term obligations (92,546) (63,009)
Increase in bank overdraft - 1,769,686
Proceeds from exercise of stock options 29,740 27,832
Other (7,385) -
Payment of withholding tax liabilities
related to acquisition of treasury stock (50,586) -
---------- ----------
Net cash provided by (used in) financing
activities (349,722) 3,029,114
---------- ----------
Net decrease in cash & cash equivalents (1,667,650) (1,204,665)
Cash and cash equivalents at beginning of period 1,954,318 1,843,951
---------- ----------
Cash and cash equivalents at end of period $ 286,668 $ 639,286
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
-7-
<PAGE>
EATERIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PREPARATION.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
NOTE 2 - BALANCE SHEET INFORMATION
Receivables are comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
------------ ------------
<S> <C> <C>
Franchisees $ 70,069 $ 70,700
Insurance refunds 231,169 314,336
Landlord finish-out allowances 255,000 1,336,311
Other 93,828 295,560
------------ ------------
$ 650,066 $ 2,016,907
------------ ------------
------------ ------------
</TABLE>
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
------------ ------------
<S> <C> <C>
Compensation $ 890,194 $ 805,997
Taxes, other than income 333,521 339,638
Other 567,872 733,325
------------ ------------
$ 1,791,587 $ 1,878,960
------------ ------------
------------ ------------
</TABLE>
-8-
<PAGE>
NOTE 3 - RESTAURANT ACQUISITION
In January 1995, the Company acquired substantially all of the assets of the
"Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along with
rights to use trademarks associated with the restaurant, for a cash purchase
price (including transaction expenses) of $529,000. Additionally, the Company
assumed real estate and equipment leases for the restaurant. The acquisition
has been accounted for under the purchase method. As a result, the Company
recorded inventory, equipment and leasehold improvements totalling $199,000,
trademarks of $125,000 and goodwill of approximately $205,000. The Company is
amortizing the cost of the trademarks and goodwill over 20 years. Pro forma
results of operations for the three and nine months ended September 30, 1994,
assuming that the restaurant acquisition had been made at the beginning of 1994,
would not be materially different than the results reported.
NOTE 4 - PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS
All estimated costs which are expected to be incurred in the closures of
restaurants are accrued when the decisions are made to close such restaurants.
These estimated costs consist primarily of lease termination costs and
reductions of the carrying values of property, equipment and leasehold
improvements to estimated net realizable value. Operating expenses of the
restaurants between the decision and closing time are not included in the
provision. When practical and dependent upon results of lease termination
negotiations, management plans to utilize equipment and fixtures in planned
future restaurant locations, however, costs to prepare such assets for future
use are not accrued as part of the provision for restaurant closures.
During the third quarter of 1995, the Company approved and began the
implementation of a plan to close certain underperforming restaurants. As of
September 30, 1995, the Company has closed two (on July 2, 1995 and September
17, 1995, respectively) of the four restaurants planned for closure. Management
anticipates that the remaining restaurant closures, including negotiation and
execution of lease termination agreements, will be completed during the first
quarter of 1996. These restaurants, collectively, accounted for $3,203,000 and
$1,775,000 of revenues and $(134,000) and $(315,000) of operating losses for
each of the nine month periods ended September 30, 1994 and 1995, respectively.
These restaurants, collectively, accounted for $1,043,000 and $479,000 of
revenues and $(97,000) and $(96,000) of operating losses for each of the three
month periods ended September 30, 1994 and 1995, respectively. Management
expects the effect of closing these underperforming stores to result in improved
margins and increased profitability for the Company in future periods.
-9-
<PAGE>
As a result of the completed and planned restaurant closures, the Company
recorded a pre-tax charge of $842,000 in the third quarter of 1995, of which
approximately $147,000 of lease termination and other exit costs had been
incurred by September 30, 1995. The provision is comprised of the following:
Estimated lease termination and exit costs $427,500
Write-down of property, equipment, and leasehold
improvements to estimated net realizable value 414,500
--------
$842,000
--------
--------
The Company also made a provision of $55,000 for equipment write-downs in the
third quarter of 1995 related to the Company's implementation plan for a new
point-of-sale ("P.O.S.") system. The new P.O.S. system will be installed in the
majority of the Company's owned and operated restaurants and is expected to be
completed by the end of 1996. This new system will enhance the Company's
ability to monitor store level operations. The provision is to write-down the
carrying value of the equipment to be disposed of to its net realizable value.
