<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (fee required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
FILE NO. 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
incorporation or organization) Identification No.)
3240 W. Britton Road
Oklahoma City, Oklahoma 73120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(405) 755-3607
Securities registered pursuant to Section 12(b)of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value, $.002 per share
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of March 1, 1996 was $6,273,000.
Number of shares outstanding as of March 1, 1996 - 3,843,158 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of annual reports, proxy statements, and Rule 424(b)
or (c) prospectuses which are incorporated by reference into the Form 10-K
and the Part of the Form 10-K into which the document is incorporated- The
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders is
incorporated by reference in Part III, Items 10, 11, 12 and 13.
One of _____ pages; exhibit index begins on page _____.
<PAGE>
EATERIES, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1995
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1. Business ......................................... 1
Item 2. Properties ....................................... 10
Item 3. Legal Proceedings ................................ 10
Item 4. Submission of Matters to a Vote of
Security Holders ................................. 10
PART II
- -------
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters .................. 11
Item 6. Selected Financial Data .......................... 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 13
Item 8. Financial Statements and Supplementary Data ...... 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............. 23
PART III
- --------
Item 10. Directors and Executive Officers
of the Registrant ................................ 23
Item 11. Executive Compensation ........................... 23
Item 12. Security Ownership of Certain
Beneficial Owners and Management ................. 23
Item 13. Certain Relationships and Related Transactions ... 23
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .......................... 24
INDEX TO EXHIBITS .......................................... 25
SIGNATURES ................................................. 28
INDEX TO FINANCIAL STATEMENTS .............................. 29
(i)
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PART I
ITEM 1. BUSINESS
IN GENERAL
Eateries, Inc. (the "Company") operates and franchises a 50-unit (42
Company, 8 franchise) chain of Garfield's and Pepperoni Grill restaurants.
These casual theme, dinnerhouse restaurants are located primarily in regional
malls in 22 states. The Company opened its first restaurant in 1984 in
Oklahoma City, Oklahoma. The Company's restaurants are family-oriented,
providing an upscale alternative to traditional fast-food. The restaurants
are designed to appeal to a divergent customer base that grew up on
fast-food, but now prefer a more sophisticated menu, the availability of
alcoholic beverages, a comfortable ambiance, speed, value and convenience.
Both restaurant concepts feature a varied selection of moderately-priced,
high quality food and beverage items with table service dining.
In January 1995, the Company acquired substantially all the assets of
the "Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along
with all rights to the use of the trademarks associated with the concept.
Pepperoni Grill features a variety of Italian entrees with special emphasis
on "brick-oven baked pizza" and grilled rotisserie chicken. The warm
European bistro atmosphere is accented with an exhibition kitchen, light
woods and booths covered in tapestry. All menu items are prepared on the
premises with the entire entree presentation being performed within view of
the guest, making the kitchen part of the restaurant's atmosphere. An
in-store bakery makes all the breads and daily desserts. Over 60 different
wine selections are offered along with 25 wines available by the glass.
In 1995, the Company constructed and opened eight (8) Garfield's and one
Pepperoni Grill in major regional malls. The Company expects to add
approximately six to eight Garfield's and one additional Pepperoni Grill in
1996 to its system. The primary expansion emphasis will be on Company rather
than franchised restaurants. However, management will visit with qualified,
interested parties as potential franchisees.
The Company's principal offices are located at 3240 West Britton Road,
Oklahoma City, Oklahoma 73120. Its telephone number is (405) 755-3607.
GARFIELD'S RESTAURANT & PUB
MENU. Each Garfield's restaurant offers a diverse menu of freshly
prepared traditional and innovative entrees, including prime rib, seafood,
steak, chicken, hamburgers, Mexican, Italian, and Oriental dinners and
sandwiches along with a variety of appetizers, salads and desserts. Menu
offerings are revised by the Company semi-annually to improve sales.
Typically there are only
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a small number of changes at the time of each revision. The Company's senior
management actively participates in the search for new menu items. In
February, 1996 the Company hired a Director of Product Research and
Development to further assist in developing new menu selections. Garfield's
restaurants also offer a separate lower-priced children's menu.
RESTAURANT LAYOUT. Garfield's restaurants are constructed in regional
malls in accordance with uniform design specifications and are generally
similar in appearance and interior decor. Restaurants are furnished and
styled in a colorful motif, highlighting the travels of the Company's
namesake, "Casey Garfield", including exhibits, photographs, souvenirs and
other travel-related furnishings. Tables are covered with paper and
customers are encouraged to doodle with crayons provided at each table.
The size and shape of Garfield's restaurants vary depending largely upon
the location. While most restaurants are located inside regional shopping
malls, original units (built prior to 1987) were smaller, typically 2,500 to
3,500 square feet, and not located in malls. Garfield's constructed since
1987 are larger, typically 4,500 to 5,500 square feet, seat approximately 200
guests and are located in malls. The Company's prototype Garfield's to be
constructed in 1996 will approximate 4,800 square feet.
Most Garfield's restaurants now include a sports bar lounge featuring
national and local sports memorabilia, including numerous televisions for the
viewing of sporting events. Over the past five years, the sports bar concept
has been incorporated into older Garfield's resulting in increased
beverage-to-food ratios, sales per unit and operating profits compared to
earlier periods. Each Garfield's restaurant features a "Beers of the World"
menu of more than 25 domestic and imported beers along with a full complement
of liquor. During 1995 the sale of alcoholic beverages represented
approximately 16% of restaurant sales from Company-owned restaurants.
HOURS OF OPERATION. Depending on location, most restaurants are open
from 11:00 a.m. until 11:00 p.m. on weekdays and Sunday, and later on Friday
and Saturday.
UNIT ECONOMICS. Historically, the cost of opening a new Garfield's
restaurant has varied widely due to the different restaurant configuration
and sizes, regional construction cost levels, the length of the Company's
operating history and certain other factors. The Company currently leases
the restaurant premises in major regional malls and builds-out the leased
space to meet the Garfield's concept specifications of style and decor. The
Company's returns on its new Garfield's restaurants have been assisted by the
favorable finish-out allowances provided by mall developers.
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SITE SELECTION. Since late 1990, all new Garfield's restaurants have
been located in regional shopping malls. The Company considers the location
of a restaurant to be critical to its long-term success and has devoted
significant effort to the investigation and evaluation of potential mall
sites. The site selection process focuses on historical sales per foot by
mall tenants and proximity to entertainment centers within and out of the
mall as well as accessibility to major traffic arteries. The Company also
reviews potential competition in the area and utilizes an Equifax site
selection model to "rate" each potential location based upon a multitude of
different criteria. Senior management inspects and approves each mall
restaurant site. The Company expects to locate future Garfield's in
regional malls. It takes approximately 18 weeks to complete construction and
open a Garfield's.
RESTAURANT LOCATIONS. The following table sets forth the location of
the existing Garfield's restaurants.
<TABLE>
<CAPTION>
COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS
- ------------------------- ----------------------
STATE # OF UNITS STATE # OF UNITS
----- ---------- ----- ----------
<S> <C> <C> <C>
Alabama................. 1 Colorado................. 1
Arkansas................ 1 Iowa..................... 2
Florida................. 2 Oklahoma................. 5
Georgia................. 1 --
Illinois................ 4 Total.................. 8*
Indiana................. 1
Kentucky................ 1
Louisiana............... 2
Michigan................ 1
Mississippi............. 3
Missouri................ 4
New York................ 2
North Carolina.......... 1
Ohio.................... 2
Oklahoma................ 5
Tennessee............... 2
Texas................... 4
West Virginia........... 1
Wisconsin............... 2
--
Total................. 40*
</TABLE>
______
* 46 Garfield's restaurants (38 Company-owned and six franchised)
are located in regional malls.
PEPPERONI GRILL RESTAURANTS
The original Pepperoni Grill restaurant, located in Oklahoma City,
Oklahoma was purchased by Eateries, Inc. in January, 1995. It is located in a
recently renovated mall and its menu features a variety of Italian entrees
with special emphasis on "brick-oven
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baked pizza" and grilled rotisserie chicken. The warm European bistro
atmosphere is accented with an exhibition kitchen, light woods and booths
covered in tapestry. All menu items are prepared on the premises with the
entire entree presentation being performed within view of the guest, making
the kitchen part of the restaurant's atmosphere. An in-store bakery makes
all the breads and daily desserts. Pepperoni Grill's signature bakery item
is a Tuscan parmesan black pepper bread that is served with all entrees along
with the traditional olive oil and balsamic vinegar. Over 60 different wine
selections are offered along with 25 wines available by the glass.
The Company purchased the Pepperoni Grill restaurant primarily because
of its many similarities to the existing Garfield's concept and its popular
"Italian" based menu. The Pepperoni Grill restaurant concept is similar to
Garfield's as it is a full service dinner house, located in a mall and is
approximately the same size with many operational functions which parallel a
Garfield's.
During 1995 the Company's management carefully studied the original
Pepperoni Grill restaurant's operations, layout, etc. and opened its second
Pepperoni Grill restaurant in a regional mall located in Terre Haute, Indiana
in November, 1995. This second Pepperoni Grill was constructed next to an
existing Garfield's and it is management's opinion that the two concepts will
provide operational efficiencies when they are situated in the same location
and will help saturate markets with the Company's own restaurants instead of
a competitors. The Company is still in the "early" stages of evaluating the
benefits of this strategy and the future growth potential of the Pepperoni
Grill restaurant concept.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. Responsibility for the Company's restaurant
operations is organized geographically with restaurant general managers
reporting to area directors of operations who in turn report to the
respective divisional vice presidents of operations for Garfield's and
Pepperoni Grill. A typical restaurant has a general manager, three to five
associate managers and average 53 employees, approximately 79% of whom are
part-time.
Area directors of operations as well as restaurant general managers and
associate managers are eligible for cash and stock bonuses, travel
incentives, professional training and attendance at industry conferences.
Receipt of these incentives is based on reaching restaurant performance
objectives. The Company's hourly employees are eligible for
performance-based awards for superior service to the Company and its guests.
Employee awards can include travel incentives, gift certificates, plaques and
Company memorabilia. Most employees other than restaurant management and
corporate management are compensated on an hourly basis.
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QUALITY CONTROL. The Company has uniform operating standards and
specifications relating to the quality, preparation and selection of menu
items, maintenance and cleanliness of the premises, and employee
conduct. Managers are responsible for assuring compliance with Company
operating procedures. Executive and supervisory personnel routinely visit
each restaurant to evaluate adherence to quality standards and employee
performance. In addition, the Company has implemented a toll free guest
satisfaction survey program in conjunction with Gallup Research. This
tailormade survey provides each restaurant with approximately 400 guest
reviews of its operations throughout the year.
TRAINING. The Company places a great deal of emphasis on the proper
training of its hourly employees and general and associate managers. In
1995, the Company hired a full-time Director of Training to oversee all areas
of employee education. The outline for the program is based on the
individual expertise of the trainee and typically lasts about two weeks for
hourly employees and up to 12 weeks for managers. Managers must be certified
in a number of skills in restaurant management, including technical
proficiency and job functions, management techniques and profit and loss
responsibilities. These skills are taught primarily in the restaurant along
with classroom training and assigned projects. Manager training is performed
in several geographically dispersed restaurants. Standard manuals regarding
training and operations, products and equipment and local marketing programs
are provided by the Company.
A highly-experienced opening team assists with the start-up of each new
restaurant. Prior to opening, all personnel undergo one or more weeks of
intensive training conducted by a restaurant opening team. Management
positions in newly-opened restaurants are typically staffed with experienced
personnel from other Company-owned restaurants.
PURCHASING. During 1994, the Company hired a purchasing director to
oversee the relations and negotiations with manufacturers and regional
distributors for most food and beverage products and to insure uniform
quality, competitive costs and adequate supplies of proprietary products.
