<PAGE> 1
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 29, 1996.
Commission File Number: 0-14968
--------------------------------------------------------
EATERIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1230348
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(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
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(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. 3,844,558 common shares,
$.002 par value, were outstanding as of November 8, 1996.
<PAGE> 2
EATERIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 and
September 29, 1996 (unaudited) . . . . . . . . . . . 4
Condensed Consolidated Statements of
Income (unaudited)
Three months ended September 30, 1995
and September 29, 1996 . . . . . . . . . . . . . . . 5
Nine months ended September 30, 1995
and September 29, 1996 . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of
Cash Flows (unaudited)
Nine months ended September 30, 1995
and September 29, 1996 . . . . . . . . . . . . . . . 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> 3
PART I
FINANCIAL INFORMATION
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<PAGE> 4
Item 1. Financial Statements
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 29,
1995 1996
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,001,954 $ 1,455,765
Receivables 1,353,099 1,645,599
Deferred income taxes 389,000 329,000
Inventories 1,368,673 1,288,514
Other 179,020 220,104
----------- -----------
Total current assets 4,291,746 4,938,982
----------- -----------
PROPERTY AND EQUIPMENT 26,819,081 32,851,065
Less landlord finish-out allowances (12,409,951) (14,442,487)
Less accumulated depreciation and
amortization (4,047,414) (5,356,879)
----------- -----------
Net property and equipment 10,361,716 13,051,699
----------- -----------
DEFERRED INCOME TAXES 991,000 1,115,000
LANDLORD FINISH-OUT ALLOWANCES
RECEIVABLE 429,000 -
OTHER ASSETS, net 522,493 522,121
----------- -----------
$16,595,955 $19,627,802
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,967,109 $ 4,482,297
Accrued liabilities 2,963,564 2,487,949
Notes payable to vendor 13,139 -
Current portion of long-term
obligations 25,305 27,525
----------- -----------
Total current liabilities 5,969,117 6,997,771
----------- -----------
OTHER NONCURRENT LIABILITIES 465,382 483,285
----------- -----------
LONG-TERM OBLIGATIONS, net of
current portion 1,249,023 3,128,093
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, none issued - -
Common stock 8,038 8,237
Additional paid-in capital 9,154,420 9,279,658
Retained earnings 1,084,593 1,065,376
----------- -----------
10,247,051 10,353,271
Treasury stock, at cost,
274,039 shares at December 31,
1995 and September 29, 1996 (1,334,618) (1,334,618)
----------- -----------
Total stockholders' equity 8,912,433 9,018,653
----------- -----------
$16,595,955 $19,627,802
=========== ===========
See notes to condensed consolidated financial statements.
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<PAGE> 5
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Thirteen Weeks
September 30, Ended September 29,
1995 1996
------------------ -------------------
<S> <C> <C>
REVENUES:
Food and beverage sales $11,291,783 $13,851,215
Franchise fees and royalties 71,796 64,058
Other income 85,837 83,572
----------- -----------
11,449,416 13,998,845
----------- -----------
COSTS AND EXPENSES:
Cost of sales 3,353,520 4,226,479
Operating expenses 6,749,060 7,986,366
Pre-opening costs 223,000 230,000
General and administrative 778,478 869,832
Provision for restaurant
closures and other disposals 897,000 -
Depreciation and amortization 347,879 480,772
Interest expense 2,962 51,042
----------- -----------
12,351,899 13,844,491
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (902,483) 154,354
PROVISION (BENEFIT) FOR INCOME
TAXES (260,000) 45,000
----------- -----------
NET INCOME (LOSS) $ (642,483) $ 109,354
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,732,684 4,086,807
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.17) $ 0.03
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Thirty-nine Weeks
September 30, Ended September 29,
1995 1996
----------------- -------------------
<S> <C> <C>
REVENUES:
Food and beverage sales $31,970,599 $39,730,073
Franchise fees and royalties 217,895 197,533
Other income 418,142 268,614
----------- -----------
32,606,636 40,196,220
----------- -----------
COSTS AND EXPENSES:
Cost of sales 9,849,966 12,143,784
Operating expenses 19,085,968 23,437,647
Pre-opening costs 564,000 504,000
General and administrative 2,167,594 2,665,845
Provision for restaurant
closures and other disposals 897,000 -
Depreciation and amortization 955,918 1,353,600
Interest expense 16,537 118,564
----------- -----------
33,536,983 40,223,440
----------- -----------
LOSS BEFORE INCOME TAXES (930,347) (27,220)
BENEFIT FOR INCOME
TAXES (268,000) (8,000)
----------- -----------
NET LOSS $ (662,347) $ (19,220)
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES 3,789,320 3,954,108