NOTE 5 - LONG-TERM DEBT
In August, 1995 the Company entered into a loan agreement with a bank. The new
$3,000,000 debt agreement is a three year unsecured revolving loan facility,
contains certain financial covenants and allows the Company to borrow at the
national prime interest rate or the London Interbank Offered Rates ("LIBOR")
plus 2.75%. At September 30, 1995 the Company was out of compliance with one of
the loan agreement's financial covenants and received a waiver from the bank in
November, 1995.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
For the nine month periods ended September 30, 1994 and 1995, the Company had
the following non-cash investing and financing activities:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1994 1995
---- ----
<S> <C> <C>
Net increase in receivables
for landlord finish-out allowances...... $468,439 $1,081,311
Borrowings for capital expenditures
under notes payable to vendor........... 435,936 112,295
Acquisition of treasury stock
upon exercise of stock options.......... 37,500 5,751
Increase in additional paid-in capital
as a result of tax benefits from the
exercise of non-qualified stock options. 125,000 47,325
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
As of September 30, 1995 the Company owned, operated and franchised 46 (38
Company and eight franchised) casual theme, dinnerhouse restaurants. Subsequent
to that date, the Company has opened one new restaurant. The Company currently
has two restaurants under development. As of the date of this report, the
entire system includes 40 Company and eight franchise restaurants.
PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA
The following table sets forth, for the periods indicated, (i) the percentages
that certain items of income and expense bear to total revenues, unless
otherwise indicated, and (ii) selected operating data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1994 1995 1994 1995
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Restaurant sales................ 98.3% 98.6% 98.1% 98.0%
Franchise fees and royalties.... 0.7% 0.6% 0.7% 0.7%
Other income.................... 1.0% 0.7% 1.2% 1.3%
-------------------------------- -------------------------------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales (1)............... 31.5% 29.7% 30.9% 30.8%
Restaurant operating expenses(1) 58.4% 59.8% 59.4% 59.7%
Restaurant pre-opening costs(1). 1.2% 2.0% 1.4% 1.8%
General and administrative expenses 6.5% 6.8% 6.5% 6.6%
Provision for restaurant
closures and other disposals.. - 7.8% - 2.8%
Depreciation and amortization
expenses (1).................. 2.4% 3.1% 2.3% 3.0%
Interest expense................ 0.2% - 0.1% 0.1%
-------------------------------- -------------------------------
98.7% 107.9% 99.0% 102.9%
-------------------------------- -------------------------------
Income (loss) before income taxes 1.3% (7.9%) 1.0% (2.9%)
Provision (benefit) for income taxes... 0.3% (2.3%) 0.3% (0.8%)
-------------------------------- -------------------------------
Net income (loss)...................... 1.1% (5.6%) 0.8% (2.0%)
-------------------------------- -------------------------------
-------------------------------- -------------------------------
Selected Operating Data:
(Dollars in thousands)
System-wide sales:
Company restaurants........... $9,777 $11,292 $27,047 $31,971
Franchise restaurants......... 1,799 2,003 5,260 5,686
-------------------------------- -------------------------------
Total..................... $11,576 $13,295 $32,307 $37,657
-------------------------------- -------------------------------
-------------------------------- -------------------------------
Number of restaurants (at end of period):
Company restaurants........... 31 38
Franchise restaurants......... 8 8
--------------------------------
Total..................... 39 46
--------------------------------
--------------------------------
</TABLE>
(1) As a percentage of restaurant sales.
- --------------------
-11-
<PAGE>
RESULTS OF OPERATIONS
For the three months ended September 30, 1995, the Company recorded net loss of
$(642,000) ($(.17) per share) on revenues of $11,449,000. This compares to net
income of $106,000 ($.03 per share) for the three months ended September 30,
1994 on revenues of $9,945,000. For the nine months ended September 30, 1995
and 1994, the Company reported net loss of $(662,000) ($(.17) per share) for
1995 compared to net income of $210,000 ($.05 per share) in 1994. During the
third quarter of 1995, the Company recorded a pre-tax charge of $897,000 to
establish a provision for restaurant closures and other disposals. The effect
of this provision on the reported net loss and per share data for the three
months and nine months ended September 30, 1995 was $(639,000) or $(.17) per
share.