The Company and its franchisees purchase substantially all food and beverage
products from several national and regional suppliers. The Company has not
experienced any significant delays in receiving food and beverage inventories
or restaurant supplies.
ADVERTISING AND MARKETING. The Company uses television, newspaper,
radio and outdoor advertising to promote its restaurants. In markets where
the Company shares a trade area with a franchisee, advertising cooperatives
are utilized to maximize the Company's restaurant's visibility. Franchisees
of Garfield's units are generally required to expend up to 4% of sales on
restaurant related marketing efforts. In addition, all Company and franchise
restaurants contribute 1/2% of their sales to a marketing fund used to
produce advertising and point of sale material to promote
5
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increased sales and to maintain quality control programs. The Company
engages in a variety of local market promotional activities such as
contributing goods, time and money to charitable, civic and educational
programs, in order to increase public awareness of the Company's restaurants.
RESTAURANT REPORTING. Financial controls are implemented through the
use of computerized cash registers and management information systems. Sales
reports and food, beverage and labor cost data are prepared weekly for
operational control.
EXPANSION STRATEGY
Eateries, Inc. intends to open Company-owned Garfield's and Pepperoni
Grill restaurants in regional malls principally throughout the Southwest,
Midwest and Southeast regions of the United States. This expansion strategy
is designed to capitalize on the growing trend to include and expand dining
and entertainment facilities in regional malls. Management believes this
mall-based expansion strategy reduces the risks associated with locating
restaurants in new markets because of the availability of historical trends
regarding mall sales and customer traffic. Further, restaurant construction
within a mall typically requires a substantially smaller investment than
construction of a free-standing restaurant.
Of the nearly three thousand major malls and shopping centers in the
United States, management believes roughly half offer possible location
opportunities for its restaurant concepts, particularly as existing malls are
expanding and remodeled with a view toward becoming entertainment and dining
centers. The Company maintains relationships with several leading mall
managing agents who provide the Company with an ongoing supply of potential
mall locations for evaluation.
The Company has retained a Director of Real Estate to represent it in
site negotiations. This individual is compensated on a success fee basis.
The Company expects to focus its expansion primarily on the opening of
Company-owned Garfield's and Pepperoni Grill restaurants. Additional
franchising is possible but likely to be a minor part of expansion.
The Company opened a new Garfield's in February, 1996 in Winter Haven,
Florida. The Company currently is developing four additional Garfield's
restaurants as follows: Adrian, Michigan; Anderson, Indiana; Tallahassee,
Florida; Columbus, Mississippi, and are negotiating for several more
locations designated to open in 1996. The Company is also developing its
third Pepperoni Grill location to be opened in Tallahassee, Florida in 1996.
The Company expects to open seven to nine Company-owned restaurants in 1996
and up to fifteen Company-owned restaurants in 1997.
6
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FRANCHISE OPERATIONS
GENERAL TERMS. Eight franchised Garfield's are currently operating
pursuant to agreements granted by the Company. The typical franchise
agreement provides for (i) the payment of an initial franchise fee of up to
$35,000 and a monthly continuing royalty fee expressed as a percentage
(typically 3% or 4%) of gross sales with a minimum fee of $2,000 to $2,500
per month; (ii) quality control and operational standards; (iii) development
obligations for the opening of new restaurants under the franchise; and (iv)
the creation and use of advertising. The franchise term usually ranges from
five to 10 years with five-year renewals. The grant of a franchise does not
insure that a restaurant will be opened. Under the Company's typical
franchise agreement, the failure to open restaurants can cause a termination
of the franchise. Although the Company largely relies upon standardized
agreements for its franchises, it will continue to adjust its agreements as
circumstances warrant.
FUTURE FRANCHISE DEVELOPMENT. The Company has elected to emphasize
Company restaurant development and as a result does not intend to aggressively
pursue new restaurant franchising. The Company had not entered into any new
franchise agreements as of March 1, 1996.
COMPANY MANAGED FRANCHISES. The Company currently manages three of its
franchised restaurants in Oklahoma City pursuant to a management agreement
with the franchisee who remains the owner of the restaurants. The Company
receives fixed management and accounting fees in addition to its royalties
and other charges under the franchise agreement.
FRANCHISE REVENUE DATA. The following table sets forth fees and royalties
earned by the Company from franchisees for the years indicated.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Initial franchise fees ........... $ 35,000 $ - $ 50,000
Continuing royalties ............. $453,000 $267,000 $258,000
</TABLE>
Compliance with Franchise Standards. All franchisees are required to
operate their Garfield's restaurants in compliance with the Company's
methods, standards and specifications regarding such matters as menu items,
ingredients, materials, supplies, services, fixtures, furnishings, decor and
signs, although the franchisee has the discretion to determine the menu
prices to be charged. However, as a practical matter, all franchisees utilize
the Company's standardized Garfield's menu. In addition, all franchisees are
required to purchase all food, ingredients, supplies and materials from
suppliers approved by the Company. The Company enforces the standards
required of franchisees. Such enforcement may result in the closure or
non-renewal of certain franchise units, but any such closings or non-renewals
are not expected to have a material adverse effect upon the Company's results
of operations and financial position.
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COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location, food type and quality, and there are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for a
substantially longer period than the Company and may be better established in
the market area than the Company's restaurants. The restaurant business is
often affected by changes in consumer taste, national, regional or local
economic conditions, demographic trends, traffic patterns and type, number
and location of competing restaurants. In addition, factors such as inflation,
increased food, labor and benefit costs, and the lack of experienced management
and hourly employees may adversely affect the restaurant industry in general
and the Company's restaurants in particular.
SERVICE MARKS
"GARFIELD'S", "CASEY GARFIELD'S" and "PEPPERONI GRILL" are Company
service marks registered with the United States Patent and Trademark Office.
The Company pursues any infringement of its marks within the United States
and considers its marks to be crucial to its operations.
EMPLOYEES
As of March 1, 1996, the Company employed 2,421 individuals, of whom
195 were management or administrative personnel (including 161 who were
restaurant managers or trainees) and 2,226 were employed in non-management
restaurant positions. As of this date, the Company employed 186 persons on a
salaried basis and 2,235 persons on an hourly basis. Each restaurant
employs an average of 53 persons.
Most employees, other than restaurant management and corporate
management personnel, are paid on an hourly basis. The Company believes that
it provides working conditions and wages that compare favorably with those of
its competition. As the Company expands, it will need to hire additional
management and its continued success will depend in large part on its ability
to attract and retain good management employees. The Company's employees are
not covered by a collective bargaining agreement.
SEASONALITY
With 40 of the 42 Company-owned restaurants located in regional malls,
the resulting higher pedestrian traffic during the Thanksgiving to New Year
holiday season, together with the Company's practice of opening new restaurants
before December, have caused the Company to experience a substantial increase
in restaurant sales and profits in the Company's fourth fiscal quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Impact of Seasonality."
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GOVERNMENT REGULATIONS
The Company's restaurants are subject to licensing and regulation by
alcoholic beverage control, health, sanitation, safety and fire agencies in
each state and/or municipality in which restaurants are located. The Company
has not experienced material difficulties in these areas, however, regulatory
difficulties or failures in obtaining the required licenses or approvals
could delay or prevent the opening of a new restaurant and affect
profitability.
Approximately 16% of the Company's food and beverage revenues in 1995
were attributable to the sale of alcoholic beverages. Alcoholic beverage
control regulations require each of the Company's restaurants to apply to a
state authority and, in certain locations, county or municipal authorities,
for a license or permit to sell alcoholic beverages on the premises and to
provide service for extended hours and on Sundays. Typically, such licenses
or permits must be renewed annually and may be revoked or suspended for cause
at any time. Alcoholic beverage control regulations relate to numerous aspects
of the daily operations of the Company's restaurants, including minimum age of
patron and employees, hours of operating, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
In certain states the Company may be subject to "dram-shop" statutes,
which generally provide a person injured by an intoxicated patron the right
to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
The Company's restaurant operations are also subject to federal and
state laws governing such matters as minimum wages, working conditions,
overtime and tip credits. Significant numbers of the Company's food service
and preparation personnel are paid at rates equal to or based upon the
federal minimum wage and, accordingly, further increases in the minimum wage
could increase the Company's labor costs. The enactment of future legislation
increasing employee benefits, such as mandated health insurance, could also
significantly adversely affect the industry and the Company, as could future
increases in workers' compensation rates.
The Company is subject to Federal Trade Commission ("FTC") regulation
and state laws that regulate the offer and sale of franchises. The Company
may also become subject to state laws that regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires the Company to furnish
prospective franchisees a franchise offering circular containing prescribed
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information. A number of states in which the Company might consider
franchising also regulate the offer and sale of franchises and require
registration of the franchise offering with state authorities. The Company
believes that it is in material compliance with such laws.
The Americans With Disabilities Act ("ADA") prohibits discrimination in
employment and public accommodations on the basis of disability. While the
Company believes it is in substantial compliance with the ADA regulations,
the Company could be required to expend funds to modify its restaurants to
provide service to, or make reasonable accommodations for the employment of,
disabled persons.
ITEM 2. PROPERTIES
All but one of the Company's facilities are occupied under leases,
primarily in regional malls. The majority of the Company's restaurant leases
provide for the payment of base rents plus real estate taxes, insurance and
other expenses and for the payment of a percentage of the Company's sales in
excess of certain sales levels. These leases typically provide for escalating
rentals in future years and have initial terms expiring as follows:
<TABLE>
<CAPTION>
YEAR LEASE TERM EXPIRES NUMBER OF FACILITIES*
----------------------- ---------------------
<S> <C>
1996-1997................................. 1
1998-1999................................. 3
2000-2001................................. 6
2002-2003................................. 8
2004-2005................................. 16
2006 and beyond........................... 12
</TABLE>
_____________
*Includes five leases which have been executed for locations where restaurants
have not yet been opened.
The Company's executive offices, located in approximately 7,400 square
feet of office space in Oklahoma City, Oklahoma, are occupied under a lease
which expires in June, 1999.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently engaged in any legal proceedings the
outcome of which is expected to have a material adverse effect upon its
business or financial condition. However, in the ordinary course of its
business, the Company is named in various lawsuits related to the operation
of its restaurants, most of which relate to on-the-job injury claims by its
employees and are typically handled by the Company's insurance carriers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders during
its fourth fiscal quarter of 1995.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock has been quoted on the NASDAQ National Market
System under the symbol "EATS" since May 1994. Prior to that date, the
Company's common stock was quoted on the NASDAQ Small-Cap Market. The following
table sets forth, for the quarterly periods indicated, the high and low closing
bid prices for the Common Stock, as reported by the NASDAQ Markets.
<TABLE>
<CAPTION>
LOW HIGH
--- ----
<S> <C> <C>
1994
First Quarter.................... $5.63 $7.00
Second Quarter................... 5.38 6.25
Third Quarter.................... 3.38 5.63
Fourth Quarter................... 3.38 4.75
1995
First Quarter.................... $3.00 $4.13
Second Quarter................... 2.88 3.63
Third Quarter.................... 2.63 3.25
Fourth Quarter................... 2.13 3.50
1996
First Quarter (to March 1)....... $2.25 $3.50
</TABLE>
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 1, 1996 the Company's stock transfer agent reported that the
Company's common stock was held by 283 holders of record. However, there are
approximately 1,000 verified owners of Eateries' common stock.
The Company has paid no cash dividends on its common stock. The Board of
Directors intends to retain earnings of the Company to support operations and
to finance expansion and does not intend to pay cash dividends on the common
stock for the foreseeable future. The payment of cash dividends in the future
will depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors deemed relevant by the Board
of Directors.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of the Company.