=========== ===========
NET LOSS PER SHARE $ (0.17) $ (0.00)
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 7
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Thirty-nine Weeks
Ended September 30, Ended September 29,
1995 1996
------------------ --------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Net loss $ (662,347) $ (19,220)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation & amortization 955,918 1,353,600
Asset write-downs included in provision
for restaurant closures and other
disposals 469,500 -
Gain on sale of assets (134,245) (3,271)
Common stock bonuses - 7,741
Deferred income taxes (268,000) (8,000)
(Increase) decrease in:
Receivables (285,530) (432,038)
Inventories (14,071) 80,159
Other (84,174) (41,084)
Increase (decrease) in:
Accounts payable (431,588) 1,515,188
Accrued liabilities 87,373 (475,615)
Other noncurrent liabilities 251,645 17,903
---------- ----------
Total adjustments 546,828 2,014,583
---------- ----------
Net cash provided by (used in) operating
activities (115,519) 1,995,363
---------- ----------
Cash flows from investing activities:
Capital expenditures (5,987,320) (6,096,471)
Landlord allowances 1,501,160 2,601,074
Net cash payments for restaurant acquisitions (529,083) -
Proceeds from sale of property and equipment 413,855 36,379
Sales of marketable securities 514,737 -
Increase in other assets (31,609) (12,381)
---------- ----------
Net cash used in investing activities (4,118,260) (3,471,399)
---------- ----------
Cash flows from financing activities:
Payments on notes payable to vendor (380,395) (13,139)
Net borrowings under revolving credit
agreements 1,675,000 1,900,000
Payments on long-term obligations (63,009) (18,710)
Increase in bank overdraft 1,769,686 -
Proceeds from exercise of stock options 27,832 60,727
Proceeds from sale of common stock - 969
---------- ----------
Net cash provided by financing
activities 3,029,114 1,929,847
---------- ----------
Net decrease in cash & cash equivalents (1,204,665) 453,811
Cash and cash equivalents at beginning of period 1,843,951 1,001,954
---------- ----------
Cash and cash equivalents at end of period $ 639,286 $1,455,765
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 8
EATERIES, INC. AND SUBSIDIARIES
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 foot-notes 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. The Company changed its fiscal
year-end in the first quarter of 1996 to a 52/53 week year ending on the last
Sunday in December. As a result of this change, each of the Company's quarters
will consist of thirteen weeks. In a 53 week fiscal year, the fourth quarter
will include fourteen weeks. The first three quarters of 1995 and 1996, both
include 273 days (combined). The third quarter of 1996 includes 91 days versus
92 days in the third quarter of 1995. Operating results for thirteen and
thirty-nine week periods ended September 29, 1996, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. 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, 1995.
Note 2 - Balance Sheet Information
Receivables are comprised of the following:
December 31, September 29,
1995 1996
----------- ----------
Franchisees $ 88,448 $ 46,584
Insurance refunds 283,883 503,464
Landlord finish-out allowances 748,288 608,750
Other 232,480 486,801
---------- -----------
$1,353,099 $1,645,599
---------- -----------
Accrued liabilities are comprised of the following:
December 31, September 29,
1995 1996
---------- -----------
Compensation $1,259,896 $1,256,160
Taxes, other than income 395,930 425,285
Other 1,307,738 806,504
---------- -----------
$2,963,564 $2,487,949
---------- -----------
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<PAGE> 9
Note 3 - Supplemental Cash Flow Information
For the nine months ended September 30, 1995 and the thirty-nine weeks ended
September 29, 1996, the Company had the following non-cash investing and
financing activities:
<TABLE>
<CAPTION>
Nine Months Ended Thirty-Nine Weeks
September 30, Ended September 29,
1995 1996
----------------- -------------------
<S> <C> <C>
Net increase (decrease) in receivables
for landlord finish-out allowances $1,081,311 $(568,538)
Borrowings for capital expenditures
under notes payable to vendor 112,295 -
Acquisition of treasury stock
upon exercise of stock options 5,751 -
Increase in additional paid-in capital
as a result of tax benefits from the
exercise of non-qualified stock options. 47,325 56,000
</TABLE>
Note 4 - Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to tbe Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
future cash flows estimated to be generated by those assets are less than the
assets' carrying amount. SFAS 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted SFAS 121 in
the first quarter of 1996, and based upon management's review of the Company's
long-lived assets, no impairment losses were recorded. (See following Note 5
for discussion of the Company's provision for restaurant closures and other
disposals).