REVENUES
Company revenues for the three and nine months ended September 30, 1995
increased 15% and 18%, respectively, over the revenues reported for the same
periods in 1994. The revenue increase relates primarily to increased restaurant
sales during the three and nine month periods in 1995. The number of Company
restaurants operating at the end of each respective period ended September 30
and the number of operating months during each period were as follows:
<TABLE>
<CAPTION>
Number of Number of Average Monthly
September 30, Units Open Operating Months Sales Per Unit
- ------------- ---------- ---------------- --------------
Three Months Nine Months Three Months Nine Months
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
1995 38 113 334 $ 99,900 $ 95,700
1994 31 92 260 $106,300 $104,000
</TABLE>
Average monthly sales per unit decreased by $6,400 and $8,300, respectively, for
the three and nine months ended September 30, 1995 versus the previous year's
results. These decreases are attributable to the following items:
In late 1994, the Company began testing and rolled out to nineteen
stores in January, 1995 a new menu which contained a combination of
several new lower priced and a la carte selections. The stores with
this new menu experienced a reduction in average check amounts and
revenues during the first five months of 1995, rather than the overall
increase the Company expected. Management reacted quickly to reverse
these declines by beginning implementation of a new menu to its stores
in late June, 1995. The new menu contains many new food selections
and incorporates a pricing strategy similar to menus used by the
Company previous to the January, 1995 menu. A new drink menu was also
rolled out to the stores in late June, 1995. The Company is
experiencing increases in average check amounts and revenues as a
result of the new menus and expects to see these trends continue
during the final quarter of 1995.
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<PAGE>
The Company's first quarter 1995 three week television advertising
campaign coincided with two consecutive weekends of bad weather in the
Company's Northern and Midwestern stores. Thus, the Company incurred
the advertising expense without the normal sales gains it has achieved
during past advertising campaigns. The Company's next major 1995
television advertising campaign began in late July, 1995 to promote
the Company's new food and drink menus. Advertising was minimal
during the second quarter of 1995 as management believed its
advertising would be more effective if it was done in conjunction with
the introduction of the new menus. As a result of this advertising
strategy, sales remained weak during the second quarter but began to
increase during the third quarter in response to the new menus and
related advertising.
The effects of the previously noted items, along with the overall
weakness in national retail sales levels contributed to the Company's
same store sales and average monthly sales per unit decreases during
the three and nine months ended September 30, 1995.
The Company recently hired a Vice President of Marketing, a new
position at the Company. The new Vice President of Marketing had over
17 years of marketing and related experience with a nationally
recognized chain of dinnerhouse restaurants. The Company's management
believes this individual has begun to have a positive impact on
directing its marketing strategy and will strengthen its management
team. A regional newspaper print program for Garfield's was developed
and implemented in early November 1995 for the majority of the
Company's restaurants and should result in an increase in revenues and
operating results during the fourth quarter of 1995. The Company's
Pepperoni Grill concept continues to perform very well. Management
expects to open a second Pepperoni Grill in November 1995.
Franchise fees and continuing royalties increased to $218,000 from
$200,000 in the nine months ended September 30, 1995 versus the
previous year. During the second quarter of 1995, one franchise
restaurant closed and a new one opened. At September 30, 1995 and
1994, there were eight franchise restaurants in service.
COSTS AND EXPENSES
A comparison of food and beverage and labor costs (excluding payroll taxes and
fringe benefits) as a percentage of restaurant sales at Company-owned
restaurants is as follows for the periods ended September 30:
<TABLE>
<CAPTION>
Three months Nine months
------------ -----------
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of sales 31.5% 29.7% 30.9% 30.8%
Labor costs 28.1% 28.2% 28.1% 28.4%
----- ----- ----- -----
Combined Total 60.0% 57.9% 59.0% 59.2%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
-13-
<PAGE>
The decrease in cost of sales percentages during 1995 reflects the Company's
improving purchasing techniques, which has allowed the Company to fix purchase
prices for certain high volume food products, and other purchasing efficiencies.