The selected financial data in the table are derived from the financial
statements of the Company. The following data should be read in conjunction
with, and are qualified in their entirety by, the Company's financial
statements and related notes and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
(Dollars in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Restaurant sales.................... $13,451 $17,913 $26,401 $38,869 $45,811
Franchise fees and royalties........ 480 522 488 267 307
Other income........................ 272 315 369 423 482
------- ------- ------- ------- -------
14,203 18,750 27,258 39,559 46,600
------- ------- ------- ------- -------
Costs and Expenses:
Costs of sales...................... 4,306 5,697 8,231 12,052 13,968
Restaurant operating expenses....... 8,053 10,435 14,891 22,359 26,387
Restaurant pre-opening costs........ 105 280 591 568 830
General and administration expenses 1,187 1,403 2,101 2,467 3,067
Provision for restaurant closures
and other disposals................ - - - - 897
Depreciation and amortization....... 413 484 601 927 1,337
Interest expense.................... 36 41 50 48 41
------- ------- ------- ------- -------
14,100 18,340 26,465 38,421 46,527
------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of accounting
change ............................... 103 410 793 1,138 73
Provision (benefit) for income taxes... - 5 293 316 (113)
------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting principle..... 103 405 500 822 186
Cumulative effect of change in
accounting for income taxes (1)....... - - 202 - -
------- ------- ------- ------- -------
Net income ............................ $ 103 $ 405 $ 702 $ 822 $ 186
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighed average shares of common and
common equivalent shares (000's)...... 2,244 2,334 3,077 3,940 3,818
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per share (2):
Income before cumulative
effect of change in accounting for
for income taxes $ .06 $ .17 $ .16 $ .21 $ .05
Cumulative effect of change in
accounting for income taxes (1)...... - - .07 - -
------- ------- ------- ------- -------
Net income (loss) per share........ $ .06 $ .17 $ .23 $ .21 $ .05
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Balance Sheet Data:
Working capital (deficit)............ $ (289) $ (567) $ 2,021 $ 922 $(1,677)
Total assets......................... 3,013 4,053 11,363 12,933 16,596
Long-term obligations (3)............ 198 117 42 75 1,249
Stockholders' equity................. 952 1,405 7,690 8,625 8,912
Other Data:
Earnings before interest,
depreciation and taxes (EDITDA)..... $ 552 $ 935 $ 1,444 $ 2,113 $ 1,451
System-wide sales.................... 25,509 29,717 39,025 45,891 53,802
</TABLE>
________________
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Based upon the weighted average number of common and dilutive common
equivalent shares (if applicable) outstanding during the period. (See
Note 2 of Notes to Consolidated Financial Statements.)
(3) Includes capital leases and long-term debt obligations, net of current
portions. (See Note 5 of Notes to Consolidated Financial Statements.)
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
As of December 31, 1995, the Company owned and operated 41 restaurants
and franchised eight (Garfield's) casual theme, dinnerhouse restaurants.
Subsequent to that date, the Company has opened one additional Garfield's.
The Company currently has five restaurants (four Garfield's and one Pepperoni
Grill) in development. As of the date of this report, the entire system
includes 42 (40 Garfield's and two Pepperoni Grills) Company owned
restaurants and eight franchise Garfield's restaurants.
Unlike a majority of its publicly-held competitors which capitalize and
amortize restaurant pre-opening costs over a period of up to 24 months, the
Company expenses such costs as incurred.
13
<PAGE>
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>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income Statement Data:
Revenues:
Restaurant sales.................... 96.9% 98.3% 98.3%
Franchise fees and royalties........ 1.8 0.7 0.7
------- ------- -------
Other income........................ 1.3 1.0 1.0
100.0 100.0 100.0
------- ------- -------
Costs and Expenses:
Costs of sales (1).................. 31.2 31.0 30.5
Restaurant operating expenses(1) 56.4 57.5 57.6
Restaurant pre-opening costs (1) 2.2 1.5 1.8
General and administrative expenses 7.7 6.2 6.6
Provision for restaurant closures
and other disposals............... - - 1.9
Depreciation and amortization
expenses (1)...................... 2.3 2.4 2.9
Interest expense.................... 0.2 0.1 0.1
Income before income taxes and
cumulative effect of accounting change 2.9 2.9 0.2
Provision for income taxes............ 1.1 0.8 (0.2)
------- ------- -------
Income before cumulative effect
of change in accounting principle 1.8 2.1 0.4
Cumulative effect of change in accounting
for income taxes (2)............... 0.8 0.0 0.0
------- ------- -------
Net income ........................... 2.6% 2.1% 0.4%
------- ------- -------
Selected Operating Data:
(Dollars in thousands)
System-wide sales:
Company restaurants................. $26,401 $38,869 $45,811
Franchise restaurants............... 12,624 7,112 7,991
------- ------- -------
Total............................. $39,025 $45,891 $53,802
------- ------- -------
------- ------- -------
Number of restaurants (at end of period):
Company restaurants................. 26 34 41
Franchise restaurants............... 8 8 8
------- ------- -------
Total............................. 34 42 49
------- ------- -------
------- ------- -------
</TABLE>
(1) As a percentage of restaurant sales.
(2) See Note 2 of Notes to Consolidated Financial Statements.
14
<PAGE>
IMPACT OF SEASONALITY
The concentration of restaurants in regional malls where customer
traffic increases substantially during the Thanksgiving to New Year holiday
season, and the practice of opening new restaurants before December have
resulted in the Company experiencing a substantial increase in restaurant
sales and profits during the fourth quarter of each year. The following
table presents the Company's revenues, net income (loss) and certain other
financial and operational data for each fiscal quarter of 1993, 1994 and 1995.
<TABLE>
<CAPTION>
Fiscal Quarters
---------------------------------------------------
1st 2nd 3rd 4th Annual
--- --- --- --- ------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
1995:
Revenues.......................... $10,475 $10,682 $11,449 $13,994 $46,600
Net income (loss) (2)............. 25 (45) (642) 848 186
Net income per share (2).......... 0.01 (0.01) (0.17) 0.22 0.05
Weighted average shares and
equivalents (000's)........... 3,908 3,727 3,733 3,904 3,818
Pre-opening costs................. $ 143 $ 198 $ 223 $ 266 $ 830
Number of Company units at end of
period....................... 37 38 38 41 41
Company restaurant operating
months....................... 107 114 113 119 453
Sales per Company restaurant
operating month.............. $ 96 $ 92 $ 100 $ 116 $ 101
1994:
Revenues.......................... $ 8,421 $ 9,276 $ 9,945 $11,917 $39,559
Net income........................ 78 27 106 611 822
Net income per share.............. .02 .01 .03 .16 .21
Weighted average shares and
equivalents (000's)........... 3,958 3,941 3,934 3,926 3,940
Pre-opening costs................. $ 177 $ 102 $ 120 $ 169 $ 568
Number of Company units at end of
period....................... 28 30 31 34 34
Company restaurant operating
months....................... 80 88 92 98 358
Sales per Company restaurant
operating month.............. $ 103 $ 103 $ 106 $ 121 $ 109
1993:
Revenues.......................... $ 5,796 $ 6,030 $ 6,774 $ 8,658 $27,258
Net income (1).................... 235 66 27 374 702
Net income per share(1)........... .08 .02 .01 .11 .23
Weighted average shares and
equivalents (000's).......... 2,970 2,915 3,015 3,407 3,077
Pre-opening costs................. $ 58 $ 148 $ 223 $ 162 $ 591
Number of Company units at end of
period....................... 19 20 22 26 26
Company restaurant operating
months....................... 56 58 63 65 242
Sales per Company restaurant
operating month.............. $ 99 $ 100 $ 104 $ 130 $ 109
</TABLE>
______________
(1) Includes $202,000 ($.07 per share) for the adoption of SFAS 109 effective
January 1, 1993 in the first quarter of 1993.
(2) 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 income
(loss) and per share data for the third quarter and the fiscal year was
$(639,000) or $(.17) per share.
15
<PAGE>
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
REVENUES. Revenues for the year ended December 31, 1995 increased 18%
over the revenues reported for the year ended in 1994. Revenues in 1994
increased 45% over 1993 levels. The 1995 and 1994 increases were primarily
due to increases in restaurant sales. Restaurant sales for the year ended
December 31, 1993 increased 45% over the same period in 1992.
The number of restaurants operating at the end of each year, the number
of operating months during that year and average sales per operating month
were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Number of units at year end....................... 26 34 41
Number of restaurant operating months............. 242 358 453
Average sales per restaurant operating month...... $109,000 $108,600 $101,100
</TABLE>
A summary of restaurant sales and related costs expressed as a
percentage of sales are listed below for the years ended December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
RESTAURANT SALES:
Food................................ 79.7% 82.0% 83.5%
Beverage............................ 20.3% 18.0% 16.5%
----- ----- -----
Total........................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
COSTS OF SALES:
Food................................ 32.0% 31.5% 30.6%
Beverage............................ 28.1% 28.8% 30.2%
Combined............................ 31.2% 31.0% 30.5%
</TABLE>
Average monthly sales per unit were $101,100 during 1995 compared to
$108,600 during 1994. The 1995 per unit monthly sales decreased by $7,500 or
6.9% from 1994 levels. This decrease is 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 experienced increases in
average check amounts and revenues beginning in the third
quarter of 1995 as a result of the new menus and the
trend continued through the end of the year.
16
<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 and lower than normal in the third quarter
as management believed its advertising would be more
effective if it was done in conjunction with the
introduction of the new menus and under the direction of
the new Vice President of Marketing. As a result of this
advertising strategy, sales remained weak during the
second and third quarters. When the campaigns were begun,
the Company did experience an improvement as reflected in
the quarterly sales comparisons.
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. 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 restaurants was developed
and implemented in early November 1995 for the majority
of the Company's restaurants and resulted in an increase
in revenues and operating results during the fourth
quarter of 1995. Also, several new entree selections
were developed during the 1995 fourth quarter holiday
season. These items were priced higher than the usual
entree pricing and achieved excellent sales results
during the fourth quarter of 1995.
The affects of the previously noted items, along with the
overall increase in casual dining restaurant development
during the past several years coupled with the recent
soft consumer discretionary spending trend contributed to
the Company's same store sales and average monthly sales
per unit decreases.
However, the average monthly sales per unit decreases
experienced during 1995 as compared to 1994 have narrowed
from $(11,300) during the second quarter to $(4,300)
during the fourth quarter. Management believes that its
increased focus on and actions taken in the marketing
area beginning in the second quarter of 1995 have had a
direct affect on the improvements in average monthly
sales per unit experienced during the second half of 1995
and believes they will continue in the future.
17
<PAGE>
Average monthly sales per unit were $108,600 during 1994 as compared to
$109,000 in 1993.
Continuing royalties decreased to $258,000 in 1995 from $267,000 in 1994
and $453,000 in 1993. Continuing royalties were comparable in 1995 versus
1994 as the same number of franchise restaurants (eight) were in operation
during the two years. During the second quarter of 1995, one franchise
restaurant closed and a new one opened. The decrease in continuing royalties
experienced in 1994 versus 1993 was attributable to the Company's acquisition
of four franchised Garfield's and the termination of three Garfield's
franchise agreements during 1993. Initial franchise fees recognized in 1995
and 1993 were $50,000 and $35,000, respectively. No initial franchise fees
were recorded in 1994.
COSTS AND EXPENSES. The following is a comparison of cost of sales and
labor costs (excluding payroll taxes and fringe benefits) as a percent of
restaurant sales at Company-owned restaurants:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Costs of sales........... 31.2% 31.0% 30.5%
Labor costs.............. 26.7% 28.2% 28.0%
----- ----- -----
Total................ 57.9% 59.2% 58.5%
----- ----- -----
----- ----- -----
</TABLE>
The decrease in cost of sales percentages during the three year period
reflects the Company's improving purchasing techniques which have allowed the
Company to fix purchase prices for certain high volume food products. Where
practical, such techniques will continue to be used in the Company's
purchasing methods.