Note 5 - 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
November 8, 1996, the Company had closed three of the four restaurants planned
for closure. Management anticipates that the remaining restaurant closures and
negotiation and execution of lease termination agreements will be completed
during the remainder of 1996. 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 $605,000 of lease termination
costs, litigation settlement costs and other exit costs had been incurred by
September 29, 1996. Management expects the effect of closing
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<PAGE> 10
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.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Introduction
As of September 29, 1996 the Company owned, operated and franchised 52 (44
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 45 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 NINE MONTHS ENDED
1995 1996 1995 1996
-------------------- ------------------
<S> <C> <C> <C> <C>
Statements of Income Data:
Revenues:
Restaurant sales...................... 98.6% 98.9% 98.0% 98.8%
Franchise fees and royalties.......... 0.5% 0.5% 0.7% 0.5%
Other income.......................... .7% 0.6% 1.3% 0.7%
-------------------- ------------------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales (1)..................... 29.7% 30.5% 30.8% 30.6%
Restaurant operating expenses(1) ..... 59.8% 57.7% 59.7% 59.0%
Restaurant pre-opening costs(1)....... 2.0% 1.7% 1.8% 1.3%
General and administrative expenses .. 6.8% 6.2% 6.6% 6.6%
Provision for restaurant
closures and other disposals........... 7.8% - 2.8% -
Depreciation and amortization
expenses (1)........................... 3.1% 3.5% 3.0% 3.4%
Interest expense....................... - 0.4% 0.1% 0.3%
-------------------- ------------------
107.9% 98.9% 102.9% 100.1%
-------------------- ------------------
Income (loss) before income taxes........... (7.9%) 1.1% (2.9%) (0.1%)
Provision (benefit) for income taxes........ (2.3%) 0.3% (0.8%) (0.0%)
-------------------- ------------------
Net income (loss)........................... (5.6%) 0.8% (2.0%) (0.0%)
==================== ==================
Selected Operating Data:
(Dollars in thousands)
System-wide sales:
Company restaurants................ $11,292 $13,851 $31,971 $39,730
Franchise restaurants.............. 2,003 2,085 5,686 6,155
-------------------- ------------------
Total.............................. $13,295 $15,936 $37,657 $45,855
=================== ==================
Number of restaurants (at end of period):
Company restaurants................ 38 44
Franchise restaurants.............. 8 8
-------------------- ------------------
Total.............................. 46 52
=================== ==================
</TABLE>
(1) As a percentage of restaurant sales.
- ----------------------
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<PAGE> 12
RESULTS OF OPERATIONS
For the three months ended September 29, 1996, the Company recorded net income
of $109,000 ($.03 per share) on revenues of $13,999,000. This compares to net
loss of $(642,000) ($(.17) per share) for the three months ended September 30,
1995 on revenues of $11,449,000. For the nine months ended September 29, 1996
and September 30, 1995, the Company reported net loss of $(19,000) $(.00) per
share) for 1996 compared to net loss of $(622,000) ($.17 per share) in 1995.
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 29, 1995
increased 22% and 23%, respectively, over the revenues reported for the same
periods in 1995. The revenue increase relates primarily to increased
restaurant sales during the three and nine month periods in 1996. The number
of Company restaurants operating at the end of each respective three and nine
month periods and the number of operating months during each period were as
follows:
<TABLE>
<CAPTION>
Number of Average Monthly
Operating Months Sales Per Unit
Number of ---------------- --------------
September 30, Units Open Three Months Nine Months Three Months Nine Months
------------- ---------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1996 44 128 378 $108,200 $105,100
1995 38 113 334 $ 99,900 $ 95,700
</TABLE>
Average monthly sales per unit increased by $8,300 and $9,400, respectively,
for the three and nine months ended September 29, 1996 versus the previous
year's results. These increases are attributable to the following items:
A stronger, more experienced management team in place at the
beginning of 1996. (Several key examples follow).
In November, 1995, the Company created and filled the position of
Divisional Vice President of Operations/Garfield's. The
individual responsible for this position brings 17 years of senior
operations' management experience with two nationally recognized
restaurant chains. The Divisional Vice President is responsible
for improving service and sales of the Garfield's stores as well
as recruiting and hiring experienced store management.
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<PAGE> 13
In August, 1995 the Company hired a Vice President of Marketing, a
new position at the Company. The new Vice President of Marketing
has over 17 years of marketing experience with a nationally
recognized chain of dinnerhouse restaurants. During the fourth
quarter of 1995, a detailed marketing plan was developed for 1996,
with the primary objectives being to improve same store sales and
guest satisfaction. The implementation of the marketing plan
began during the first quarter of 1996 positively impacted the
Company's same store sales results during the first nine months of
1996.