Where practical, such techniques will continue to be used in the Company's
purchasing methods. Also, the third quarter 1995 cost of sales percentage
improved over the previous year's as a result of lower produce and selected meat
prices. Labor costs experienced during the 1995 periods are comparable to the
1994 levels and have remained at the levels expected by the Company.
For the three months ended September 30, 1995, restaurant operating expenses as
a percentage of restaurant sales increased from 58.4% to 59.8% in the 1994 three
month period. An increase was experienced during the nine months ended
September 30, 1995, during which operating expenses were 59.7%, as compared to
the 1994 period level of 59.4%. Both 1995 period increases in operating
expenses as a percent to sales are attributable to higher occupancy costs
(primarily rent and utilities) and repairs and maintenance expenses partially
offset by lower advertising and promotional expenses.
Restaurant pre-opening costs, which are expensed as incurred, were
$223,000 and $120,000 for the three months ended September 30, 1995 and 1994,
respectively, and $564,000 and $399,000 for the nine month periods ended
September 30, 1995 and 1994, respectively. Seven restaurants were developed in
the first nine months of 1995 while five restaurants were developed in the 1994
period. There was no pre-opening costs associated with the Company's purchase
of the Pepperoni Grill restaurant in January, 1995. The Company plans to open
three additional restaurants (for a total of ten) in 1995 with anticipated
average pre-opening costs of $65,000 to $75,000 per restaurant location.
Under the Company's policy of expensing pre-opening costs as incurred, during
periods of new store expansion income from operations, on an annual and
quarterly basis, could be adversely affected; however, the Company believes that
its initial investment in the restaurant pre-opening costs yields a long-term
benefit of increased operating income in subsequent periods.
During the three and nine months ended September 30, 1995 and 1994, general and
administrative costs as a percentage of revenues increased to 6.8% and 6.6%,
respectively, from 6.5% and 6.5%, respectively. The increases in percent to
sales and actual dollar amounts of general and administrative costs from 1994 to
1995 are related primarily to additional personnel costs and related costs of
operating the expanding restaurant system. The Company anticipates that its
costs of supervision and administration of Company and franchise stores will
increase at a slower rate than revenue increases during the fourth quarter of
1995 and the next few years.
-14-
<PAGE>
PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS
During the third quarter of 1995, the Company approved and began the
implementation of a plan to close certain underperforming restaurants. As of
September 30, 1995 the Company has closed two (on July 2, 1995 and September 17,
1995, respectively) of the four restaurants planned for closure. Management
anticipates that the remaining restaurant closures, including negotiation and
execution of lease termination agreements, will be completed during the first
quarter of 1996. These restaurants, collectively, accounted for $3,203,000 and
$1,775,000 of revenues and $(134,000) and $(315,000) of operating losses for
each of the nine month periods ended September 30, 1994 and 1995, respectively.
These restaurants, collectively, accounted for $1,043,000 and $479,000 of
revenues and $(97,000) and $(96,000) of operating losses for each of the three
month periods ended September 30, 1994 and 1995, respectively.
As a result of the completed and planned restaurant closures, the Company
recorded a pre-tax charge of $842,000 in the third quarter of 1995, of which
approximately $147,000 of lease termination and other exit costs had been
incurred by September 30, 1995. The provision is comprised of the following:
Estimated lease termination and exit costs $427,500
Write-down of property, equipment, and leasehold
improvements to estimated net realizable value 414,500
--------
$842,000
--------
--------
The Company also made a provision of $55,000 for equipment write-downs in the
third quarter of 1995 related to the Company's implementation plan for a new
point-of-sale system. The new point-of-sale system will be installed in the
majority of the Company's restaurants (six restaurants have the new system as of
September 30, 1995) and is expected to be completed during 1996. This new
system will enhance the Company's ability to monitor store level operations.
The provision is to write-down the carrying value of the equipment to be
disposed of to its net realizable value.
Management expects the effect of closing these underperforming stores to result
in improved margins and increased profitability for the Company in future
periods. In the normal course of business, Management performs a regular review
of the strength of its operating assets. It is Management's plan to continue to
make such decisions to close underperforming restaurants and/or dispose of other
assets it considers in the best long-term interest of the Company's
shareholders.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased for the first nine months of
1995 to $956,000 (3.0% of restaurant sales) compared to $632,000 (2.3% of
restaurant sales) in 1994. The cost increase relates principally to the
increase in net assets subject to depreciation and amortization in 1995 versus
1994 because of additional restaurants, the purchase of the Pepperoni Grill
restaurant and the remodeling of existing restaurants.