Labor costs experienced during 1995 improved slightly over 1994 levels
and remain at the level expected by the Company. Labor costs increased in
1994 compared to 1993 because of a significant increase in employee training
which is included in pre-opening costs. (See discussion below regarding
pre-opening costs.)
Restaurant operating expenses (which include labor costs) as a
percentage of restaurant sales were 56.4% in 1993, 57.5% in 1994 and 57.6% in
1995. The modest increase in operating expenses as a percent to restaurants
sales in 1995 versus 1994 was attributable to higher occupancy costs
(primarily rent and utilities) and repairs and maintenance expenses partially
offset by lower advertising and promotional expenses. The increase in
operating expenses in 1994 as compared to 1993 was primarily attributable to
increases in occupancy costs.
18
<PAGE>
PRE-OPENING COSTS. The Company's accounting policy for restaurant
pre-opening costs is to expense such costs as incurred. Management
anticipates that these pre-opening costs will increase per location because
of the greater distance of new restaurants from the Company's base of
operations and the Company's enhanced training program for new employees.
During each of the three years ended December 31, 1993, 1994 and 1995,
the Company incurred and recognized as expense the following amounts for
restaurant pre-opening development costs relative to the corresponding number
of restaurants in various stages of development:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Amount............. $591,000 $568,000 $830,000
Restaurants........ 8 8 9
As a percentage of
restaurant sales. 2.2% 1.5% 1.8%
</TABLE>
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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative costs
decreased as a percentage of revenues from 7.7% in 1993 to 6.2% in 1994, and
increased to 6.6% in 1995. The higher absolute levels of general and
administrative costs from 1993 to 1995 are related primarily to additional
personnel costs and related costs of operating the Company's expanding
restaurant group. General and administrative costs as a percent to sales
increased in 1995 as compared to 1994 primarily due to the strengthening of
the Company's management group through hiring employees to fill new positions
(Vice President of Marketing, Divisional Vice Presidents of Garfield's and
Pepperoni Grill, Director of Training, etc.) management believes are
necessary to effectively operate its existing restaurant units and continue
its expansion plans. 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 December 31, 1995, the
Company had 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 1996. These restaurants,
collectively, accounted for $4,021,000, $4,275,000 and $2,290,000 of revenues
in the years 1993, 1994 and 1995, respectively. These restaurants,
collectively, accounted for $123,000, $(100,000) and $(303,000) of operating
profits (losses) in the years 1993, 1994 and 1995, respectively.
19
<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 $251,000 of lease termination costs, litigation settlement
costs and other exit costs had been incurred by December 31, 1995. The
provision is comprised of the following:
<TABLE>
<S> <C>
Estimated lease termination costs, litigation
settlement costs and exit costs $427,500
Write-down of property, equipment and leasehold
improvements to estimated net realizable value 414,500
--------
$842,000
--------
--------
</TABLE>
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 (18 restaurants have the new system as
of March 1, 1996) and is expected to be completed during the next eighteen
months. 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. Approximately
$18,000 of the equipment write-down has been utilized as of December 31, 1995.
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 EXPENSE. Depreciation and amortization
expense increased for 1995 to $1,337,000 (2.9% of restaurant sales) compared
to $927,000 (2.4% of restaurant sales) in 1994 and $601,000 (2.3% of
restaurant sales) in 1993. The cost increase in 1995 versus 1994 relates
principally to the increase in net assets subject to depreciation and
amortization because of additional restaurants, the purchase of the Pepperoni
Grill restaurant and the remodeling of existing restaurants. The increase in
expense in 1994 as compared to 1993 levels was primarily attributable to
additional operating restaurants' assets in service.
INTEREST EXPENSE. Interest expense during the three year period ending
December 31, 1995, was $50,000 in 1993, $48,000 in 1994 and $41,000 in 1995.
INCOME TAXES. During 1993, the Company adopted SFAS 109 (see below) and
applied the Statement prospectively. The deferred provision (benefit) for
income taxes was $293,600, $316,400 and $(131,000), respectively, under SFAS
109 for 1993, 1994 and 1995.
20
<PAGE>
At December 31, 1995, the Company has recorded a benefit for its
deferred tax assets of approximately $2,448,000. Management of the Company
believes that approximately $1,068,000 of the assets will be recognized
through the reversal of existing taxable temporary differences with the
remainder to be recognized through realization of future income. It is
management's opinion, based on the historical trend of normal and recurring
operating results, present store development and forecasted operating
results, that it is more likely than not that the Company will realize the
approximately $3,700,000 in the future net income in the next three years
necessary to recognize the deferred tax assets not otherwise offset by
reversing taxable temporary differences; net operating loss carryforwards do
not begin to expire until 2003 and general business tax credits until 2009.
While management of the Company is not presently aware of any adverse
matters, it is possible that the Company's ability to realize the deferred
income tax assets could be impaired if there are significant future exercises
of non-qualified stock options or if the Company were to experience declines
in sales and/or profit margins as a result of loss of market share, increased
competition or other adverse general economic conditions. Management intends
to evaluate the realizability of the net deferred tax asset at least
quarterly by assessing the need for a valuation allowance.
CHANGE IN ACCOUNTING FOR INCOME TAXES. Effective January 1, 1993, the
Company adopted SFAS 109. The effect of this accounting change was to
recognize a $322,000 increase in the Company's net deferred tax assets as of
January 1, 1993. The adoption of SFAS 109, excluding the effect upon
adoption, decreased net income by $202,600 ($.07 per share) for the year
ended December 31, 1993.
The cumulative effect of adopting Statement 109 as of January 1, 1993 was
recorded as follows:
<TABLE>
<S> <C>
Cumulative effect of change in accounting principle... $202,000
Increase in additional paid-in capital................ 120,000
--------
$322,000
--------
--------
</TABLE>
The change in accounting recognized an increase in additional paid-in
capital related to the portion of the net operating loss carryforwards
resulting from tax deductions for the exercise of non-qualified stock options
in both 1991 and 1992 for which there was no corresponding charge to earnings.
21
<PAGE>
NET INCOME PER SHARE AMOUNTS. Net income per share amounts are computed
by dividing net income by the weighted average number of common and dilutive
common equivalent shares outstanding during the period as more fully
described in Note 2 of the Notes to Consolidated Financial Statements. 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 3,076,774, 3,939,750, and 3,817,997 in 1993, 1994 and
1995, respectively. Under the treasury stock method of computation,
outstanding stock options represented 167,164 common equivalent shares for
the quarter ended December 31, 1995.
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
the 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 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 costs
could increase in the future which could affect the Company's ability to
expand.
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1995, the Company's
working capital ratio decreased to .72 to 1 compared to 1.24 to 1 at
December 31, 1994. As is customary in the restaurant industry, the Company
has periodically operated with negative working capital and has not
historically required large amounts of working capital. In 1993, the Company
raised $4,600,000 in net proceeds from the sale of common shares.
Historically, the Company has leased the vast majority of its restaurant
locations. For the three years in the period ended December 31, 1995, the
Company's expenditures for capital improvements were $3,984,000, $5,453,000,
and $7,789,000, respectively, which were funded out of cash flows from
operating activities of $1,865,000, $2,557,000, and $3,318,000,
respectively, landlord finish-out allowances of $1,879,000, $3,167,000, and
$2,492,000, respectfully, the net proceeds from the 1993 sale of common stock
and borrowings under the Company's credit agreements. In addition, the
Company expended approximately $529,000 in January 1995 for the acquisition
of the Pepperoni Grill restaurant and tradename.
During 1996, the Company expects to construct and open six to eight new
Garfield's and one new Pepperoni Grill in 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.
22
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are included in a separate
section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
In accordance with General Instruction G(3), a presentation of
information required in response to Items 10, 11, 12, and 13 appear in the
Company's Proxy Statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein by
reference when filed.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the report:
1. Consolidated Financial Statements:
Management's Responsibility for Financial Reporting
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1994 and 1995
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1995
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1995
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1995
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules:
All schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
24
<PAGE>
3. Exhibits.
The following exhibits are filed with this Form 10-K and are identified by
the numbers indicated:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amendment to the Amended and Restated Articles of Incorporation.(2)
3.3 Bylaws as amended.(1)
4.1 Specimen Stock Certificate.(3)
4.2 Form of Representative's Warrant.(3)
10.1 Employment Agreement between the Company and Vincent F. Orza, Jr.,
dated January 1, 1993.(4)
10.2 Employment Agreement between the Company and James M. Burke,
dated January 1, 1993.(4)
10.4 Lease Agreement dated May 1, 1987 (as amended June 30, 1990,
October 1, 1992 and October 1, 1993) between the Company and
Colonial Center, LTD for the lease of the Company's corporate
office facilities in Oklahoma City, Oklahoma. (3)
10.5 Lease Agreement dated May 28, 1992 between the Company and The
Pines Mall Limited Partnership, an Iowa limited partnership, for
the lease of the Garfield's restaurant facilities at The Pines
Mall, Pine Bluff, Arkansas.(3)
10.6 Lease Agreement dated March 16, 1992 between the Company and UM
Partners, an Illinois general partnership, for the lease of the
Garfield's restaurant facilities at University Mall, Carbondale,
Illinois.(3)
10.7 Lease Agreement dated December 17, 1991 (and amended November 10,
1992) between the Company and Columbia Mall Limited Partnership,
an Iowa general partnership, for the lease of the Garfield's
Restaurant facilities at Columbia Mall, Columbia, Missouri.(3)
10.8 Franchise Agreement and Amendment dated August 31, 1993 between
the Company and Wolsey Dublin Company for the Garfield's franchise
in Sioux City, Iowa and non-exclusive development rights to two
additional locations in seven cities in four states over the next
two years.(3)
10.9 Amended and Restated Franchise Agreement and Modification of
Amended and Restated Franchise Agreement dated December 31, 1992
between the Company and O.E., Inc. for the three Garfield's
franchise locations in the Oklahoma City, Oklahoma metropolitan
area.(3)
10.10 Form of Franchise Agreement (Revised March 1, 1993).(7)
25
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
10.11 Management Agreement dated December 31, 1992 between the Company
and O.E., Inc. for the supervision and accounting services provided
by the Company for three Garfield's franchise locations in the
Oklahoma City metropolitan area.(3)
10.12 Collateral Assignment Agreement dated January 20, 1991, between the
Company and Vincent F. Orza, Jr.(5)
10.13 Collateral Assignment Agreement dated January 20, 1991, between the
Company and James M. Burke.(5)
10.15 Stock Plan for Significant Employees of the Company, dated
December 1, 1986.(6)
10.16 1987 Director Stock Incentive Plan.(6)
10.17 Eateries, Inc. Omnibus Equity Compensation Plan.(6)
10.18 September, 1993 Amendment to Omnibus Equity Compensation Plan.(3)
10.19 November, 1993 Amendment to Omnibus Equity Compensation Plan.(3)
10.20 Form of Stock Option Agreement.(6)
10.21 Underwriting Agreement between the Company, Pauli & Company
Incorporated, RAS Securities Corp. and certain shareholders of
the Company dated November 15, 1993.(3)
10.22 Asset Sale Agreement dated January 9, 1995 between the Company and
Pepperoni Grill, Inc. and Specialty Restaurants, involving the
purchase of assets of Pepperoni Grill restaurant by the Company. (9)
10.23 Employment Agreement between the Company and August A. Hehemann,
dated January 1, 1995. (9)
10.24 Employment Agreement between the Company and Peter L. Holloway,
dated January 1, 1995. (9)
10.25 Employee Stock Purchase Plan dated June 15, 1994 (8).
10.26 Amended and restated Eateries, Inc. Omnibus Equity Compensation
Plan dated as of June 15, 1994. (9)
11.1 Computation of net income (loss) per share.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
___________
(1) Filed as exhibit to Registrant's Registration Statement on Form S-18
(File No. 33-6818-FW).