Following the November, 1995 successful introduction of regional
newspaper advertising, the Company ran its second regional
newspaper print program for Garfield's restaurants in February,
1996. A third regional program continued to drive sales during
May and June, 1996. A fourth regional program continued to yield
the results of the first three programs during the third quarter
of 1996. These programs were used in the majority of the
Company's restaurant markets and have all been successful in
increasing revenues and customer visits.
During the first nine months of 1996, the Company began testing
radio and direct mail advertising campaigns in selective
restaurant markets. Initial results have been favorable and the
Company plans to further utilize these campaigns in additional
restaurant markets during the remainder of the year and into 1997.
While these marketing programs resulted in increased
short-term costs, management believes their effects, along with
the local efforts of our restaurant management, contributed to the
Company's significant average monthly sales per unit increases.
(The Company experienced a 10% increase in average unit volumes
during the first nine months of 1996 versus the comparable 1995
period). Management expects it will continue to experience
improving sales trends for the balance of the year with higher
marketing and promotion costs, of which management believes the
long-term benefits outweigh the short-term costs.
Franchise fees and continuing royalties decreased to $198,000 from
$218,000 in the nine months ended September 29, 1996 versus the
previous year. At September 29, 1996 and September 30, 1995, there
were eight franchise restaurants in service.
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<PAGE> 14
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 three and nine month periods:
<TABLE>
<CAPTION>
Three months Nine months
------------ -----------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of sales 29.7% 30.5% 30.8% 30.6%
Labor costs 28.2% 27.2% 28.4% 28.1%
Combined Total 57.9% 57.9% 59.2% 58.7%
</TABLE>
The decrease in cost of sales percentages during the nine month period in 1996
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. The third quarter 1995 cost of sales
percentage of 29.7% was favorably impacted by several product rebates which
lowered overall cost of sales percent. The third quarter 1996 cost of sales
percentage of 30.5% is in line with 1996 to date product costs. Labor costs
experienced during the first nine months of 1996 have improved over comparable
1995 levels as a result of better store level monitoring of labor needs and
enhanced scheduling techniques.
Due to the increase in minimum wage laws, the Company is facing increasing labor
costs. Likewise, meat, chicken and dairy prices are increasing nationally.
While the Company has been able to absorb most of these increases to date,
management expects both food and labor to continue to increase which could
negatively impact earnings.
For the three months ended September 29, 1996, restaurant operating expenses as
a percentage of restaurant sales decreased to 57.7% from 59.8% in the 1995
three month period. A decrease was experienced during the nine months ended
September 29, 1996, during which operating expenses were 59.0%, as compared to
the 1995 period level of 59.7%. Both 1996 period decreases in operating
expenses as a percent to sales are attributable to lower occupancy costs
partially offset by higher advertising and promotional expenses.
Restaurant pre-opening costs, which are expensed as incurred, were $230,000 and
$223,000 for the three months ended 1996 and 1995, respectively, and $504,000
and $564,000 for the nine month periods ended 1996 and 1995, respectively.
Five restaurants were developed in the first nine months of 1996 while seven
restaurants were developed in the 1995 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 1996.
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<PAGE> 15
Under the Company's policy of expensing pre-opening costs as incurred, income
from operations, on an annual and quarterly basis, could be adversely affected
during periods of restaurant development; 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 month periods ended during 1996 and 1995, general and
administrative costs as a percentage of revenues were 6.2% and 6.6%,
respectively, and 6.8% and 6.6%, respectively. The higher absolute levels of
general and administrative costs in 1996 as compared to 1995 amounts 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 next few years.
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 29, 1996 the Company has closed three of the four restaurants planned
for closure.
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. The
provision was 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased for the first nine months of
1996 to $1,354,000 (3.4% of restaurant sales) compared to $956,000 (3.0% of
restaurant sales) in 1995. The cost increase relates principally to the
increase in net assets subject to depreciation and amortization in 1996 versus
1995 because of additional restaurants opened since October, 1995, and the
remodeling of existing restaurants.
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<PAGE> 16
INCOME TAXES
The Company's tax benefit for income taxes was $(8,000) during the first nine
months of 1996 versus a tax benefit for income taxes of $(268,000) for the 1995
comparable period. The effective tax rates for the periods are as follows:
Three Months Nine Months
------------ -------------
1995 1996 1995 1996
---- ---- ---- ----
Effective income tax rates 28.8% 29.2% 28.8% 29.4%
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 3,732,684 and 4,086,807 in the
three months ended September 30, 1995 and September 29, 1996, respectively, and
3,789,320 and 3,954,108 in the nine months ended September 30, 1995 and
September 29, 1996, respectively. There were no dilutive common equivalent
shares for the quarter ended September 30, 1995 as the Company incurred a net
loss for the period. Under the treasury stock method of computation,
outstanding stock options and warrants represented 242,256 dilutive common
equivalent shares for the quarter ended September 29, 1996.