-15-
<PAGE>
INCOME TAXES
The Company's tax benefit for income taxes was $(268,000) during the first nine
months of 1995 versus a tax provision for income taxes of $70,000 for the 1994
comparable period. The effective tax rates for the periods ended September 30,
are as follows:
Three Months Nine Months
------------ -------------
1994 1995 1994 1995
---- ---- ---- ----
Effective income tax rates 20.9% 28.8% 25.0% 28.8%
The 20.9% effective tax rate for the three months ended September 30, 1994 was
caused by an adjustment made in the tax provision to properly reflect the
estimated tax provision for the nine months ended September 30, 1994. The
effective tax rate was 27.8% for the Company's fiscal year ended December 31,
1994.
NET INCOME (LOSS) PER SHARE AMOUNTS
Net income (loss) per share amounts are computed by dividing net income (loss)
by the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Per share amounts are based on total outstanding
shares plus the assumed exercise of all dilutive stock options and warrants.
Common and common equivalent share amounts were 3,933,759 and 3,732,684 in the
three months ended September 30, 1994 and 1995, respectively, and 3,944,352 and
3,789,320 in the nine months ended September 30, 1994 and 1995, respectively.
Under the treasury stock method of computation, outstanding stock options and
warrants represented 277,308 dilutive common equivalent shares for the quarter
ended September 30, 1994. There were no dilutive common equivalent shares for
the quarter ended September 30, 1995 as the Company incurred a net loss for the
period.
IMPACT OF INFLATION
The impact of inflation on the costs of food and beverage products, labor and
real estate can affect the Company's operations. Over the past few years,
inflation has had a lesser impact on the Company's operations due to the lower
rates of inflation in the nation's economy and economic conditions in the
Company's market area.
Management believes the Company has historically been able to pass on increased
costs through certain selected menu price increases and has offset increased
costs by increased productivity and purchasing efficiencies, but there can be no
assurance that the Company will be able to do so in the future. Management
anticipates that the average cost of restaurant real estate leases and
construction cost could increase in the future which could affect the Company's
ability to expand. In addition, mandated health care and an increase in the
Federal or state minimum wages could significantly increase the Company's costs
of doing business.
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995 the Company's working capital ratio was .92 to 1 compared
to 1.24 to 1 at December 31, 1994. Working capital decreased to $(375,000) at
September 30, 1995 versus $922,000 at December 31, 1994. As is customary in the
restaurant industry, the Company has operated with negative working capital and
has not required large amounts of working capital. Historically, the Company
has leased the majority of its restaurant locations and through a strategy of
controlled growth, financed its expansion principally from operating cash flow
and, to a lesser extent, short-term vendor financing.
During the nine months ended September 30, 1995, the Company had net cash used
by operating activities of $116,000 as compared to net cash provided by
operating activities of $717,000 during the comparable 1994 period.
The Company plans to expand its Company-owned restaurants at the rate of 10 to
15 units per year in the 1995 - 1996 period. In addition to the Pepperoni Grill
restaurant purchased in January, 1995 for approximately $529,000, the Company
will complete construction of nine new restaurants during 1995 in restaurant
locations leased in regional malls. The Company believes the cash generated
from its operations and borrowing availability under its credit facility
(described below), will be sufficient to satisfy the Company's net capital
expenditures and working capital requirements through 1996.
On August 31, 1995, the Company entered into an agreement with a bank for a
revolving line of credit for $3,000,000. This revolver is unsecured, has a
three year term and contains customary financial covenants. This new credit
facility provides the Company additional borrowing capacity to continue its
expansion plans over the next several years.
-17-
<PAGE>
PART II
OTHER INFORMATION
-18-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 11.1 - Computation of net income per share.
(b) Exhibit 27.1 - Financial Data Schedule
(c) No reports on Form 8-K were filed during the three months
ended September 30, 1995.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EATERIES, INC.