(2) Filed as exhibit to Registrant's Quarterly Report on Form 10-Q for
the six months ended June 30, 1988 (File No. 0-14968) and
incorporated herein by reference.
(3) Filed as exhibit to Registrant's Registration Statement on Form S-2
(File No. 33-69896).
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (File No. 0-14968) and
incorporated herein by reference.
26
<PAGE>
(5) Filed as exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No. 0-14968) and
incorporated herein by reference.
(6) Filed as exhibit to Registrant's Registration Statement on Form S-8
(File No. 33-41279).
(7) Filed as exhibit to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (File No. 0-14968) and
incorporated herein by reference.
(8) Filed as Appendix A to the Company's Notice of Annual Meeting of
Shareholders dated April 29, 1994 and incorporated herein by
reference.
(9) Filed as exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-14968) and
incorporated herein by reference.
(b) No reports on Form 8-K were filed during the three months
ended December 31, 1995.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGISTRANT:
EATERIES, INC.
Date: March 29, 1996 By: /s/ Vincent F. Orza, Jr.
------------------ -------------------------------------
Vincent F. Orza, Jr., President
Chief Executive Officer
Date: March 29, 1996 By: /s/ August A. Hehemann
------------------ -------------------------------------
August H. Hehemann Vice President/
Treasurer - Chief Financial and
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1996 By: /s/ Vincent F. Orza, Jr.
------------------ -------------------------------------
Vincent F. Orza, Jr., Chairman
of the Board, President and
Director
Date: March 29, 1996 By: /s/ James M. Burke
------------------ -------------------------------------
James M. Burke, Vice President
of Operations, Assistant
Secretary and Director
Date: March 29, 1996 By: /s/ Edward D. Orza
------------------ -------------------------------------
Edward D. Orza, Director
Date: March 29, 1996 By: /s/ Patricia L. Orza
------------------ -------------------------------------
Patricia L. Orza, Secretary and
Director
Date: March 29, 1996 By: /s/ Thomas F. Golden
------------------ -------------------------------------
Thomas F. Golden, Director
Date: March 29, 1996 By: /s/ Philip Friedman
------------------ -------------------------------------
Philip Friedman, Director
28
<PAGE>
EATERIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Management's Responsibility for Financial Reporting .................. F-1
Report of Independent Auditors ....................................... F-2
Consolidated Balance Sheets as of December 31, 1994
and 1995......................................................... F-3
Consolidated Statements of Income for each of the three
years in the period ended December 31, 1995 ..................... F-4
Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended
December 31, 1995 ............................................... F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended
December 31, 1995 ............................................... F-6
Notes to Consolidated Financial Statements ........................... F-7
29
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Eateries, Inc. has the responsibility for preparing the
accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's best estimates and judgment where necessary. Management
believes that all representations made to our external auditors during their
examination of the financial statements were valid and appropriate.
To meet its responsibility, management has established and maintains a
comprehensive system of internal control that provides reasonable assurance
as to the integrity and reliability of the consolidated financial statements,
that assets are safeguarded, and that transactions are properly executed and
reported. This system can provide only reasonable, not absolute, assurance
that errors and irregularities can be prevented or detected. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control is subject to close scrutiny by management and is revised as
considered necessary.
The Board of Directors of Eateries, Inc. have engaged Ernst & Young LLP,
independent auditors, to conduct an audit of and express an opinion as to the
fairness of the presentation of the 1995 consolidated financial statements.
Their report is included on the following page.
/s/ Vincent F. Orza, Jr.
- -----------------------------------
Vincent F. Orza, Jr.
President and Chairman
Chief Executive Officer
/s/ August A. Hehemann
- -----------------------------------
August A. Hehemann
Vice President/Treasurer
Chief Financial Officer
March 29, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheets of Eateries,
Inc. and subsidiary as of December 31, 1994 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position
of Eateries, Inc. and subsidiary at December 31, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in the year ended December
31, 1993.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 4, 1996
F-2
<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 1,843,951 $ 1,001,954
Marketable securities ........................... 514,737 -
Receivables:
Franchisees ................................... 70,069 88,448
Insurance refunds ............................. 231,169 283,883
Landlord finish-out allowances ................ 255,000 748,288
Other ......................................... 93,828 232,480
Deferred income taxes (Note 8) .................. 569,000 389,000
Inventories ..................................... 1,085,308 1,368,673
Prepaid expenses and deposits ................... 133,807 179,020
----------- -----------
Total current assets ...................... 4,796,869 4,291,746
Property and equipment, at cost (Notes 4 and 5):
Land and buildings .............................. 387,526 175,376
Furniture and equipment ......................... 5,693,923 7,455,322
Leasehold improvements .......................... 13,065,019 19,064,963
Assets under capital leases ..................... 123,420 123,420
----------- -----------
19,269,888 26,819,081
Less: Landlord finish-out allowances ............ 8,995,732 12,409,951
----------- -----------
10,274,156 14,409,130
Less: Accumulated depreciation and amortization . 2,964,540 4,047,414
----------- -----------
Net property & equipment ...................... 7,309,616 10,361,716
Deferred income taxes (Note 8) .................... 651,000 991,000
Landlord finish-out allowances receivable (Note 2). - 429,000
Other assets ...................................... 175,256 522,493
----------- -----------
$12,932,741 $16,595,955
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to vendor (Note 5) ................ $ 330,934 $ 13,139
Accounts payable (Note 6) ....................... 1,681,747 2,967,109
Accrued liabilities:
Compensation .................................. 890,194 1,259,896
Taxes, other than income ...................... 333,521 395,930
Other (Note 6) ................................ 567,872 711,699
Restaurant closure costs (Note 7) ............. - 596,039
Current portion of long-term obligations
(Note 5)......................................... 70,409 25,305
----------- -----------
Total current liabilities ................. 3,874,677 5,969,117
Deferred credit ................................... 358,141 353,482
Other liabilities.................................. - 111,900
Long-term obligations, net of current portion
(Note 5).......................................... 74,538 1,249,023
Commitments (Note 4) ..............................
Stockholders' equity (Note 9):
Preferred stock, $.002 par value, none
outstanding .................................... - -
Common stock, $.002 par value, 3,952,890 and
4,019,134 shares outstanding at December 31,
1994 and 1995, respectively .................... 7,906 8,038
Additional paid-in capital ...................... 9,047,594 9,154,420
Retained earnings ............................... 898,752 1,084,593
----------- -----------
9,954,252 10,247,051
Treasury stock, at cost, 272,122 and 274,039
shares at December 31, 1994 and 1995,
respectively ................................... (1,328,867) (1,334,618)
----------- -----------
Total stockholders' equity ................ 8,625,385 8,912,433
----------- -----------
$12,932,741 $16,595,955
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Food and beverage sales ......... $26,400,511 $38,869,481 $45,810,664
Franchise fees and royalties .... 487,867 266,872 307,653
Other ........................... 369,569 422,756 482,123
----------- ----------- -----------
Total revenues .............. 27,257,947 39,559,109 46,600,440
Cost of sales ....................... 8,231,095 12,051,825 13,967,757
----------- ----------- -----------
19,026,852 27,507,284 32,632,683
Operating expenses (Note 6) ......... 14,890,715 22,358,999 26,387,127
Pre-opening costs (Note 2) .......... 591,231 568,129 830,000
General and administrative .......... 2,101,194 2,466,743 3,067,610
Provision for restaurant closures
and other disposals (Note 7)....... - - 897,000
Depreciation and amortization ....... 600,673 927,128 1,336,919
Interest expense .................... 49,593 47,628 41,186
----------- ----------- -----------
18,233,406 26,368,627 32,559,842
----------- ----------- -----------
Income before income taxes and
cumulative effect of change in
accounting for income taxes ....... 793,446 1,138,657 72,841
Provision (benefit) for income
taxes (Note 8) .................... 293,600 316,400 (113,000)
----------- ----------- -----------
Income before cumulative effect
of change in accounting for
income taxes ...................... 499,846 822,257 185,841
Cumulative effect of change in
accounting for income taxes
(Note 2) .......................... 202,000 - -
----------- ----------- -----------
Net income .......................... $ 701,846 $ 822,257 $ 185,841
----------- ----------- -----------
----------- ----------- -----------
Weighted average common and
common equivalent shares .......... 3,076,774 3,939,750 3,817,997
----------- ----------- -----------
----------- ----------- -----------
Net income per share:
Income before cumulative
effect of change in accounting
for income taxes .............. $0.16 $0.21 $0.05
Cumulative effect of change in
accounting for income taxes
(Note 2) ...................... 0.07 - -
----- ----- -----
Net income per share $0.23 $0.21 $0.05
----- ----- -----
----- ----- -----
</TABLE>
See accompanying notes.