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 could significantly
increase the Company's costs of doing business.
-16-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 1996 the Company's working capital ratio was .71 to 1 compared
to .72 to 1 at December 31, 1995. Working capital decreased to $(2,059,000) at
September 29, 1996 versus $(1,677,000) at December 31, 1995. 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, proceeds from the sale of common stock and utilizing the
Company's revolving line of credit.
During the nine months ended September 29, 1996, the Company had net cash
provided by operating activities of $1,995,000 as compared to net cash used by
operating activities of $(116,000) during the comparable 1995 period.
The Company had planned to open six units during 1996. However, management has
elected to accelerate its scheduled openings to a total of eight new
restaurants to capitalize on two favorable real estate opportunities. The two
additional restaurants will open late in the year and will have a negative
impact on fourth quarter and yearend earnings. Historically, the Company has
earned the vast amount of its income in the fourth quarter. While this will
still be the case in 1996, earnings will likely be negatively impacted by the
start-up costs related to these two additional openings.
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
during 1996.
In August, 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 credit
facility provides the Company additional borrowing capacity to continue its
expansion plans over the next several years.
In July, 1996, the Company's $3,000,000 revolving line of credit was increased
to $5,000,000 and the term was extended by one year to August, 1999.
-17-
<PAGE> 18
PART II
OTHER INFORMATION
-18-
<PAGE> 19
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 thirteen weeks
ended September 29, 1996.
-19-
<PAGE> 20
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 12, 1996 By: /s/ AUGUST A. HEHEMANN
--------------------------
August A. Hehemann
Vice President/Treasurer
Principal Financial and
Accounting Officer
-20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
Exhibit 11.1 - Computation of net income per share.
Exhibit 27.1 - Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
EATERIES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
1996 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............................ 3,745,095 3,842,258 3,843,908
Common shares issued upon:
Exercise of stock options.............. 62,996 - -
Sale of common stock................... - 198 50
Common stock bonuses................... - 948 593
---------- ---------- ----------
3,808,091 3,843,404 3,844,551
Common stock equivalents (unless
anti-dilutive):
Shares issuable upon exercise of options
(dilutive)............................ 761,983 - 864,483
Assumed repurchase of outstanding shares
up to 20% limitation (based on average
market price for the quarter).......... (637,961) - (622,227)
---------- ---------- ----------
124,022 - 242,256
---------- ---------- ----------
Total shares............ 3,932,113 3,843,404 4,086,807
========== ========== ==========
Net income (loss)............................ $ 37,279 $ (165,853) $ 109,354
========== ========== ==========
Net income (loss) per share.................. $ 0.01 $ (0.04) $ 0.03
========== ========== ==========
<CAPTION>
Thirty-nine weeks ended
September 29, 1996
------------------
<S> <C>
Net loss (sum of three quarters
above)..................................... $ (19,220)
==========
Weighted average number of common and common
equivalent shares (average of three
quarters above)........................... 3,954,108
==========
Net loss per share........................... $ (0.0)
</TABLE> ==========
<PAGE> 2
-1-
Exhibit 11.1
EATERIES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
1996 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............................. 3,680,768 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:
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)
========== ========== ==========
<CAPTION>
Nine Months ended
September 30, 1995
-----------------
<S> <C>
Net (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 income per share......................... $ (0.17)
==========
</TABLE>
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 29, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 1,456
<SECURITIES> 0
<RECEIVABLES> 1,646
<ALLOWANCES> 0
<INVENTORY> 1,289
<CURRENT-ASSETS> 4,939
<PP&E> 18,409
<DEPRECIATION> 5,357
<TOTAL-ASSETS> 19,628
<CURRENT-LIABILITIES> 6,998
<BONDS> 3,128
0
0
<COMMON> 8
<OTHER-SE> 9,010
<TOTAL-LIABILITY-AND-EQUITY> 19,628
<SALES> 39,730
<TOTAL-REVENUES> 40,196
<CGS> 12,144
<TOTAL-COSTS> 36,935
<OTHER-EXPENSES> 3,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> (27)
<INCOME-TAX> (8)
<INCOME-CONTINUING> (19)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19)
<EPS-PRIMARY> (0.0)
<EPS-DILUTED> (0.0)
</TABLE>