Registrant
Date: November 9, 1995 By: /s/ AUGUST A. HEHEMANN
---------------------------------------
August A. Hehemann
Vice President/Treasurer
Principal Financial and
Accounting Officer
-20-
<PAGE>
Exhibit 11.1
EATERIES, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-----------------------------------------
March 31 June 30 September 30,
-------- ------- -------------
<S> <C> <C> <C>
Shares for net income (loss) per share
computation:
Weighted average shares:
Common shares outstanding from beginning
of period............................ 3,680,768 3,723,684 3,732,684
Common shares issued upon exercise
of stock options..................... 14,830 3,000 -
Treasury shares acquired............... (682) - -
---------- ---------- ----------
3,694,916 3,726,684 3,732,684
Common stock equivalents (unless
anti-dilutive):
Shares issuable upon exercise of options
(dilutive)............................ 394,813 - -
Assumed repurchase of outstanding shares
up to 20% limitation (based on average
market price for the quarter).......... (181,138) - -
---------- ---------- ----------
213,675 - -
---------- ---------- ----------
Total shares............ 3,908,591 3,726,684 3,732,684
---------- ---------- ----------
---------- ---------- ----------
Net income (loss)............................ $ 25,207 $ (45,071) $ (642,483
---------- ---------- ----------
---------- ---------- ----------)
Net income (loss) per share.................. $0.01 $(0.01) $(0.17)
----- ------ ------
----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1995
-------------------
<S> <C>
Net income (loss) (sum of three quarters
above)..................................... $ (662,347)
----------
----------
Weighted average number of common and common
equivalent shares (average of three
quarters above)........................... 3,789,320
----------
----------
Net loss per share........................... $(0.17)
----------
----------
</TABLE>
-1-
<PAGE>
Exhibit 11.1
EATERIES, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
1994 QUARTER ENDED
----------------------------------------
March 31 June 30 September 30,
---------- ---------- -------------
<S> <C> <C> <C>
Shares for net income per share computation:
Weighted average shares:
Common shares outstanding from beginning
of period............................. 3,608,001 3,627,192 3,628,872
Common shares issued upon exercise
of stock options...................... 11,301 - 32,326
Treasury shares acquired - - (4,747)
---------- ---------- -----------
3,619,302 3,627,192 3,656,451
Common stock equivalents:
Shares issuable upon exercise of options
(dilutive)............................ 380,239 418,528 336,875
Assumed repurchase of outstanding shares
up to 20% limitation (based on average
market price for the quarter)........ (41,305) (104,658) (59,567)
---------- ---------- ----------
338,934 313,870 277,308
---------- ---------- ----------
Total shares......... 3,958,236 3,941,062 3,933,759
---------- ---------- ----------
---------- ---------- ----------
Net income................................... $ 77,911 $ 26,635 $ 105,906
---------- ---------- ----------
---------- ---------- ----------
Net income per share......................... $0.02 $0.01 $0.03
----- ----- -----
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Nine Months ended
September 30, 1994
------------------
<S> <C>
Net income (sum of three quarters above)..... $ 210,452
----------
----------
Weighted average number of common and common
equivalent shares (average of three
quarters above).......................... 3,944,352
----------
----------
Net income per share......................... $0.05
----------
----------
</TABLE>
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the condensed consolidated balance sheet as of September 30, 1995 and
the condensed consolidated statement of income for the nine months
ended September 30, 1995 included in the Company's Form 10-Q for the
quarterly period ended September 30, 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 639
<SECURITIES> 0
<RECEIVABLES> 2,017
<ALLOWANCES> 0
<INVENTORY> 1,114
<CURRENT-ASSETS> 4,613
<PP&E> 13,032
<DEPRECIATION> 3,707
<TOTAL-ASSETS> 15,367
<CURRENT-LIABILITIES> 4,988
<BONDS> 1,731
<COMMON> 8
0
0
<OTHER-SE> 8,030
<TOTAL-LIABILITY-AND-EQUITY> 15,367
<SALES> 31,971
<TOTAL-REVENUES> 32,606
<CGS> 9,850
<TOTAL-COSTS> 29,892
<OTHER-EXPENSES> 3,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (930)
<INCOME-TAX> (268)
<INCOME-CONTINUING> (662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (662)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