F-4
<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
SHARES TREASURY STOCK ADDITIONAL RETAINED
----------------------------- --------------------- PAID-IN EARNINGS
AUTHORIZED ISSUED AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- --------- ------ ------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992...... 20,000,000 1,925,938 $3,852 13,201 $ (34,417) $2,061,251 $ (625,351) $1,405,335
Change in accounting for
income taxes (Note 2) ......... 120,000 120,000
Issuance of common stock:
Public offering (Note 9).... 1,051,250 2,102 4,608,517 4,610,619
Exercise of stock options... 834,831 1,670 528,850 530,520
Acquisition of restaurant... 45,000 90 149,910 150,000
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... 1,378,000 1,378,000
Treasury stock acquired (Note 9) 235,817 (1,206,364) (1,206,364)
Net income ..................... 701,846 701,846
---------- --------- ------ ------- ----------- ---------- ----------- ----------
Balance, December 31, 1993...... 20,000,000 3,857,019 7,714 249,018 (1,240,781) 8,846,528 76,495 7,689,956
Issuance of common stock:
Exercise of stock options .. 94,191 189 68,801 68,990
Employee bonus ............. 1,680 3 9,650 9,653
Tax benefit from the exercise of
non-qualified stock options
(Note 8)....................... 130,000 130,000
Treasury stock acquired
(Note 9)....................... 23,104 (88,086) (88,086)
Other (7,385) (7,385)
Net income ..................... 822,257 822,257
---------- --------- ------ ------- ----------- ---------- ----------- ----------
Balance, December 31, 1994...... 20,000,000 3,952,890 7,906 272,122 (1,328,867) 9,047,594 898,752 8,625,385
Issuance of common stock:
Exercise of stock options... 53,833 107 33,476 33,583
Employee stock purchase
plan........................ 12,411 25 26,350 26,375
Tax benefit from the exercise of
non-qualified stock options
(Note 8)....................... 47,000 47,000
Treasury stock acquired
(Note 9)........................ 1,917 (5,751) (5,751)
Net income...................... 185,841 185,841
---------- --------- ------ ------- ----------- ---------- ----------- ----------
Balance, December 31, 1995...... 20,000,000 4,019,134 $8,038 274,039 $(1,334,618) $9,154,420 $ 1,084,593 $8,912,433
---------- --------- ------ ------- ----------- ---------- ----------- ----------
---------- --------- ------ ------- ----------- ---------- ----------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
EATERIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 701,846 $ 822,257 $ 185,841
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................ 600,673 927,128 1,336,919
(Gain)loss on asset disposals ................ - 9,627 (133,144)
Common stock bonus ........................... - 9,653 -
Provision (benefit) for deferred income taxes. 293,600 316,400 (113,000)
Cumulative effect of change in accounting
for income taxes ........................... (202,000) - -
(Increase) decrease in operating assets:
Receivables ............................. (135,928) (46,784) (209,745)
Inventories ............................. (235,915) (256,662) (268,464)
Prepaid expenses and deposits ........... 23,480 (317) (45,213)
Increase (decrease) in operating liabilities:
Accounts payable ........................ 679,043 296,695 1,285,362
Accrued liabilities ..................... 152,203 401,295 1,171,977
Deferred credit ......................... (11,818) 77,215 (4,659)
Other liabilities ....................... - - 111,900
---------- ---------- ----------
Total adjustments ............................. 1,163,338 1,734,250 3,131,933
---------- ---------- ----------
Net cash provided by operating activities ..... 1,865,184 2,556,507 3,317,774
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures ............................. (3,984,280) (5,453,460) (7,788,654)
Landlord finish-out allowances ................... 1,878,571 3,166,297 2,491,931
Net cash payments for restaurant acquisitions .... (791,480) - (529,083)
Proceeds from the sale of property and equipment . 95,000 4,548 426,214
(Purchases) sales of marketable securities ....... (1,000,000) 485,263 514,737
Collection of notes receivable ................... - 30,000 -
Increase in other assets ......................... (21,337) (67,916) (24,143)
---------- ---------- ----------
Net cash used in investing activities ............ (3,823,526) (1,835,268) (4,908,998)
---------- ---------- ----------
Cash flows from financing activities:
Sale of common stock ............................. 4,610,619 - 26,375
Payments on notes payable to vendor .............. (587,284) (694,338) (434,362)
Payments on long-term obligations ................ (96,588) (110,787) (70,619)
Net borrowings under revolving credit agreement .. - - 1,200,000
Proceeds from issuance of stock on exercise of
stock options .................................. 183,020 31,490 27,833
Payment of withholding tax liabilities related
to acquisition of treasury stock ............... (858,864) (50,586) -
Other............................................. - (7,385) -
---------- ---------- ----------
Net cash provided by (used in) financing
activities ................................. 3,250,903 (831,606) 749,227
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.. 1,292,561 (110,367) (841,997)
Cash and cash equivalents at beginning of period ..... 661,757 1,954,318 1,843,951
---------- ---------- ----------
Cash and cash equivalents at end of period ........... $1,954,318 $1,843,951 $1,001,954
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
EATERIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1995
(1) ORGANIZATION
Eateries, Inc. (the "Company") was incorporated under the laws of the
State of Oklahoma on June 1, 1984. The Company is engaged in the creation,
design, management and operation of restaurants through Company-owned and
franchise restaurants. The Company's restaurants are located primarily in
regional malls in the Southwest, Midwest and Southeast regions of the United
States. The Company's restaurants operate under the name "Garfield's
Restaurant & Pub" ("Garfield's") and "Pepperoni Grill." An analysis of
Company-owned and franchised restaurants for the three years in the period
ended December 31, 1995, is as follows:
<TABLE>
<CAPTION>
COMPANY FRANCHISED TOTAL
UNITS UNITS UNITS
------- ---------- -----
<S> <C> <C> <C>
At December 31, 1992 ............. 18 14 32
Units opened ................... 6 1 7
Units closed ................... (1) (3) (4)
Unit sold ...................... (1) - (1)
Purchase of franchise units..... 4 (4) -
---- ---- ----
At December 31, 1993 ............. 26 8 34
Units opened ................... 8 - 8
At December 31, 1994 ............. 34 8 42
Units opened ................... 9 1 10
Units closed ................... (3) (1) (4)
Purchase of Pepperoni Grill .... 1 - 1
---- ---- ----
At December 31, 1995 41 8 49
---- ---- ----
---- ---- ----
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Eateries, Inc. and its wholly-owned subsidiary, Pepperoni Grill,
Inc. All significant intercompany transactions and balances have
been eliminated.
CASH AND MARKETABLE SECURITIES
Cash and cash equivalents include certain highly liquid debt
instruments with a maturity of three months or less when purchased.
Marketable securities consist of tax exempt floating rate municipal
bonds (with a maturity of 2025) carried at cost, which approximates
market value and are held for working capital purposes and
classified as available for sale.
F-7
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost (first-in,
first-out) or market and consist primarily of food, beverages and
smallwares.
LANDLORD FINISH-OUT ALLOWANCES
Amounts received or receivable from landlords for
reimbursement of improvements to leased facilities are recorded
as a reduction of the costs incurred by the Company for property
and equipment. As of December 31, 1995, there was $429,000 of
non-current landlord finish-out receivables recorded in the
balance sheet, which represents the amount of landlord finish-out
receivables in excess of capital expenditures recorded.
DEPRECIATION AND AMORTIZATION
Property and equipment (which includes assets under capital
leases) and landlord finish-out allowances are stated at cost (or
amounts received with respect to landlord finish-out allowances)
and are depreciated and amortized over the lesser of the estimated
useful lives of the assets or the remaining term of the leases
using the straight-line method. Estimated useful lives are as
follows:
<TABLE>
<S> <C>
Buildings ........................ 15-30 Years
Furniture and equipment .......... 5-15 Years
Leasehold improvements ........... 3-15 Years
Landlord finish-out allowances ... 8-15 Years
</TABLE>
PRE-OPENING COSTS
The costs related to the opening of restaurant locations are
expensed when incurred.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109") which supersedes SFAS 96. Among other changes,
SFAS 109 relaxes the recognition and measurement criteria for
deferred tax assets and alternative minimum tax included in SFAS
96. As a result of adopting SFAS 109 in 1993, the Company
recognized a net deferred tax asset of $322,000. As permitted by
SFAS 109, prior year financial statements were not restated to
reflect the change in accounting method. The cumulative effect, as
of January 1, 1993, of adopting SFAS 109, increased net income for
the year ended December 31, 1993 by $202,000 ($.07 per share).
Additionally, $120,000 of the net deferred tax asset was recorded
to additional paid-in capital for the recognition of a tax benefit
for the portion of net operating loss carryforwards resulting from
the exercise of non-qualified stock options in 1991 and 1992. The
adoption of SFAS 109, excluding the cumulative effect upon
adoption, decreased net income by $202,600 ($.07 per share) for the
year ended December 31, 1993.
F-8
<PAGE>
Under SFAS 109, deferred income taxes are provided on the tax
effect of presently existing temporary differences, net of existing
net operating loss and tax credit carryforwards. The tax effect is
measured using the enacted marginal tax rates and laws that will be
in effect when the differences and carryforwards are expected to be
reversed or utilized. Temporary differences principally consist of
depreciation caused by using different lives for financial and tax
reporting, the expensing of smallwares when incurred for tax
purposes while such costs are capitalized for financial purposes
and the expensing of costs related to restaurant closures and other
disposals for financial but not tax purposes.
DEFERRED CREDIT
Certain of the Company's long-term noncancellable operating
leases for restaurant and corporate facilities include scheduled
base rental increases over the term of the lease. The total
amount of the base rental payments is charged to expense on the
straight-line method over the term of the lease. The Company has
recorded a deferred credit to reflect the net excess of rental
expense over cash payments since inception of the leases.
FRANCHISE ACTIVITIES
The Company franchises the Garfield's Restaurant & Pub concept
to restaurant operators and, at December 31, 1994 and 1995, 8
restaurant units were operating under franchise agreements. The
initial franchise fee paid to the Company is recognized as income
when substantially all services have been performed by the
franchisor to each franchised location, which is typically when the
related restaurant is opened. The franchisor provides initial
services to the franchisee in the selection of a site, approval of
architectural plans, assistance in the selection of equipment for
the restaurant, distribution of operations manuals and training of
franchisee's personnel prior to the opening of the restaurant. The
Company recognized $35,000 and $50,000, respectively, of initial
franchise fees for franchised restaurants during the years ended
December 31, 1993 and 1995 (none were recorded in 1994).
Continuing royalties are recognized as revenue based on the
terms of each franchise agreement, generally as a percentage of
sales of the franchised restaurants. During each of the three
years ended December 31, 1993, 1994 and 1995, the Company
recognized $453,000, $267,000 and $258,000, respectively, of fees
from continuing royalties.
F-9
<PAGE>
Franchisees are required to remit to the franchisor an amount
equal to 1/2% of their sales to the Garfield's Creative Marketing
Fund. The franchisees' payments, which were $62,000, $44,000, and
$39,000, respectively, during the years ended December 31, 1993,
1994 and 1995, respectively, are combined with the franchisor's
expenditures to purchase services for creative advertising and
design, market research, and other items to maintain and further
enhance the Garfield's concept.
Franchisee receivables at December 31, 1994 and 1995 are
comprised principally of uncollected continuing royalties, which
are generally unsecured; however, the Company has not experienced
significant credit losses in prior years and is not aware of any
significant uncollectible amounts at December 31, 1995.
CAPITALIZATION OF INTEREST
Interest attributed to funds used to finance restaurant
construction projects is capitalized as an additional cost of the
related assets. Capitalization of interest ceases when the related
projects are substantially complete. The Company has capitalized
approximately $72,000 of interest costs during the year ended
December 31, 1995 (none in 1993 and 1994). These costs are
included in leasehold improvements in the accompanying balance
sheet.
STOCK-BASED COMPENSATION
In 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS 123, "Accounting for Stock-Based Compensation," which
requires adoption no later than fiscal years beginning after
December 15, 1995. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under
the fair value method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant
to the new standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," but are required to
disclose in a note to the financial statements pro forma net income
and earnings per share as if the Company had applied the new method
of accounting. The Company will not adopt the new standard but
will present the required pro forma footnote disclosures commencing
in 1996.
F-10
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the FASB issued SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
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 plans to
adopt SFAS 121 in 1996 and does not expect adoption of the
statement to have a material effect, if any, on the Company's
financial position or results of operations.
NET INCOME PER COMMON SHARE
Per share amounts are computed by dividing net income by the
weighted average number of common and dilutive common equivalent
shares outstanding during the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
STATEMENTS OF CASH FLOWS
Interest of $47,000, $48,000 and $94,000 was paid for each of
the three years in the period ended December 31, 1995,
respectively.
F-11
<PAGE>
For the three years in the period ended December 31, 1995 the Company
had the following non-cash investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- --------- --------
<S> <C> <C> <C>
Increase (decrease) in current
receivables for landlord
finish-out allowances.......... $ 411,429 $(271,429) $493,288
Increase in non-current
receivables for landlord
finish-out allowances ......... - - 429,000
Sales of property and equipment
in exchange for notes
receivable .................... 65,851 - -
Borrowings under capital leases.. 123,420 - -
Borrowings for capital
expenditures under notes
payable to vendor ............. 643,008 664,030 116,567
Acquisition of treasury stock
upon exercise of stock
options (Note 9) .............. 347,500 37,500 5,751
Increase in additional paid-in
capital as a result of change
in accounting for income taxes. 120,000 - -
Increase in additional paid-in
capital as a result of tax
benefits from the exercise of
non-qualified stock options ... 1,378,000 130,000 47,000
</TABLE>
In July 1993, the Company purchased one franchised Garfield's Restaurant
operated in Savannah, Georgia from a franchisee. Details of the purchase are
as follows:
<TABLE>
<S> <C>
Fair value of assets acquired ........... $ 260,000
Liabilities assumed ..................... (100,528)
Common stock issued(45,000 common shares) (150,000)
---------
Cash paid ............................... $ 9,472
---------
---------
</TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments for purposes of complying
with SFAS 107, "Disclosures About Fair Values of Financial Instruments":
Cash and cash equivalents - The carrying amounts reported
in the consolidated balance sheets approximate fair
values because of the short maturity of these
instruments.
F-12
<PAGE>
Long-term obligations - The revolving credit agreement,
which represents the material portion of long-term
obligations in the accompanying consolidated balance
sheets, bears interest at a variable rate, which is
adjusted monthly. Therefore, the carrying values for
these borrowings approximate their fair values.
(3) RESTAURANT ACQUISITIONS
JULY 1993 ACQUISITION
In July 1993, the Company acquired one franchised Garfield's in
Savannah, Georgia. The acquisition was accounted for under the purchase
method of accounting (See Note 2). The operating results for this restaurant
are included in the Company's results of operations since the date of
acquisition. Pro forma results of this restaurant acquisition, assuming it
had been made at the beginning of 1993, would not be materially different
from the results reported.
DECEMBER 1993 ACQUISITION
In December 1993, the Company acquired three Garfield's (the "December
1993 Acquisition") which are located in South Texas and Louisiana from a
franchisee (GRP of Texas, Inc.). The results for these restaurants are
included in the Company's results of operations since the date of
acquisition. The acquisition costs consisted of a cash purchase price of
$770,000 and other direct acquisition costs incurred by the Company, which
were accounted for under the purchase method of accounting.
The following unaudited pro forma combined data gives effect to the
December 1993 Acquisition as if it had been consummated as of January 1, 1993
(dollar amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1993
------------
<S> <C>
Revenues $31,199
Income before cumulative
effect 514
Net income 716
Net income per share $.22
Weighted average shares(000's) 3,240
</TABLE>
The unaudited pro forma combined data is based upon the historical
financial statements of the Company and GRP of Texas, Inc., giving effect to
the transaction under the purchase method of accounting and adjustments for:
(1) amortization and depreciation of the property and equipment acquired, (2)
reductions of general and administrative expenses for known reductions to
occur upon
F-13
<PAGE>
consummation of the acquisition, (3) elimination of franchise fees and
royalties paid by the franchisee to the Company, (4) the tax effects of the
adjustments and pro forma results of the acquisition, and (5) to adjust the
weighted average common and common equivalent shares outstanding to give
effect to the number of shares whose proceeds from the Company's common stock
offering were used to pay the costs of the December 1993 Acquisition.
The unaudited pro forma combined data has been prepared based on
estimates and assumptions deemed by the Company to be appropriate and do not
purport to be indicative of the results of operations which would actually
have been obtained if the December acquisition had occurred as presented in
such data or which may be obtained in the future.
JANUARY 1995 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 using the straight-line method and asseses the recoverability
of such assets based upon the expected future cash flows from operations of
the Pepperoni Grill concept. Pro forma results of operations for the year
ended December 31, 1994, assuming that the restaurant acquisition had been
made at the beginning of 1994, would not be materially different than the
results reported.
(4) REAL ESTATE LEASES
The Company leases the majority of its restaurant facilities and its
corporate office under operating leases with initial terms expiring at
various dates through the year 2009. Certain leases contain renewal options
ranging from five to ten years. Most, but not all, leases require the
Company to be responsible for the payment of taxes, insurance and/or
maintenance and include percentage rent and fixed rent escalation clauses.
In the normal course of business, the Company may grant a landlord lien on
certain personal property upon an event of default by the Company. At
December 31, 1995, the remaining minimum rental commitments under long-term
noncancellable leases, excluding amounts related to taxes, insurance,
maintenance and percentage rent, are as follows:
<TABLE>
<S> <C>
1996 ............................. $ 2,741,000
1997 ............................. 3,079,000
1998 ............................. 3,013,000
1999 ............................. 3,049,000
2000 ............................. 3,017,000
Thereafter ....................... 12,081,000
------------
Total minimum rental commitments.. $ 26,980,000
------------
------------
</TABLE>
F-14
<PAGE>
Total minimum rental commitments includes $4,603,000 related to 5
locations scheduled for opening in 1996.
The components of rent expense for noncancelable operating
leases are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rents ............... $1,316,000 $2,013,000 $2,611,000
Percentage rents ............ 78,000 123,000 131,000
---------- ---------- ----------
$1,394,000 $2,136,000 $2,742,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(5) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable to vendor of $330,934 and $13,139 at December 31, 1994 and
1995, respectively, consist of promissory notes for restaurant equipment
purchases. Each note is payable in eight equal monthly installments
beginning in the month after each restaurant opening and bears interest at a
rate from 8.5% to 11.0% (weighted average interest rate on borrowings
outstanding at December 31, 1994 and 1995 is 10.1% and 11.0%, respectively).
The notes are secured by the related restaurant equipment (with a net book
value of approximately $46,000 at December 31, 1995).
Long-term obligations consist of the following at December 31,:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Mortgage payable to bank, interest
at 8.25%; payable in monthly
installments through April 1995;
secured by a restaurant
and office building and related
furniture and fixtures ................ $ 42,067 $ -
Revolving line of credit with a bank,
interest at the London Interbank
Offered Rates ("LIBOR") plus 2.75%
(8.78% at December 31, 1995) .......... - 1,200,000
Obligations under capital leases(A) ..... 102,880 74,328
-------- ----------
144,947 1,274,328
Less current portion .................... (70,409) (25,305)
-------- ----------
$ 74,538 $1,249,023
-------- ----------
-------- ----------
</TABLE>
(A) At December 31, 1995 the future minimum lease payments for
equipment under capital leases are $32,400 for 1996, $32,400
for 1997, and $21,600 for 1998 (amount representing interest
is $12,072).
Maturities of notes payable and long-term obligations at December 31,
1995 are:
<TABLE>
<CAPTION>
NOTES LONG-TERM
PAYABLE OBLIGATIONS
------- -----------
<S> <C> <C>
1996 $13,139 $ 25,305
1997 - 28,045
1998 - 1,220,978
------- ----------
$13,139 $1,274,328
------- ----------
------- ----------
</TABLE>
F-15
<PAGE>
At December 31, 1994, the Company had a revolving line of credit with a
Bank which expired July 15, 1995. The maximum borrowings available under
this credit facility were $500,000. Outstanding borrowings beared interest at
the New York base rate plus 2% (10.5% at December 31, 1994). The Company was
not required to maintain compensating balances or to pay commitment fees on
unused balances. No borrowings were outstanding at December 31, 1994.
Certain real estate and restaurant equipment, with a net book value of
approximately $564,000 at December 31, 1994 was pledged to the Bank as
collateral for any borrowings.
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 allowing the Company to borrow at the national prime interest rate
or the LIBOR plus 2.75% (the interest rate is reset monthly). The Company is
required to pay a non-use fee of 1/2 of 1% per annum on the daily average of
the unborrowed amount of the revolving loan facility. At December 31, 1995,
the unborrowed amount under the agreement was $1,800,000. The loan agreement
contains, among other things, certain financial covenants and restrictions.
The more significant financial covenants require the Company maintain or
achieve designated amounts of tangible net worth, current ratio and cash flow
coverage ratio. The more significant restrictions contained in the loan
agreement include amounts for capital expenditures, number of new stores,
guaranteed debt obligations of any other corporation or individual, entering
into merger, acquisition or significant asset sales agreements and limitation
of borrowings for thirty consecutive days during a designated period
("clean-down period"). The clean-down periods and respective borrowing
limitation amounts are $600,000 during the periods commencing November 30,
1995 and 1996 and ending January 31, 1996 and 1997 and $2,000,000 during the
period commencing November 30, 1997 and ending January 31, 1998.
During the year ended December 31, 1995, the Company had not met two of
the loan agreement's restriction provisions. The Company exceeded the
capital expenditure and the amount of borrowings during the clean-down period
limitations contained in the agreement. In March, 1996 these violations were
waived by the bank.
(6) RELATED PARTY TRANSACTIONS
An affiliate of the Company is providing marketing and advertising
services. Total costs incurred for such services (primarily radio,
television and print media) were approximately $504,000 in 1993, $607,000 in
1994 and $424,000 in 1995. As of December 31, 1994 and 1995, the Company
owed the affiliate $2,676 and $4,891, respectively, which is included in
accounts payable for services rendered. A director of the Company is a
partner in a law firm that provides legal services to the Company. During
1993, 1994 and 1995, the Company incurred $132,000, $107,000 and $127,000
respectively, in legal services with the firm of which $21,000 and $40,000
were payable at December 31, 1994 and 1995, respectively.
During 1993 and 1994, the Company also acquired common stock from
certain officers and directors (see Note 9).
F-16
<PAGE>
(7) PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS
All estimated costs which are expected to be incurred in the closures or
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 1995, the Company approved and began the implementation of a plan
to close certain underperforming restaurants. As of December 31, 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 1996. These restaurants
collectively, accounted for $4,021,000, $4,275,000 and $2,290,000 of
revenues and $123,000, $(100,000) and $(303,000) of operating income (losses)
for the years ended December 31, 1993, 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.
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 $251,000 of lease termination costs, litigation
settlement costs and other exit costs had been incurred by December 31, 1995.
The provision is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Estimated lease termination costs, litigation
settlement costs and exit costs $427,500
Write-down of property, equipment and leasehold
improvements to estimate net realizable value 414,500
--------
$842,000
--------
--------
</TABLE>
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 (18 restaurants have the new
system as of March 1, 1996) and is expected to be completed during the next
eighteen months. 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.
F-17
<PAGE>
(8) INCOME TAXES
The provision (benefit) for income taxes consist of the following (see
Note 2):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ............ $ - $ - $ -
State .............. - - -
-------- -------- --------
- - -
-------- -------- --------
Deferred:
Federal ............ 253,600 264,400 (110,000)
State .............. 40,000 52,000 (3,000)
-------- -------- --------
293,600 316,400 (113,000)
-------- -------- --------
Provision (benefit) for
income taxes .......... $293,600 $316,400 $(113,000)
-------- -------- --------
-------- -------- --------
</TABLE>
The components of deferred tax assets and liabilities consist of the
following at December 31,:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........ $1,544,000 $1,702,000
General business tax credits ........... 163,000 400,000
Restaurant closures and other disposals. - 260,000
Other .................................. 32,900 86,000
---------- ----------
Total deferred tax assets ............ 1,739,900 2,448,000
Valuation allowance for deferred
tax assets ........................... - -
---------- ----------
Total deferred tax assets,
net of allowance ................... 1,739,900 2,448,000
---------- ----------
Deferred tax liabilities:
Smallwares expensed for tax purposes ... 206,000 272,000
Tax depreciation in excess of
financial depreciation ............... 312,000 787,000
Other .................................. 1,900 9,000
---------- ----------
Total deferred tax liabilities ....... 519,900 1,068,000
---------- ----------
Net deferred tax assets ................ $1,220,000 $1,380,000
---------- ----------
---------- ----------
</TABLE>
At December 31, 1995, the Company has recorded a benefit for its
deferred tax assets of approximately $2,448,000. Management of the Company
believes that approximately $1,068,000 of these assets will be recognized
through the reversal of existing taxable temporary differences with the
remainder to be recognized through realization of future income. It is
management's opinion based on the historical trend of normal and recurring
operating results, present store development, and forecasted operating
results that it is more likely than not that the Company will realize the
approximately $3,700,000 in future net income in the next three
F-18
<PAGE>
years necessary to realize the deferred tax assets not otherwise offset by
reversing taxable temporary differences; net operating loss carryforwards do
not begin to expire until 2003 and general business tax credits until 2009.
While management of the Company is not presently aware of any adverse
matters, it is possible that the Company's ability to realize the deferred
income tax assets could be impaired if there are significant future exercises
of non-qualified stock options or the Company were to experience declines in
sales and/or profit margins as a result of loss of market share, increased
competition or other adverse general economic conditions.
A reconciliation of theoretical income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Expected tax provision at 34% ...... $269,800 $387,100 $ 24,800
Permanent differences .............. 10,400 6,200 8,500
State tax provisions, net of
federal benefit .................. 26,400 34,200 2,200
Tax effect of general business
tax credits ...................... - (107,800) (149,000)
Other, net ......................... (13,000) (3,300) 500
-------- -------- ---------
Income tax provision (benefit)...... $293,600 $316,400 $(113,000)
-------- -------- ---------
-------- -------- ---------
</TABLE>
The Company estimates that at December 31, 1995, the tax net operating
loss carryforward was approximately $4,600,000 (which principally relates to
the tax benefit from the exercise of non-qualified stock options, the benefit
of which was recognized through paid-in capital) which is available for
utilization in various years through 2009.
(9) STOCKHOLDERS' EQUITY
The Company has authorized 10,000,000 shares of $.002 par value
preferred stock. None of the preferred stock has been issued. The rights,
preferences and dividend policy have not been established and are at the
discretion of the Company's Board of Directors.
The Company has authorized 20,000,000 shares of common stock at a par
value of $.002 per share. As of November 22, 1993, the Company completed an
offering of 950,000 shares of common stock at $5.13 per share. In December
1993, the underwriters exercised its over-allotment option and purchased
101,250 additional common shares at the offering price of $5.13 per share.
The total proceeds of the offering, after deducting the underwriting discount
and offering costs, were $4,610,000. In conjunction with the offering, the
Company issued to the underwriters warrants to purchase 67,500 common shares
of the Company. Such warrants are
F-19
<PAGE>
exercisable beginning on November 22, 1994 at an initial exercise price of
$5.89 per share. The exercise price escalates each anniversary date with a
final exercise price of $6.56 per share on the fourth anniversary of the
issuance of the warrants. The warrants expire on November 22, 1998. The
exercise price and the number of shares of common stock for which the
warrants are exercisable are subject to adjustment upon the occurrence of
certain dilutive events.
In May 1989, the Company's shareholders approved the Eateries, Inc.
Omnibus Equity Compensation Plan "the Plan" (which was amended in June 1994
by approval of the shareholders). The Plan consolidated the Company's equity
based award programs which are described as follows:
DIRECTOR OPTION PLAN
Non qualified stock options granted and outstanding include 324,156
Director options. Under The Plan each director receives options to purchase
50,000 shares of common stock upon initial election to the Board of
Directors. These options vest over a five year period at 20% per year and
expire five years from the date vested (last expiring in 2001). As a result
of an amendment to The Plan in 1994, any director who has served as a
director of the Company for five years, upon election for any additional
terms, shall be granted an option to purchase 10,000 shares of common stock
for each additional year elected. These options fully vest after one year of
additional service by the director and expire five years from the date vested
(last expiring in 2001).
MANAGEMENT OPTIONS
Non-qualified stock options granted and outstanding include 127,500
management options, which are vested over a five year period at 20% per year
and expire five years from the date vested (last expiring in 2004).
F-20
<PAGE>
A summary of stock option activity under the plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1992 1,229,805 $ .50 -$1.25
Options exercised:
Director (109,831) $ .625-$1.25
Management (725,000) $ .50 -$ .625
---------
Outstanding at December 31, 1993 394,974 $ .50 -$1.25
Granted 172,500 $3.375-$6.00
Options exercised:
Director (19,191) $1.25
Management (75,000) $ .50 -$ .625
Forfeited (22,794) $1.25
---------
Outstanding at December 31, 1994 450,489 $ .50 -$6.00
Granted 120,000 $2.875-$3.875
Options exercised:
Director (23,333) $ .625-$1.00
Management (30,500) $ .50
Forfeited (65,000) $3.375-$5.50
---------
Outstanding at December 31, 1995
(of which approximately 284,000
options are exercisable) 451,656 $ .625-$6.00
---------
---------
</TABLE>
As of December 31, 1995, the Plan provides for issuance of options up to
2,516,867 shares and has 1,119,980 shares of common stock reserved for future
grant under the Plan.
RESTRICTED MANAGEMENT OPTIONS
As of December 31, 1995, there was 120,000 restricted (not granted under
the Plan) stock options which primarily vest over a four year period at 25%
per year and expire five years from the date vested (last expiring in 2004).
A summary of restricted stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding at December 31,
1992, 1993 and 1994 - -
Granted 120,000 $3.00 -$3.125
Outstanding at December 31, 1995 120,000 $3.00 -$3.125
------- -------------
------- -------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In June 1994, the Company's shareholders approved the Employee Stock
Purchase Plan under the Company's Omnibus Equity Compensation Plan. The
Stock Purchase Plan enables substantially all employees to subscribe to
shares of Common Stock on an annual offering date at a purchase price of 85%
of the fair market value of the shares
F-21
<PAGE>
on the offering date or, if lower, 85% of the fair market value of the shares
on the exercise date, which is one year from the annual offering date. A
maximum of 200,000 shares are authorized for subscription over the ten year
term of the plan (30,000 shares reserved for issuance at December 31, 1995
for the offering period ending on December 1, 1996). No shares were issued
under the plan during 1994. During 1995, 12,411 shares were issued under the
plan.
STOCK BONUS PLAN
The Plan provides for up to 200,000 shares of stock to be awarded to
non-executive employees at the Compensation Committee's discretion over
specified future periods of employment. A total of 18,211 shares have been
issued under the Plan leaving 181,789 shares available for issuance.
TREASURY STOCK TRANSACTIONS
As provided for in each stock option agreement, option holders can
satisfy amounts due for the exercise price and applicable required
withholding taxes on the exercise by delivery to the Company shares of common
stock having a fair market value equal to such amounts due to the Company.
During 1993, 1994 and 1995, the Company acquired 235,817, 23,104 and 1,917
common shares, respectively, in lieu of cash for such amounts due to the
Company related to the exercise of stock options. (Also see Note 8 regarding
the tax benefits from the exercise of stock options.)
(10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER ANNUAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total revenues...............$10,475 $10,682 $11,449 $13,994 $46,600
Gross profit................. 7,261 7,399 8,096 9,877 32,633
Net income................... 25 (45) (642) 848 186
Net income per share......... 0.01 (0.01) (0.17) 0.22 0.05
1994
Total revenues...............$ 8,421 $ 9,276 $ 9,945 $11,917 $39,559
Gross profit................. 5,903 6,511 6,866 8,227 27,507
Net income................... 78 27 106 611 822
Net income per share......... 0.02 0.01 0.03 0.16 0.21
</TABLE>
F-22
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
<PAGE>
EXHIBIT 11.1
PAGE 1 OF 3
EATERIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
1993 QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Shares for net income per
share computation:
Weighted average shares:
Common shares outstanding
from beginning of period 1,912,737 1,912,737 1,963,345 2,004,345
Common shares issued upon:
Issuance of common stock - - - 435,153
Stock option exercise - 5,560 30,663 330,415
Treasury stock acquired - - - (100,620)
--------- --------- --------- ---------
1,912,737 1,918,297 1,994,008 2,669,293
Common stock equivalents:
Shares issuable upon exercise
of options and warrants 1,229,795 1,174,795 1,169,795 895,140
Assumed repurchase of outstanding
shares up to 20% limitation
(based on average market
price for the quarter) (172,886) (177,658) (148,362) (157,858)
--------- --------- --------- ---------
1,056,909 997,137 1,021,433 737,282
--------- --------- --------- ---------
2,969,646 2,915,434 3,015,441 3,406,575
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income:
Income before cumulative effect
of change in accounting for
income taxes $ 32,960 $ 66,225 $ 27,077 $ 373,584
Cumulative effect of change in
accounting for income taxes 202,000 - - -
--------- --------- --------- ---------
Net income $ 234,960 $ 66,225 $ 27,077 $ 373,584
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share:
Income before cumulative effect
of change in accounting for
income taxes $ .01 $ .02 $ .01 $ .11
Cumulative effect of change in
accounting for income taxes .07 - - -
----- ----- ----- -----
Net income per share $ .08 $ .02 $ .01 $ .11
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
-----------------
<S> <C>
Net income (sum of four quarters above):
Income before cumulative effect of
change in accounting for income
taxes $ 499,846
Cumulative effect of change in
accounting for income taxes 202,000
----------
Net income $ 701,846
----------
----------
Weighted average number of common and
common equivalent shares (average
of four quarters above) 3,076,774
----------
----------
Net income per share:
Income before cumulative effect of
change in accounting for income
taxes $.16
Cumulative effect of change in
accounting for income taxes .07
----
Net income per share $.23
----
----
</TABLE>
<PAGE>
EXHBIT 11.1
PAGE 2 OF 3
EATERIES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
1994 QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ ------------
<S> <C> <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 3,677,268
Common shares issued upon
exercise of stock options 11,301 - 32,326 2,283
Treasury stock acquired - - (4,747) -
--------- --------- --------- ---------
3,619,302 3,627,192 3,656,451 3,679,551
Common stock equivalents:
Shares issuable upon exercise
of options (dilutive) 380,239 418,528 336,875 342,979
Assumed repurchase of outstanding
shares up to 20% limitation
(based on average market
price for the quarter) (41,305) (104,658) (59,567) (96,587)
--------- --------- --------- ---------
338,934 313,870 277,308 246,392
--------- --------- --------- ---------
3,958,236 3,941,062 3,933,759 3,925,943
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income $ 77,911 $ 26,635 $ 105,906 $ 611,805
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share $ .02 $ .01 $ .03 $ .16
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
Net income per share:
Net income (sum of four quarters
above) $822,257
--------
--------
Weighted average number of common
and common equivalent shares
(average of four quarters above) 3,939,750
---------
---------
Net income per share $.21
----
----
</TABLE>
<PAGE>
EXHBIT 11.1
PAGE 3 OF 3
EATERIES, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------- ------------ ------------
<S> <C> <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 3,732,684
Common shares issued upon
exercise of stock options 14,830 3,000 - -
Common shares issued under
employee stock purchase
plan - - - 4,182
Treasury shares acquired (682) - - -
--------- --------- --------- ----------
3,694,916 3,726,684 3,732,684 3,736,866
Common stock equivalents (unless
anti-dilutive):
Shares issuable upon exercise
of options (dilutive) 394,813 - - 224,146
Assumed repurchase of outstanding
shares up to 20% limitation
(based on average market
price for the quarter) (181,138) - - (56,982)
--------- --------- --------- ----------
213,675 - - 167,164
--------- --------- --------- ----------
3,908,591 3,726,684 3,732,684 3,904,030
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income (loss) $ 25,207 $ (45,071) $(642,483) $ 848,188
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income (loss) per share $0.01 $(0.01) $(0.17) $0.22
----- ------ ------ -----
----- ------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Net income (loss) (sum of four
quarters above) $ 185,841
----------
----------
Weighted average number of common
and common equivalent shares
(average of four quarters above) 3,817,997
---------
---------
Net income per share $0.05
-----
-----
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-41279) pertaining to the Eateries, Inc. Omnibus Equity
Compensation Plan of our report dated March 4, 1996, with respect to the
financial statements of Eateries, Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,002
<SECURITIES> 0
<RECEIVABLES> 1,353
<ALLOWANCES> 0
<INVENTORY> 1,369
<CURRENT-ASSETS> 4,292
<PP&E> 14,410
<DEPRECIATION> 4,047
<TOTAL-ASSETS> 16,596
<CURRENT-LIABILITIES> 5,969
<BONDS> 1,249
0
0
<COMMON> 8
<OTHER-SE> 8,904
<TOTAL-LIABILITY-AND-EQUITY> 16,596
<SALES> 45,811
<TOTAL-REVENUES> 46,600
<CGS> 13,968
<TOTAL-COSTS> 41,692
<OTHER-EXPENSES> 4,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 73
<INCOME-TAX> (113)
<INCOME-CONTINUING> 186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
